FIGHTING FINANCIAL CRIME

AMIDST GROWING
COMPLEXITY
THE NEED TO RETHINK AML TECHNOLOGY AND APPROACH

Arin Ray
18 April 2018
CONTENTS

Growing Complexities in Financial Crime Compliance Operations .................................... 1

No Signs of Regulatory Respite ...................................................................................... 1
Technology: A Bane and A Boon in Compliance ............................................................ 1
About This Research ....................................................................................................... 1
Increasing Overlap Among AML Components.................................................................... 2
Ineffective Use of Data and Technology in AML ................................................................. 3
Fragmented and Siloed Operations Create Inefficiencies............................................... 3
Poor Data Management Limits Analytical Capabilities .................................................... 3
Current Technology Falls Short of Compliance Requirements ....................................... 3
Implications for Effectiveness and Efficiency ...................................................................... 4
AML Programs are Costly and Inefficient ........................................................................ 5
Transforming the Rules in AML with AI ............................................................................... 6
Leveraging Celent’s Expertise ............................................................................................ 8
Support for Financial Institutions ..................................................................................... 8
Support for Vendors ........................................................................................................ 8
Related Celent Research .................................................................................................... 9
GROWING COMPLEXITIES IN FINANCIAL CRIME
COMPLIANCE OPERATIONS

Financial institutions are facing intense pressure in financial crime compliance

operations. Exploding costs and risks of running compliance programs are forcing banks
to rethink their strategy, resulting in some cases in termination of relationship and service
offerings. In addition to impacting revenue streams for individual banks, such trends can
impact the broader economy by stifling commercial activities and economic output.

NO SIGNS OF REGULATORY RESPITE

There are no signs of regulatory respite after many cases of heavy fines, penalties, and
settlements, running to the order of tens of billion dollars at the industry level. Instead the
remits and expectations of regulators continue to grow.

• Beginning with a focus on tackling organized crime, scope of financial crime

compliance has expanded to include a range of activities such as terrorist financing,
economic sanctions, political corruption, tax evasion, trade based money laundering,
and other illicit activities; these risks are often managed by an institution’s Anti-Money
Laundering (AML) program.
• A complex web of multiple and disparate regulatory regimes at global, regional,
national, and local levels creates additional challenges. A New York State law
can have a major impact on a faraway bank in Asia with a single branch in New York.
• Critical regulatory changes, such as shift away from rule based procedural
approach to risk based analytic approach, or tighter Ultimate Beneficial Ownership
Regulatory scrutiny
(UBO) identification requirements will require new strategies in compliance.
and technology
evolution are
TECHNOLOGY: A BANE AND A BOON IN COMPLIANCE exposing critical
Rapid evolution of technology is transforming traditional business models in limitations of AML
financial services, giving rise to new products, delivery channels, and customer operations.
segments. Fintech companies and players from adjacent industries are creating
competition as well as partnership opportunities for banks. On the other end of the Efficient
technology spectrum, new risks are emerging in areas that are still reliant on paper management of the
documents, such as in trade finance. growing scale and
complexities in AML
Growing speed, volume, and technological complexities raise the challenges in will require intelligent
AML, because banks lack complete information, prior knowledge, and advanced automation.
technology to detect evolving criminal behavior. The good news is that recent
developments in artificial intelligence (AI), machine learning (ML), and robotic
process automation (RPA) are producing solutions which have the potential to
overcome the challenges, and make AML programs more efficient and effective.

ABOUT THIS RESEARCH

This research is part of Celent’s ongoing coverage of emerging technology in
compliance. It was commissioned by SAS Institute 1, while Celent kept full editorial
control. In addition to Celent’s extensive knowledge base, this research benefitted from
detailed discussions with compliance professionals from eight banks. This report
analyzes the challenges in AML, and highlights how RPA, AI, and ML can help in solving
them. A separate report will discuss how banks are approaching AI and RPA adoption in
existing operations.

1 www.sas.com
INCREASING OVERLAP AMONG AML COMPONENTS

AML operations at financial institutions span across client and transaction lifecycles, and
consist of several components as shown in Figure 1.

