Ross Marrazzo is Managing Partner of Treliant. He is also responsible for the firm’s Corporate & Regulatory Compliance and Global Financial Crimes Compliance services areas. Ross has over 34 years of domestic and international experience in the design, oversight, and assessment of corporate and regulatory compliance, Anti-Money Laundering/Bank Secrecy Act,…
Three related trends dominated the field of financial crimes compliance in 2018: ongoing enforcement, countervailing cost pressures, and the rise of artificial intelligence as a means to improve the existing leveraging of technology for Anti-Money Laundering/Bank Secrecy Act (AML/BSA), economic sanctions, and fraud risk mitigation. Despite the industry’s long-standing desire for regulatory relief and the mixed interest in the U.S. Congress to provide some relief, the field has been rife with regulatory activity worldwide. Companies need to be wary of claims of easy fixes and rationalizing staff to save money, and make every effort to sustain effective and efficient compliance programs in 2019.
Enforcement Authorities More Active Than Ever
Public enforcement actions in the U.S. may have been down in 2018, but a closer look reveals that U.S. and foreign regulators and law enforcement authorities have been more active than ever.
In the U.S., regulators haven’t let up all that much on their expectations for robust AML/BSA and economic sanctions compliance programs. Federal regulators still issued several public enforcement actions, even if fewer than prior years. What’s more, non-public enforcement actions continue. That’s not to mention agencies’ findings of “matters requiring immediate attention,” which can be as painful as enforcement actions.
Meanwhile Congress, under pressure from the financial services industry, has discussed easing BSA requirements. But don’t look for revisions to be made anytime soon, with the recent political leadership change in the House. There is also significant debate over whether even the simplest provisions of the BSA, such as currency transaction reporting, should be amended. The message continues to be mixed, at least publicly, from zero tolerance to risk-based being acceptable. No matter the volume of public enforcement actions, companies need to continue to be vigilant. Let’s face it, nobody likes a money launderer or terrorist.
Looking across to Europe, we are seeing regulators stepping up their oversight and enforcement. Asia is experiencing significant activity by regulators ranging from the Korean Financial Supervisory Service to the Australian Transaction Reports and Analysis Center. Australia’s largest bank agreed to a proposed civil settlement—subject to court approval—of historic proportions, including a fine of approximately AU$700 million (US$500 million) for numerous alleged AML and Counter Terrorism Financing (CTF) violations.
Cost Pressures Could Erode Effectiveness
A recurring cycle may once again be under way within some companies, which are trading effectiveness for efficiency as pressures to reduce costs combine with the (mis)perception of an easing of enforcement activity.
The unfortunate meaning of the question “how can we be more efficient?” is often really “how can we reduce headcount?” Every company should be continuously striving for efficiencies, but not at the risk of impacting effectiveness. Going too far will in most cases result in control failures.
When you look back in history—and you don’t have to look all that far—enforcement activity has cycled up and down against U.S. companies. Of course, foreign bank offices have received most of the recent attention, but that doesn’t mean U.S. companies are off the hook. And over time, as boards, management, and compliance executives move on, taking with them their regulatory experience, controls can begin to weaken. It will be interesting to see what new enforcement actions are issued—and even more interesting, repeats—in 2019.
Artificial Intelligence Poised for Impact
In 2018, one of the most talked-about topics in the financial crimes space seemed to be artificial intelligence. There is no doubt that it will be more impactful in financial crimes risk management in 2019.
Larger companies have built in-house teams (innovation labs) to develop tools with artificial intelligence. These and other activities recently prompted U.S. federal regulators and the Financial Crimes Enforcement Network (FinCEN) to issue a joint statement recognizing the importance of such work but cautioning that safety and soundness standards cannot slip during pilot programs and other initiatives.
Most current tools are designed to make customer due diligence a more effective and efficient process. Treliant has looked into some of these tools and found nuances that companies should consider for their specific needs. As with any tool, companies should do their homework on actual capabilities and conduct a robust proof of concept prior to committing to purchase and full implementation.
Customer due diligence tools represent just one category in the multitude of new artificial intelligence tools and capabilities. On the monitoring side, companies are still having issues with implementing and managing rules-based alerting tools. Most of the issues appear to reside with data integrity and the vendors themselves. The never-ending challenge with optimizing rules seems to never go away. Some companies have even moved from one tool to another at great expense, in part due to insufficient due diligence in
identifying the right tool for their risk profile and IT capabilities.
2019 will in all likelihood be another year of challenges for companies that want to do the right thing. What every company needs, really, is an experienced compliance officer at the helm who is not afraid to tell the true story about the state of the compliance program, supported by a qualified staff (including IT and data people) and adequate tools. At the same time, boards and executive management need to be aware that the global regulatory landscape may fluctuate, but the moment you let your guard down is the moment the enforcement hammer may come down on you. It is clear that no matter which party is in power in any country, particularly the U.S., anti-money laundering and economic sanctions compliance are top priorities for regulators and law enforcement. Simply put, it is significantly less costly from both a business and financial perspective to get it right, than to get it wrong.