TM has served as a backbone of efforts to detect and prevent money laundering within financial services and other sectors. In many cases, the production of alerts has been an automated approach, often using a rule-based application. People are employed to ‘work’ alerts, which usually involves information gathering, reviewing transactions, and understanding the rationale for customer behaviour. Based on this alert working, and subsequent investigation a SAR ‘Suspicious activity report’ may be disclosed to the relevant law enforcement.
This process has worked, and continues to work, in a fashion that is expensive and time-consuming, with humans performing many ‘routine’ tasks such as information gathering, before decision making. It is not cheap and with many alerts being closed out, it can be a demotivating activity for the humans in the loop, who spend a lot of time looking at nonvalue alerts.
Unfortunately, compliance can be seen as a break in growth, often having a significant cost, both in terms of the systems management and the number of people required in the operations. Firms have to manage the cost and effort, remain within the law and continually review their systems and approach. The costs and limitations of monitoring, in terms of new products, or threat responses can prevent firms from expanding into new markets or releasing new products for fear of overwhelming their AML operations or failing out of compliance.
This is where the balance comes in. Currently, the process is highly people-intensive, and arguably the wrong type of people-intensive, as noted previously a significant amount of time and effort is spent gathering information, performing online searches, and documenting outcomes as opposed to making decisions.
Firms know the issues, but to date have had little room for manoeuvre, on the systems side improvements have been incremental, not evolutionary. On the people side, they have a focus on employing and retaining more and more people. So, I hear you ask, what can be done in this situation? How can firms expand their compliance coverage, making it more effective, without the overwhelming costs? What is the vision? Where are firms heading and what is the future for TM?
Fortunately, we are now at a point where innovative and new approaches, focused on data, analytics, networks, and intelligence can start to turn the dial, moving TM away from ‘producing and clearing alerts’ to intelligence lead financial crime investigations. Here are some simple steps that firms could consider to address the balance.
1) Set a vision and strategy, with a roadmap – Where do you want to be, what is the vision, what do intelligence lead detection and investigations mean? How can you use data and analytics, what does it mean for your current operations and employees, and what new skills will they need to have? How can you achieve this, over a 12-24-, 3- and 5-year time scale? Take time to document, socialise, and agree, even if it looks currently unattainable.
2) Automate routine activities – What are the immediate gains you can make, at lower cost, which bring quicker benefits? In particular, the automation of routine activities such as information searching and gathering, documenting, and preparing information for decision-making. With tried and trusted technologies such as RPA, NLP, and NLG this is very achievable.
3) Refine current output – How can you refine the output from current TM systems, the application of scoring and prioritising, after the production of ‘events’? Usually, this is based on data enrichment, the use of analytical and statistical models, and supervised learning, as an example, based on human outcomes on similar events. There are several choices here, including what you use to score, what additional data you use for discounting, enhancement, and what you do with the output, do you hibernate, or do you close?
4) Produce less noise – focus on quality, reduce the number of alerts produced in the first place, reducing the ‘noise’ when compared to ‘signal’. A word of warning here, this is not a focus on ‘false positive’ reduction to the detriment of other controls, it is not a comparison of ‘x% versus Y%’ but a careful and thoughtful use of good data, customer segmentation, and augmentation of new innovative approaches.
5) Augment with innovative approaches – there are many new approaches and solutions, can you start to trial and use some of these solutions across the entire operation or for specific business areas and threats? What is already in use in the industry? Are you replacing or augmenting current systems? How can you trial and test before going to full use, what does it mean for operations?
6) Move to intelligent lead investigations – by reducing noise, augmenting current approaches, and using enhanced, and shared data and analytics to support well-trained human decision-makers, you can move towards intelligent lead investigations. This will need to be defined for your firm, what are the journey and roadmap?
In summary – the balance between computer-led and human-led transaction monitoring does not currently support an effective and efficient TM function. Doing more of the same will not enable firms to make the step change in how they approach Transaction monitoring.
However, firms can start to take steps toward a new balance, once which is more efficient and repeatable, through the application of intelligence, data, networks, and analytics. Importantly, the need for people will not go away, the ‘human in the loop’ is critical, this is about moving the balance, using technology and analytics sensibly to free up people from the mundane, supporting the intelligence lead detection and prevention of financial crime.
This editorial was initially published in the Financial Crime and Fraud Report 2023 which dives into the captivating world of fraud management, digital onboarding, and financial crime in the financial services industry. You can download your free copy here.
Colin Whitmore is an AML subject matter expert, he brings over 20 years of experience within the banking and financial services, working in the UK and the US with firms including Reuters, Aviva, Barclays, RBS, HSBC, and now the NatWest Group.
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