A Guide to Anti-Money Laundering for Crypto Firms

European Challenger Banks and Innovative Technology

AML Compliance Digital Bank Knowledge & Training

Enhancing Both the Customer Experience and Compliance Risk Management Programs

Now more than ever, consumers and organizations alike are relying on technology as a result of the COVID-19 pandemic to shop, work, and communicate. As many traditional financial institutions were not prepared for the changes brought on in 2020, more customers are making the switch to challenger banks for better access to convenient online services and the relative ease of account opening.

Growth within the challenger bank sector means that these organizations will need to ensure operational and compliance processes are scalable and adaptable to match risk exposures without sacrificing customer satisfaction.

Quick Database Checks May Not Be Enough

One feature of challenger banks that is especially appealing to consumers is a seamless onboarding process, which, in some cases, can be completed within minutes. Unfortunately, this can result in a less-than-complete assessment of a customer’s risk level, leaving gaps in anti-money laundering (AML) compliance.

Challenger banks must balance the need to acquire and investigate an appropriate amount of customer information for compliance purposes with the desire to provide a smooth customer experience. For example, many organizations rely on simple database checks during customer identification processes such as detecting politically exposed persons (PEPs) and their relatives and close associates (RCAs), however, these types of checks oftentimes reveal that databases are not updated regularly to contain the most current information. Some databases do not include recent activity or new information pertaining to PEPs and others may have inaccurate or incomplete results, such as missing key information pertaining to PEPs. Furthermore, some databases have been found to contain information on PEPs that are deceased or have not been active in decades.

Many organizations recognize the need for improvement in this area. A survey conducted by ComplyAdvantage on the State of Financial Crime in 2021 found that 44 percent and 41 percent of respondents identified PEPs and RCAs, respectively, as one area of due diligence they are most focused on improving. This is made clear when considering that AML regulations require ongoing monitoring of customer risk, ideally in real-time, to understand the patterns of a customer’s transactions and identify unusual behavior and suspicious activity.

Be Prepared for the Future

It is important for AML compliance programs to be commensurate with the size, complexity, and risk exposure of an organization. Certain procedures may be necessary for higher-risk customers, products, or jurisdictions and any company that is looking to expand should consider the types of risk management processes that may be required to adequately prevent and detect money laundering and financial crime in the event of growth. Oftentimes, leading financial institutions will implement compliance practices that exceed regulatory requirements to avoid any reputational risk that could stem from additional regulatory scrutiny in the future as operations expand and compliance requirements evolve.

Adverse media screening for customers is one area that may not be explicitly required by AML rules, yet many large financial institutions have implemented to ensure that a complete and appropriate risk assessment has been performed on a customer. Financial Action Task Force (FATF) recommendations state that financial institutions must implement AML processes that “understand their client’s reputation”. As such, robust customer due diligence procedures include adverse media screening during the onboarding process and on an ongoing basis to validate customer risk ratings.

Changing regulatory guidelines also impact the adverse media screening process. For example, effective in 2021, the EU’s 6AMLD clarified 22 predicate offenses for money laundering crimes. As a result, screening processes may need to be adjusted to ensure that screening tools are capable of identifying media by specific categories, and those categories are inclusive of new regulatory requirements.

Fortunately, innovative technology such as machine learning can correctly identify adverse media not only through the use of keywords but also based on an understanding of context, which is critical to ensuring that an accurate and complete customer risk rating is assigned.

Making Technology Work Harder and Smarter

While challenger banks and technology go hand in hand in terms of product and service offerings to the consumer, many of these types of organizations have yet to capitalize on the benefits of technology internally for compliance risk management programs.

Innovative technology can address many of the hurdles posed by ever-changing regulatory requirements within a growing sector without negatively impacting resources or customer service. Customer information profiles and due diligence screening can be performed billions of times per day on a wide-ranging field of data, streamlining workflows and allowing the compliance function to operate at maximum efficiency.

ComplyAdvantage’s unique API can be quickly and easily integrated into existing systems to improve many required AML functions, including PEP and RCA screenings. As the regulatory landscape continues to evolve and bring challenges to all types of financial institutions, those organizations that utilize technology from the start will be better equipped to address what lies ahead, while continuing to experience growth and maintaining customer satisfaction.

Originally published March 2, 2021, updated May 5, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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