27 Nov 2020
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Is the 'fast follower' mentality holding back anti-money laundering in Australia?

By Contributor

Article by FICO financial crimes leader for APAC Timothy Choon.
 

Earlier this year, Australia was cited by the 2020 Financial Secrecy Index as a nation that hosts ‘significant quantities of illicit funds from outside the country’. The report listed numerous high-profile money laundering cases and instances of non-compliance spanning the banking sector, the property market, clubs and most recently casinos.

In the recent FinCEN leak, a handful of Australian banks were named and alleged to have moved millions in potentially dirty money. Plus, we have also seen the ‘big four’ Australian banks publicly run into issues with money laundering with one recently agreeing to pay a record penalty to settle legal action.

Much more needs to be done to modernise Australia’s efforts in fighting this criminal activity, rather than just keeping up with regulatory requirements. The simple truth is that the decade-old rules-based systems cannot keep up with sophisticated cyberattacks and money laundering threats on their own.  

Money laundering is an age-old problem, but today’s criminals have become so sophisticated that long-standing anti-money laundering (AML) systems and processes cannot keep up.

What is holding back Anti Money Laundering efforts in this region? 

FICO surveyed several financial institutions and found that when it came to financial crime challenges, almost half of respondents cited the speed of responding to new threats, while a third believe achieving accurate detection remains a significant test. 

Australian institutions are still relying largely on decades-old rules-based systems for AML, even though they employ more modern AI-driven solutions to track fraud. A significant 89% still believe in the ability of traditional rules-based AML systems, and they are still the workhorse for banks in the APAC region in the fight against financial crime, even though almost 30% struggle to modify them. 

They operate their fraud and compliance functions largely separately. These silos create inefficiencies, increase costs and impair the customer experience. 

This research also tells us that, while Australian banks are aware of available solutions that could strengthen anti-money laundering efforts, many remain unsure how to operationalise the advanced technology. 

What will stop Australia’s money laundering problem in its tracks?

The solution, according to 68% of Australian banks, will be artificial intelligence (AI). 

Advanced machine learning techniques are required, which are designed to address these challenges by significantly improving detection accuracy and models that can help financial institutions operationalise AI within their existing compliance strategies.

These machines learning techniques commonly include supervised and unsupervised models that can make sense of gargantuan amounts of data, and work in tandem with existing systems to significantly improve overall alert accuracy — in ways that manual or rule-based systems cannot.   

New technologies and approaches would primarily address key compliance and AML challenges, including:

  • Meeting new types of compliance risks in channels and products
  • Providing an end-to-end integrated compliance solution
  • Updating quickly to changes in regulation
Modernisation will happen

In Australia, 96% of banks said they would continue to invest in compliance in the year ahead and 43% plan to increase this investment in 2021 significantly. There is undoubtedly a clear need for investment to modernise anti-money-laundering strategies. 

Overall levels of investment in compliance technology by banks in APAC are expected to rise in 2021, with 49% of respondents reporting budgets will increase, and an additional 34% expecting a significant increase.  

This survey, conducted in May 2020, shows that even in the recent economic downturn triggered by the pandemic, banks remain committed to targeted spending that boosts their AML compliance defences. There is an increased willingness to perceive compliance and fraud as a common financial crime risk — a fraudster is more likely to launder money, and vice versa.

Convergence is ‘in’ — but does it go far enough?

More than 70% of Asia-Pacific (APAC) banks believe that convergence will help stop fraud and financial crimes, but this same research shows there is a long way to go. 

Most banks in the APAC region admit they currently have siloed fraud and AML operations, with more than 90% of respondents identifying they operate separately or have low levels of collaboration when it comes to controls, detection systems and investigative systems. 

In contrast, 82% of banks in the United Kingdom report either full integration of fraud and AML operations or a high level of collaboration for detection systems, and over three quarters are integrated in terms of controls. 

 Act now to move from ‘hotbed’ to AML success

In light of the results from both studies and experience in the sector, industry observers are warning Australian financial institutions that a ‘follower’ mindset would stand in the way of necessary progress for mitigating the combined risks in financial crime. 

Organisations in this region may be watching the change happening overseas to learn lessons from the first movers before they undertake significant change themselves. 

However, outdated, siloed systems, manual processes and the current state of regulatory compliance will not suffice. This is evidenced by recent news about Australian organisations falling prey to money laundering crimes, self-identifying that their systems are not up to scratch, and facing penalties for monitoring and reporting breaches. 

While the vast majority of banks in the APAC region understand the benefits of integrating their financial crime functions, they are not currently as integrated as banks in other countries. Those with plans have ambitious time scales, but they do not intend to integrate as tightly as seen in other markets. 

In addition to watching for the best practices of the first movers converging the fraud and AML parts of the business, they will also need to adopt the new best of breed of technologies that have been developed to work across fraud and financial crime. 

The Australian Transaction Reports and Analysis Centre (AUSTRAC) has recognised that regtech plays a vital role in assisting organisations in meeting their AML obligations and has been employing AI and machine learning in the fight against money laundering for years. 

AI is undoubtedly the way forward; proven AI-based technology solutions that have been successfully used to fight fraud can be applied to AML. 

Financial institutions in Australia must not wait for new regulations mandating an increase in regtech, artificial intelligence and automation to emerge. They must act now to ensure they can protect their organisations, shareholders and customers from sophisticated criminal activity by monitoring, identifying and stopping money laundering operations in their tracks.

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