The Future of Financial Crime 

Due Diligence (DD), including Know Your Customer (KYC), is moving from a manual and periodic exercise to a digital first, automated, and continuously performed activity. This will provide a single, continuously updated view of the customer’s Financial Crime (FC) risk. Digital first approach within Anti-Money Laundering (AML) involves using digital technologies to improve effectiveness and efficiency of AML processes. It includes leveraging AI, machine learning, and automation to streamline activities like customer due diligence and transaction monitoring. Benefits include faster detection of suspicious activities and improved compliance, but human expertise is still essential for interpreting and validating the outputs.

This is the third article in our Future of Financial Crime (FoFC) series and looks at the changes in customer DD needed to deliver better risk outcomes, reduce cost, and build competitive advantage.

Continuous changes in the environment

Financial Services (FS) institutions must consider how they respond to changing customer expectations, new entrants who are taking market share (including digital banks and embedded payment providers), continued regulatory scrutiny, and evolving regulatory requirements (e.g. AML package of the EU, EBA Guideline on the effective management of ML / TF risks when providing access to financial services¹, introduced in 2023). 

These changes have far-reaching implications for FS institutions’ business and operating models and create multiple challenges in how they conduct DD and customer lifecycle management in a way that is efficient and effective.

New challenges in due diligence

• Customers who are demanding more personal, tailored, less intrusive and digital experiences;
• Processes that are fragmented across the organisation, with a large number of manual processes used to capture, consolidate, validate and risk assess basic data; and
• Costs being too high, with legacy high volume, low value processes requiring large operational teams, which lead to high labour costs, for an average 62% of the estimated 3 billion dollar spent on FC compliance in Central and Eastern Europe (Poland, Czech Republic, Hungary) in 2020.²

Recommended capabilities to address the challenges

Addressing the challenge effectively is not just a matter of compliance, it is essential for sustainable business growth and competitiveness over the longer term. To achieve this requires an incremental set of capabilities which, when implemented, are complementary and can provide a ‘sum of the parts’ benefit. Points to consider include:

Digital first - the majority of customer information will be collected, validated and updated via digital channels for retail, wealth and corporate customers;

Externally validated - all customer data will be validated and assessed against external data sources where available (e.g., for example, through open banking and third-party data providers) to improve data quality and automate tasks that are currently performed manually;

Automated processes - using existing and emergent technology (including direct system integration, artificial intelligence (AI), robotic process automation and machine learning) so that human intervention is required only in exceptions cases (e.g., for complex plausibility statements) and reviews required for model tuning;

Single customer risk score - which responds rapidly to changes in the nature of the customer’s business and actual behaviour, to develop a single, integrated customer risk score of expected and actual behaviour. This is underpinned by high quality, accurate and complete customer data, as an essential foundation for effective DD (note: we will cover this topic in more detail, in the next article in this series); and,

Continuous customer monitoring - for most customers, perpetual KYC will replace traditional periodic reviews. A well-tuned customer risk change model will ensure that the number of cases requiring human intervention will be much lower than typically seen in a periodic review approach.

Together these capabilities will allow for more efficient and effective control and oversight of DD and FC risk across the customer lifecycle.

Achievable benefits

Through our work with FS institutions, we understand that some of these capabilities are planned or ongoing; and, when implemented together, we believe they will deliver significant benefit, including:

1. Enhanced risk management

Better quality data enabling an enhanced and up-to-date understanding of the customer risk exposure, which will allow the FS institution to make better risk-based decisions as to where it focuses its resources.

2. Improved customer experience

By delivering a digital first, automated and integrated DD model, the FS institution will be able to enhance its customers’ experience across the full lifecycle, from on-boarding to off-boarding. Additionally, the removal of periodic review (e.g., 1,3,5 year) will reduce the impact on legitimate customers, creating a competitive advantage. 

3. Cost optimisation

Moving from the current model of a manual and periodic exercise with a high volume of manual, low-value tasks to a digital first, automated and integrated model for DD and continuous monitoring, will drive significant cost savings. From our work with new entrants and partnering with emergent technology (including AI), we believe the majority of the tasks currently undertaken manually can be automated. This can lead to at least a 30-40% reduction in cases requiring manual intervention and can allow for significant re-deployment of existing AML operations staff to focus on higher value tasks.

Conclusion

When implemented alongside an intelligence-led, enterprise-wide risk assessment and a holistic approach to monitoring customer expected / actual behaviour, the adoption of these changes to customer DD represents a real shift towards a more integrated, efficient and effective approach to FC.

Please get in touch if you would like to discuss this topic further. Also look out for further articles in our Future of Financial Crime series – up next, Convergence of customer monitoring. 

¹ EBA Guidelines on policies and controls for the effective management of money laundering and terrorist financing (ML/TF) risks when providing access to financial services

² True Cost of Financial Crime Compliance Study, LexisNexis Risk Solutions, Global Report 2021