New competencies required as focus is shifting within AML

Focus is shifting in the Anti Money Laundering processes and as a result, new competencies are required, says Ronny Gustavsson, Head of AML within Advisory SE at FCG.

We can see a transition where the AML-activities shift from being regulatory compliance-focused to be more operational. What is the state of AML-practices in the industry today?

The transformation from an AML-governance focus to the establishment of an effective operational model requires a different type of expertise. Today, the challenge is to embed the regulatory requirements into effective and holistic processes, systems, and measurements in order to identify and prevent attempts of money laundering. The Integration between AML-related systems, as well as interrelationships between the AML- and credit and risk systems are challenging, and require staffing a wide set of skills and experience. We can also clearly see a development where competencies and resources from other disciplines, for instance the credit risk functions, are demanded in the AML area. Given all this, we should also acknowledge that many, both large and small, institutions in the Nordics still have challenges with remediation programs, risk coverage and getting the basics in place and coordinated.

A strong mix of staff/experience, apart from subject matters experts, should include personnel with experience from establishing new operating models, risk analysts with experience from data quality assurance and data management, all combined with client executives and business operations which can provide insights to how the customers would like to interact and communicate with the bank to ensure that all processes are sufficiently adapted with respect to automation, intuition and customer feedback.

The KYC-process area is in the forefront here, since it is the primary process for customer interaction and the threshold into the system for money launderers. However, feedback to related processes is important as well and should be considered. The important thing is that the entire AML system, from handling KYC, risk classification of customers, transaction monitoring, to reporting of suspicious activities, should be viewed holistically.

All-in-all, there is high attention to ensuring that the institutions deploy whatever digitalised or automation processes that are available and relevant.

What are the key drivers to the ongoing transformations that you observe?

We have seen how activities related to the AML-area is starting to make a dent in the PnL of the banks, so it is obvious that one rationale is to be as cost-effective that one can be. Particularly since the concept of strong AML-practice-as-an-opportunity has not crystallised enough yet. This is an interesting topic that we will discuss around going forward, i.e. how to take advantage of a regulation that everyone must adhere to.

Secondly, and arguably even more important when explaining the initiatives that we see, is the fact that the board of directors would like to ensure that there are no black marks to their legacy. No one wants to be associated with money laundering, and the consequences of being caught with weak practices has been displayed clearly over the last couple of years. So from now on and going forward, the board members are expecting the organisations to provide them more accurate AML-compliance information at a higher frequency in comparison to the industry practices as of 5 years ago.

About a year ago, FCG called for more collaboration between AML and the traditional credit risk departments . Can we see any movements with respect to this?

Absolutely. Many organisations have been able to identify relevant and supporting competencies that can be allocated to support the AML-programs. The collaboration is often two-fold, project participation and internal services structures.

With respect to project participation, risk analysts, outside the AML-organisation, is often advised in setting standards for model development, risk management and validation activities that needs to be integrated in the AML-space. There are a lot of similarities and techniques that can be deployed from the credit risk area and this collaboration constitute a strong lever to use within AML programs.

Secondly, we can see that the risk department is willing to take on more responsibilities with respect to model monitoring/model risk management and model validation, or chooses to use an external independent partner providing it as a managed service in the shape of validation-as-a-service. The traditional validation activities for the model validation department were previously to validate IFRS9 and credit risk management models, as well as some models for market- and liquidity risk etc., depending on the business mix and complexity of the bank. The standard risk set-up so to say.

Added to the list is now AML-related models. Often as an effect of the model risk management- and governance principles that are deployed. In case you have a different set of generally accepted approaches and standards, one could argue that the governance structure and framework for model risk management and risk vs AML is inconsistent. And in the case where you harmonise all the principles that shall apply, why not collect all activities under one umbrella? The workload for the validation departments is more volatile than for other departments, so we can also see shifts where outsourcing of model validation is used but where the validation department still is responsible for ensuring that the bank’s ambition and standards are deployed in the process.

If it is possible to identify and measure risks more accurately, as well as ensure a high degree of model quality, the institutions will be able to work more risk-based with measures against money laundering, corruption, fraud and international sanctions. The end goal being more effective processes and organizations. Except advantages such as lower cost, faster decision making and higher quality, it also reduces the risk exploitation by organized crime and the reputational damages that it can lead to. To conclude, we believe that the organisations should continue to go in this direction, i.e. using their existing resources and capacity as optimal as possible.

About Money Laundering

According to the analysis ”Nationell riskbedömning av penningtvätt och finansiering av terrorism i Sverige 2019”, approximately 130 billion SEK is washed every year in the Swedish financial system. During the last 5 years, the number of reports to the Finance Police on suspected money laundering activities have more than doubled. The credit institutes are behind more than 90 percent of the increase since 2014. We expect to see this development continued as other actors increase their spend on AML.