How to overcome money laundering in Capital Markets
Written by Ross Aubrey
Published: 8th Apr 2020
The UK regulator’s first thematic review on money laundering risks in capital markets makes it clear that the time has come for a distinctly new approach to a problem everyone knows exists, but have long struggled to come to grips with.
For the uninitiated, thematic reviews are used by the Financial Conduct Authority to highlight an issue, flush out failings, and lay the groundwork for rigorous action either via enforcement or another form of investigation; they believe the industry is lacking and this is the first step toward stronger supervision.
Smarten up to mitigate risk
Capital markets are a magnet for money launderers, with characteristics that make it tough to root out effectively; the combination of large volumes of transactions running through global securities hubs, multiple clients across many institutions, cross-border activity, and electronic trading venues make them a perfect storm for criminals to obscure illicit funds.
There is a direct line between the exponential growth of data in and around financial services firms and the increasing use of data for nefarious purposes. Technology has enabled criminals, and the regulator indicates it is time the industry adopts smarter software to fight back.
US enforcers have stepped up attempts to drive dirty money out of Wall Street in recent years, and clients report regulatory visits are more frequent than ever, with guidance from both the Financial Industry Regulatory Authority and the Securities and Exchange Commission is this is set to continue.
Similar trends are also playing out in Europe where record anti-money laundering (AML) fines have been handed out as traditional methods of repelling criminal activity are failing.
The status quo isn’t working
The truth is, it can happen to any institution that isn’t ready. The FCA findings prove that not only are a large percentage of firms unprepared, but they also don’t know where to start looking, and in some cases don’t even know what they are looking for.
The FCA paper reveals existing tools and techniques, largely carried across from retail, aren’t working. They are not effectively identifying the risk, are inefficient (over 99 per cent of alerts generated are false positives), and potentially easier to circumvent by criminals who can work out how to avoid suspicion.
While this is costly in terms of staffing hours, as more people are needed to work the churn of low-quality alerts, it also amplifies the chances of missing a serious incident at a time the regulator has put the sector on notice.
The regulator also makes clear that the same scenarios and typologies do not always carry across to different asset classes and client behaviour. Quantexa works closely with our clients to identify how/where/why money can be laundered across specific products based on individual and tailored client profiles. We recognise that everyone has different risks and appetites to risk, so typologies must be uniquely calibrated to be effective.
Don’t wait until it’s too late
Sophisticated money laundering methods won’t be uncovered by digging through an old playbook; regulators are becoming increasingly vocal in telling banks to adopt the latest technology to improve compliance, as this is where the solution lies.
The FCA believes a new approach is required, blending contextual monitoring and network analysis – transaction monitoring via a wider set of information about the customer or trade – to deliver a holistic client view.
It is something we support, shifting from the outdated rules-based systems of the past which looked at transactions in isolation, and concerns tools that can interrogate vast amounts of data, alongside automating manual aspects of the investigative process.
Effective use of external and alternate data sources throughout the life of a client’s relationship with the bank can help build a better picture of who that client is, and how they operate, as well as identifying previously unseen connections that add context.
Automation also gives the reviewer better data on which to make a decision and helps to prioritise high-risk areas that require immediate attention.
The net result is fewer but more meaningful alerts, ensuring more time can be spent performing in-depth investigations into cases, and double-checking any suspicions between the AML team and market abuse surveillance teams to satisfy relevant reporting obligations.
Are you ready to embrace a new approach?
Ultimately, the increased focus from the regulator is a great starting point in helping the industry gain a greater understanding of the risk of AML and its typologies within capital markets. But it is clear that firms can do more.
It is time for capital markets firms to embrace new technologies and approaches that can stamp out money laundering in Capital Markets before it crystallizes into a knock on the door from the regulator or becomes a serious threat to the business.
Ross Aubrey is Global Head of Financial Markets at Quantexa.
Quantexa helps firms detect complex money laundering activity quickly and accurately by creating a holistic view of their data. We build context around our customers, enabling them to see the bigger picture and automatically assess potential criminal behaviour.
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