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Compliance: Is the Purpose Lost in the Process?

By 2 minute read

The goal of financial compliance should be clear: keep criminals out of the financial system and track them quickly if – or when – they find their way in. But as regulations grow in number and complexity, this gatekeeping goal is often overshadowed by the requirement to deliver high levels of process compliance.

Increasing regulations are a logical consequence of current compliance being ineffective. But with regulators focused on process compliance - seeking conformity with rules and procedures rather than assessing the outcomes - this conflates the alignment of objectives.

Ebook: How to Leverage AI for AML Compliance

Many organizations have reacted in a fire-fighting manner, adding additional layers of control, which results in more alerts being generated, and an ever-growing number of compliance staff required to review them.

The compliance balancing act

The resources required to achieve compliance are considerable. According to a recent Ernst & Young survey, 86% of organizations put crisis prevention and compliance as the top drivers of increased spend. For smaller, and particularly fast-growing financial institutions, achieving the balance between ensuring compliance and growing their business is even more challenging. They simply cannot absorb the costs of hiring the number, or quality, of people required and this often leads to a lack of (clean) data, poor detection approaches, and ultimately the misjudgment of risk in client portfolios.

In some countries, central banks have made concerted efforts to reduce the regulatory hurdles for innovators. In Lithuania, for example, the central bank offers a one-week (preliminary) response time to license inquiries, the fastest turnaround in the EU. This more accommodating environment has led many fintech's to set up in the country, including payments platform Transactive.

A new outcomes-based approach is needed

Fintechs are now at the forefront of fighting financial crime and the industry is relying on their innovation and ambition to drive advancement. A new approach to compliance must be adopted if they are to succeed.

Some fintech companies seek to develop a complete customer due diligence and transaction monitoring solution in-house. In theory, this may make sense. Most fintech's will have highly skilled developers working for them. But in practice, in-house solutions are rarely the right choice. Fintech companies are dynamic, especially in the initial stages. Their goals, and even entire business models, can shift overnight. With the focus necessarily on gaining the competitive edge, compliance projects can fall by the wayside, with updates unable to keep up with the pace of change.

Cooperating with other fintech's, and knowing which parts of the process to delegate, brings the best results. Of course, tech partnerships are nothing new in the industry but outsourcing a large part of the compliance process is. Collaborating with a third-party provider can help identify the best system, one that can quickly adapt to changing requirements and scale with the business, supporting continuous and holistic client risk monitoring.

Ebook: 6AMLD In Practice: Key Risks & Opportunities for Fintechs

This is how AI can help

Plug-and-play AI-based money laundering systems are highly configurable, allowing businesses to tailor the processes to their specific risk management requirements at the outset rather than refitting business process to ‘out of the box' processes. Intelligent use of AI technology also supports continuous learning so that the processes applied can adapt and adjust to the changing needs of the organization.

At Sentinels, we focus on compliance outcomes delivered through efficient processes. Through intelligent use of automation, we improve the detection of potentially illicit activities and ensure businesses operate legally. Our clients can then focus on the end goal, protecting and growing their business.

White paper: The use of AI in AML Transaction Monitoring