• In watchlist screening, customers are screened against public and private lists
during on-boarding, and periodically, to identify suspect entities and their associates.
• In transaction screening, payment details are examined to prevent sanctioned or
potentially illicit transfers from taking place.
• In transaction monitoring, completed transactions are analyzed in detail because
money launderers can evade detection during transaction screening.
– For example, in “transaction structuring” criminals make several smaller
transactions below usual detection thresholds, which can only be detected by
analyzing aggregated flows, ideally across accounts, channels, and products.
Holistic AML
– Similarly, not all transactions exceeding given thresholds are illicit. analysis requires
• In alert triage and case management, all potentially suspicious activities are information and
investigated, and resolved by sourcing and analyzing additional information. knowledge sharing
The investigation process is highly resource intensive; it is therefore essential to based upon a single
focus compliance resources on the highest risks areas. Appropriate risk assessment view of customer
during Know Your Customer (KYC) process and on an ongoing basis is therefore a across multiple
critical component, and lays the foundation of AML operations. lines of business.

Figure 1: AML Programs Consist of Different Components

KYC, Risk Assessment

Watchlist Transaction Transaction

Screening Screening Monitoring

Alert Triage, Investigation, and Case Management

Chapter: Increasing Overlap Among AML Components

Block/ Pass Transactions Report Suspicious Acts, Actors

Source: Celent

Traditionally banks have managed the different AML components separately with limited
ability for interaction among them. A truly risk based approach and integrated
strategy will necessitate the ability to leverage information and knowledge across
AML components and other systems. For example, transaction monitoring results can
be used to update customer risk assessments; similarly, watchlist screening results can
be used to risk-prioritize transaction monitoring alerts. Similarly, operational silos along
business or geographical lines need to be dismantled for smoother information flow and
intelligent analysis.

“We want to add new information in case investigation, such as information from KYC
documents, other internal sources, as well as external sources; but getting the data is a
challenge.” — Tier 1 global bank

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INEFFECTIVE USE OF DATA AND TECHNOLOGY IN AML

Efficient management of AML components and their interplay is difficult to achieve due to
suboptimal use of data and technology plaguing banks’ compliance operations.

FRAGMENTED AND SILOED OPERATIONS CREATE INEFFICIENCIES

Banks have highly fragmented and siloed technology and operational framework,
which results from having a wide range of business lines, regional presence, and
accretion of systems through organic and inorganic growth. Disparate regulatory regimes
in different regions hinder achieving enterprise wide common standards and frameworks,
and exacerbate technological inconsistencies and operational fragmentation.

POOR DATA MANAGEMENT LIMITS ANALYTICAL CAPABILITIES

Traditional bank operations and data management processes create challenges for
accessing quality data and complete records.

• Data collected using manual processes at KYC on-boarding can contain incomplete
or erroneous records. Banks also lack adequate information in critical areas,
such as beneficial ownership, or counterparty information in correspondent banking.
• Banks use customer information file identifiers to create a single view of customer; Current AML
but the views may be inconsistent across business lines or subsidiaries. operations are
mired with poor
• Aggregating customer and transaction records with alert information, building profiles
data management
and networks of entities, and analyzing their changes over time are challenging.
practices, and
• Regulatory expectations on data lineage are rising, and banks will have to do more difficulty in sourcing
to ensure accuracy, consistency, and integrity of data across its lifecycle. data creates gaps
Data collection and preparation therefore involve additional research, outreach to in coverage.
different divisions, and other manual efforts, making it a critical source of inefficiency.
Banks often have to undertake major projects to improve data governance.

“Many of our banking clients also have brokerage accounts with us, but because of
different systems of records we do not have a holistic view of their activities.” — Tier 2
American bank

Chapter: Ineffective Use of Data and Technology in AML

CURRENT TECHNOLOGY FALLS SHORT OF COMPLIANCE REQUIREMENTS
Technology and models used in AML detection work with simple rules, scenarios, and
thresholds. These are based on prior and subjective assessments of risk, and seldom
informed by data on a bank’s specific client or business mix.
• Current AML software predominantly work with structured data, and have limited
capability to analyze multiple and different types of variables, such as geo-
locations, images, or text information.
• Current AML technology is mainly based on relational databases, and are ill-
equipped to support big data analytics, such as, finding complex patterns and
networks in large datasets, or unstructured data analysis for analyzing text in
payment messages, watchlists, news media, and suspicious activity reports (SARs).
• The mechanisms for learning from investigation decisions are inconsistent due to
the subjective nature of case resolution.

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IMPLICATIONS FOR EFFECTIVENESS AND EFFICIENCY

The technology and data challenges greatly limit effectiveness and efficiency levels of
AML programs, as highlighted in Figure 2.

