A spate of recent regulatory action on banks found to be in breach of transaction reporting and Anti-Money Laundering (AML) rules has highlighted the need for more automated RegTech solutions.

Earlier this month, the Financial Conduct Authority (FCA) fined Standard Chartered £102 million for AML breaches in two higher risk areas of its business. It found “serious and sustained shortcomings” in the bank’s AML controls relating to customer due diligence and ongoing monitoring, with a failure to implement risk-sensitive policies and procedures.

Mark Steward, director of enforcement and market oversight at the FCA, said: “These breaches are especially serious because they occurred against a backdrop of heightened awareness within the broader, global community, as well as within the bank, and after receiving specific attention from the FCA, US agencies and other global bodies about these risks.”

John Dobson, chief executive of AML firm SmartSearch, pointed out that just last month estate agency chain Countrywide also received a record fine from HM Revenue & Customs of £215,000 for failing to ensure its money laundering procedures and recordkeeping.

“Complying with AML regulations is a cumbersome process, and with regulations changing all the time, it can be difficult to keep up with the latest rules – but, thanks to a booming RegTech industry in the UK there are now a huge number of electronic solutions.

“Thousands of banks, estate agencies, law firms and other regulated businesses are now turning to electronic AML platforms to complete their checks, global sanctions and politically exposed person screening,” he continued. “With the fifth money laundering directive stipulating that electronic solutions be used wherever possible, it is likely that electronic AML checks will soon become compulsory anyway.”

In March, Goldman Sachs International was fined £34 million by the FCA for failing to provide accurate and timely reporting relating to 220 million transactions between November 2007 and March 2017.

In this case, Steward called out serious and prolonged failures, adding: “We expect all firms will take this opportunity to ensure they can fully detail their activity and are regularly checking their systems so any problems are detected and remedied promptly, unlike in this case.”

Simon Richards, global managing director of financial services at business community advisor tekVizion, said the Goldman Sachs fine shows just how critical effective reporting is for banks’ compliance.

“We all know regulations such as MiFID II require comprehensive and evidence-proof recording of all communications relating to a trade, but as this case starkly reveals, if the regulator asks a bank years later to retrieve it, how confident are they that their voice recording systems were working properly at that point in time?

“Augmenting and enhancing manual testing with automation is the only way banks can safely - and cost effectively - be sure they won’t be exposed to the same risks as we’ve seen highlighted here,” he added.

It’s not just the big banks either, as it was recently revealed that in July 2018, Revolut experienced an issue whereby a greater number of transactions were being flagged for further checks than necessary, during a trial of a new sanctions screening system.

Colin Bristow, fraud and AML specialist at SAS UK & Ireland, argued that financial organisations need to invest in advanced analytical capabilities to ensure they can spot fraud before it even begins.

“Artificial intelligence can not only help identify trends in large datasets, but also advise on the best action to take in response – for example, it could have flagged up that Revolut’s new system was no longer blocking suspicious payments and quickly advised anti-fraud teams to intervene.

“Money laundering is a pervasive problem that all challenger brands - and major banks - have to face,” he continued, adding: “As finance increasingly goes digital, fraud is getting harder and harder to spot.”

A spokesperson for Revolut responded: “At no point did we stop checking transactions for sanctions compliance last year, nor was there any failure in our sanctions screening procedures.”

Adam Gable, product director for financial crime mitigation at Temenos, commented that a bank’s culture, systems and process go hand in hand in terms of establishing an efficient financial crime mitigation model.

“However, with most top banks in Europe being subject to significant penalties for anti-money laundering or sanction breeches since the last financial crisis, it seems clear both system and process is failing,” he stated. “Costs are also spiralling, albeit not very successfully, with compliance often being addressed by increasing headcount – something that is no longer sustainable.”

The Financial Action Task Force recently estimated that money laundering activities cost the global economy between $590 billion and $1.5 trillion, although true figures cannot be identified as a high percentage of these transactions are untraceable.

Under section 19 of the EU AML regulations, businesses must actively seek new technologies to reduce their money laundering monitoring costs. Several RegTech startups specialising in AML and transaction reporting have popped up to fill the gap.

Since its launch in 2018, Israeli RegTech vendor FinCom.Co has developed several strategic relationships with tier one banks to support compliance and data management, launching on the London Stock Exchange last month. Its proprietary AML platform utilises advanced mathematics with phonetic fingerprint technology to aid customer verification and compliance in real time.

“Small to medium banks spend over $100 million annually to fight AML, which in turn costs the consumer,” commented co-founder and chief executive Gideon Drori. “The need for such solutions is key for businesses to remain compliant with current and future AML directives which can see individuals within organisations prosecuted for any wrongdoings.”

Jumio, an AI-powered identity-as-a-service provider, recently launched a fully automated AML screening solution that integrates ComplyAdvantage, a real-time database of people and companies that pose financial crime risk.

This integration automatically flags any new online customers when they are initially onboarded if their names are listed within any of these databases, delivering proactive alerts and ongoing monitoring after the initial onboarding process to help maintain compliance.

Rachel Woolley, RegTech firm Fenergo’s global AML manager, noted that significant monetary penalties - totalling $26 billion between 2008 and 2018 - have been imposed worldwide for violations against AML, KYC and sanctions rules, but the industry is no closer to turning the tide against criminal money flows.

“The saying ‘follow the money' can be difficult to apply across geographies due to complex cross-border treaties and a lack of information sharing,” she explained.

“While government agencies, watchdogs and the banking sector appreciate the need for information sharing these partnerships remain mostly national, meaning investigations that extend across borders, particularly where AML frameworks are not robust, often go cold, allowing the international illicit finance industry to succeed.”

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