Anti Money Laundering – The Money lies in the Data
The banking sector has been working hard to polish up its reputation in the last five years, and the recent headlines about money laundering and fraud that have beset the likes of HSBC, Deutsche Bank, Commerzbank and RBS have made that task harder. The industry has to be seen to take a tough stance on such issues for its own sake, not just to comply with new regulations.
The US Foreign Accounts Tax Compliance Act (FATCA) and a raft of European legislation are pushing the industry towards greater transparency, but in many ways this is unfamiliar territory for the large and complex organisations that banks have become.
"Since the headlines about money laundering and fraud, there is more demand at board level for compliance services, but often banks are not clear what they need or what to expect," says Henrik von Kunhardt, CEO of KvS Business Solutions. "FATCA discussions are a hot topic in Germany, for example, and everywhere there is a focus on anti-money laundering (AML), fraud and handling the finances of terrorist organisations. What all of this asks for is more detailed 'know your customer' processes."
Know your customer
An adviser to small to medium-sized financial services companies and the back and middle-office departments of larger financial services organisations, KvS Business Solutions provides support services during the planning and implementation phase, to ensure compliance with statutory and regulatory requirements. The company has seen the emphasis that banks are now putting on know-your-customer processes, and the experience of von Kunhardt and his colleagues means it understands the issues in great depth.
"I've been at the sharp end, unlike most consultants, and so have all of my employees," he says. "We have been responsible for regulatory and organisational matters in banks and have hands-on experience. Most banks put a lot of effort into improving their infrastructure and procedures because there has been a significant amount of regulatory change. But what they end up with is one big building site.
"The key is linking the existing information within a bank, but often that data doesn't come together centrally. If you know how a banks works - leaving aside the political issues - then it is a relatively easy problem to solve. You need to convince everyone in the bank that amalgamating data is good for everyone, but banks are often made up of separate kingdoms."
Von Kunhardt cites the example of a bank that wanted a relatively straightforward fraud assessment, but which had such a fragmented infrastructure that it first needed to replace its entire core banking system.
"I focus on adding value, but sometimes that means delivering an uncomfortable message," he says. "With the regulatory change that is happening, banks must change the way they work and become more transparent."
Compliance with regulations such as Basel III requires improvements in the organisational structures of financial institutions, which ultimately benefits other initiatives, including AML.
"Banks need to be quicker to respond to change," says von Kunhardt. "They are really just big IT companies, so it all boils down to having IT departments involved from the outset when change occurs. Often, the IT department is the last to become involved.
"When it comes to tackling issues like AML, banks could do it on their own, but with consultants like KvS, they have a good sounding board as well as an additional resource. They get a fresh pair of eyes on the problem. The regulations are aimed very much at retail banking, but few banks operate solely in that space. They challenge is to bring the regulatory impact home for them as corporate banks."
Von Kunhardt's advice to banks is to act now to amalgamate data across the board, and bring together IT and compliance.
"But first they have to know what action to take," he explains. "The key is to look at the information they already have and bring it together to see what conclusions they can draw. If they do so, they will quickly stumble across the usual scenarios that identify fraud or money laundering. Then patterns will quickly emerge.
"Regulation is a moving target and the way to prepare for it is not to put in place millions of small solutions, but to consolidate the systems infrastructure. That brings huge advantages for fraud and AML, as it gives banks the transparency they so badly need.