Figure 2: Efficiency and Effectiveness of AML Hampered by Data and Technology Challenges

Source: Celent
High volume of
false positives is the
Risk assessment biggest challenge in
• Generic risk segmentation with subjective and ill-defined thresholds results in AML, but they are
skewed alert distribution, and is a drag on productivity. symptomatic of
• Alert prioritization is also based on generic classifications (e.g., particular list strategies driven by
hits or high value transactions bear highest risk), and is not effective. generalized
typologies.

Chapter: Implications for Effectiveness and Efficiency

“Our client segmentation is so broadly defined that 95% of our alerts come from just 5%
of our client base. We are rethinking our approach in segmentation.”— Tier 1 Asian bank

Screening
• Managing multiple lists, name variations, secondary fields (e.g., date of birth),
with incomplete and erroneous records are challenges in screening.
• Foreign language analysis in native scripts, secondary sources for ownership
information, news and media scanning are not well supported in current solutions.

“Our digital channels are witnessing high growth in Asia, and customers there want end
of day onboarding if not in real time, but onboarding currently takes days. We need better
and faster screening tools with good local language support.” — Tier 1 Global bank

Monitoring
• Rules based systems may not always detect hidden and unknown patterns,
identify behavior nested across undeclared relationships, or group alerts through
correlations in underlying alert attributes. The lack of consolidation makes it difficult to
see the holistic picture of activity, and firms may miss illicit reportable activity.

4
• Subjective tuning of rules and parameters generate high false positives in
transaction monitoring, typically over 90 percent, which includes high share of
duplicate alerts on same customer or transactions, and recurring alerts of similar
activity that were previously resolved.

“Even after statistical modeling our false positive rates are over 80%, we are now thinking
of using advanced analytics to manage so many false positives.”— Tier 1 European bank

Case Management
• Data challenges, and lack of automated workflows and search tools limit ability Banks have tried to
to conduct entity resolution leveraging holistic customer and transaction records. It throw more bodies
also makes peer analysis, network analysis, and behavior profiling challenging. to manage the
volume of false
• System fragmentation is a barrier to automatically combining, correlating, and positives; the result
enriching alerts. Reporting workflows similarly rely on manual efforts. is exploding costs
and high
AML PROGRAMS ARE COSTLY AND INEFFICIENT inefficiency
Banks take a conservative approach to be safe from regulators, and set low thresholds.
The result is high operational cost, because alert management is resource intensive.

Figure 3: Compliance Analysts’ Time is Spent Mostly Doing Low Productivity Work

Source: Celent

• Celent estimates bottom half of banks in developed markets can spend up to

US$100 million in their KYC-AML programs annually. Costs rapidly escalate for
larger banks with the largest banks spending close to a billion dollars or more.

Chapter: Implications for Effectiveness and Efficiency

• Similarly, the bottom half of banks have up to 100 people in their compliance teams.
Team size also grows rapidly and can be close to 1,000 people for large banks.
Some banks have even reported to have close to 10,000 compliance staff.
• Most importantly, both costs and team sizes have grown at a rapid pace,
becoming double or triple in the last five years at many banks, and growing even
more rapidly at banks that have received consent orders, or been fined.
• Despite the efforts, efficiency and productivity levels in compliance is abysmal,
as shown in Figure 3. Close to two-thirds of compliance analysts’ time is spent on low
level knowledge tasks, and only a third is left for productive investigation.

“Our analysts spend almost 80% of their time on routine and highly tedious work. We are
looking to automate many of the tasks to not only improve efficiency, but also make
analysts’ life easier and raise productivity.” — Regional bank in the US

False positives are demonstrably costly. However, false negatives – where AML systems
fail to spot actual suspicious cases – may carry higher risk and be hard to quantify. As
criminals become smarter, ability to quickly identify new and previously unknown patterns
will be paramount in AML. Advanced analytics such as AI, ML, and RPA offer
opportunities for real improvements and efficiency gains in AML operations.

5
TRANSFORMING THE RULES IN AML WITH AI

Artificial intelligence is an umbrella term used to describe several analytical techniques

which automate manipulation of large and disparate data sets resembling human
thinking, and can be improved through feedback. Robotic process automation on the
other hand automates collection of data with less emphasis on analytics. Figure 4
highlights some examples where the new tools can be applied in AML.

Figure 4: AI and RPA Tools Have Numerous Applications in AML

Source: Celent

Link analysis facilitates easy discovery of complex networks involving individuals,

Chapter: Transforming the Rules in AML with AI

entities, jurisdictions by highlighting the nature of relationships (e.g., transaction,
ownership), its strength (e.g., transaction volumes, frequency), and other features.

Graph analytics display networks, patterns, and their evolution over time. Interrogative
drill down allows detailed investigation based on specific nuances of each case.

• Link and graph analyses help in understanding a specific customer or

transaction more holistically within a larger context of its connections and over
time; these are particularly helpful in entity resolution and case investigation.
Correlation and regression analyses analyze extent of dependence among
variables, and are used when there is a general understanding of the dynamics among
several variables, but its strength and statistical significance are not well understood.

• These can reveal which attributes are most important predictors of risk based on
a bank’s specific business and client portfolio. Based on this, new risk scoring
or alert prioritization models can be developed, calibrated, and updated regularly.

6
Cluster analysis classifies entities in different groups, and identifies commonalities
within a group and differentiating features separating groups.

• Clustering helps find new groups, or subgroups within subjectively defined

groups, and new classification approaches. Identification of common
characteristics among group members helps in creating profiles of peer groups,
which can be used to track behavioral anomalies for spotting suspicious activities.
Neural networks and predictive analytics tools can analyze data sets with numerous
variables and different types of data (such as name, location, transaction details,
counterparties), and find hidden patterns and trends. Applying AI, RPA in
AML can enhance
• These are helpful for finding hidden patterns and networks, modeling expected efficiency through
behavior, and detecting unusual activity. workflow
automation, and
• Predictive capabilities enable machines to generate probabilities or likelihood, and
improve monitoring
thereby suggest if alerts are potentially true or false positives, rank them, or
effectiveness
recommend next steps such as auto alert escalation or closing for disposition.
through superior
Natural language processing (NLP) is used to scan and extract context from insights and
documents, free text, internet, deep and dark web, and classify them based on context visualization
and relevance. Natural language generation (NLG) enables narrative based report
generation from given data sets, and is already in use by media companies.

• The NLP techniques can enhance name matching algorithms. It can also be used
to extract information from message fields to aid payment screening analysis.
Context based media and web analyses help in UBO assessment and due diligence.
• Document scanning with NLP can be used for regulatory analysis where machines
identify and recommend changes, or for analyzing Suspicious Activity Reports
(SAR), Currency Transaction Reports (CTR) to identify unknown risks.
• Another use case is NLP application in trade finance to scan documents, classify
them in different categories, and extract information for analysis.
• For internal and external reporting, reports can be generated quickly using NLG.
Natural language analyses are part of a larger group of unstructured data analysis that
can also aid in analysis of images, geo-location, digitized communication, and more.

Robotic Process Automation enables huge improvements in efficiency by automating

routine manual tasks. Cognitive capabilities can be added to perform data repair,
reconciliation, and context based searches through automated intelligent tools.

Chapter: Transforming the Rules in AML with AI

• In screening, lists can be consolidated using web crawlers. Similarly, information
can be scraped from internal or external sources to enrich alerts and cases.
• Reconciliation of account level data across systems or business lines can help in de-
duplication of customer data and create a single 360-degree view of customers.
• Intelligent bots can act as digital assistants and respond to commonly asked
questions (written, oral) with relevant information, documents, and suggestions.
These applications of AI and RPA to AML will enhance efficiency by automating manual
processes, and improve effectiveness by generating superior insights and intelligent
visualization. Banks have started dipping their toes into the pool of AI through pilots and
proof of concepts, and there is growing interest for wider adoption. A separate report will
discuss how banks are approaching AI and RPA adoption in existing operations.

Was this report useful to you? Please send any comments, questions, or suggestions for
upcoming research topics to [email protected].

7
LEVERAGING CELENT’S EXPERTISE

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Chapter: Leveraging Celent’s Expertise

8
RELATED CELENT RESEARCH

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March 2018

Innovations in AML and KYC Platforms: New Models Powered by Advanced Computing
January 2018

Innovation in AML Technology: New Tools for Optimizing Compliance Efficiency

November 2017

A New Era in Capital Markets Surveillance: As Far as the AI Can See

November 2017

Cloud-Enabled Governance, Risk, and Compliance Solutions

October 2017

Under the Spotlight: Innovative Vendors in Financial Crime Case Management

Technology
August 2017

Banker’s Guide to Third Party Risk Management: Strategic, Complex, and Liable
December 2016

Treating Cyber-Risk as an Operational Risk: Governance, Framework, Processes, and

Technologies
October 2016

Risk Outlook for Banking: Calmer Times

June 2016

Artificial Intelligence in KYC-AML: Enabling the Next Level of Operational Efficiency

August 2016

Emerging Solutions in Anti-Money Laundering Technology

May 2015

Chapter: Related Celent Research

9
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