Whether you are a new neobank, crypto exchange, or other company in the financial services space, your organization is subject to the same risk and compliance requirements as large banks and financial institutions.
This has driven the impetus for dynamic and lean AML technology – computer programs used by financial organizations to monitor customer data and detect suspicious transactions.
AML systems screen customer data, flag suspicious events, and inspect it for anomalies. Regulators raise concerns about due diligence, identity, or Anti-Money Laundering (AML) checks. And the SEC, Commodity Futures Trading Commission (CFTC), and IRS have all started asserting regulatory control for new digital banks and crypto exchanges.
For example, the CFTC has the authority to regulate Crypto as a commodity, and the IRS has stated that cryptocurrency investments will be treated like any other assets for tax purposes. Risk management teams report spending up to 10% of revenue on compliance.
Yet financial organizations are far from reaching their risk and compliance obligations. The Financial Crimes Enforcement Network (FinCEN) has increasingly enforced AML regulations, with the 90% of laundered money going undetected.
Therefore, it is crucial for financial organizations to remain diligent in the fight against financial crime so that we can collectively stay one step ahead of the bad actors who aim to cause harm.
Here, we’ll take a look at the state of global money laundering, the challenges posed by current AML compliance systems, and the three AML technology systems required to protect financial organizations from falling victim to money laundering schemes.
The Current State of Money Laundering Across the Globe
Globally money laundering is on the rise with the pandemic.
With most laundered money going undetected, it isn’t easy to gauge the actual rate of growth. However, the UN estimates that up to $4 trillion is laundered annually. Launderers are increasingly counting on communication gaps between banks, while governments continue to try and address the threat with increasingly strict, multi-layered AML regulations.
The consequences of non-compliance are multifaceted. For example, in 2020, AML fines exceeded USD 10 billion globally, an 80% increase over the prior year. In addition, in 2020, the SEC issued 715 enforcement actions. And, in 2021, FinCEN issued Capital One with penalties of $390 million for failure to report thousands of suspect transactions.
Moreover, the costs of non-compliance go beyond fines – on average, in a year, a financial organization can lose up to a total of $15 million for the consequences of non-compliance — which is 2.71x higher than what firms typically pay to stay compliant.
Additionally, a 2020 European Corporate Governance Institute report shows that stock price reactions to negative press were 9x more significant than the penalties as they erode the brand and reputation.
Aside from the penalties associated with financial crime, what happens behind the scenes of money laundering is very harrowing. From human trafficking and terrorist financing to illicit drug trades, money laundering can fund tragic realities which we often do not want to think about.
Of course, most individuals and organizations do not condone the outcomes that laundering money supports, but catching these fraudsters is and has never been an easy problem to solve.
One of the biggest reasons for this is failure at the system level.
The Challenges with Current AML Compliance Systems
AML transaction monitoring rules are frighteningly ineffective at preventing and detecting financial crime.
At best, they are rudimentary, do not account for various scenarios and organizations, and are difficult to change. Compliance alert systems based on standard regulatory technology trigger thousands of false positives every day.
With false-positive rates sometimes exceeding 95%, something is very broken with traditional processes and rules.
A compliance officer must review these false alarms. In fixed, rules-based AML and fraud models, the simpleness leads to many false positives that disguise actual illegitimate activity. Therefore, It is no surprise that more than 90% of laundered money in the world goes undetected.
Such rules and assumptions are often tricky and time-consuming to change in incumbent systems and, as a result, provide a limited foundation for anomaly detection. Moreover, incumbent solutions have a narrow view of transaction trails, whereas several non-monetary data streams such as user behaviors and entities may provide helpful context.
A solution lies in looking at the overall activity around transactions and dynamically changing and adjusting rules in response to threats. As such, it is crucial for any financial or crypto organization to have a dynamic and effective AML compliance program in place.
3 AML Technologies You Need to Stay Compliant
Like a user journey, you want to track a user end-to-end to ensure they stay in compliance throughout their transactions.
The three critical components of any AML technology platform consist of: Know your Customer/Business (KYC/KYB) onboarding, followed by Transaction Monitoring and Case Management.
Let’s delve into each of these.
The Identity Verification process, or Know your Customer (KYC) / Business (KYB), is the first step in determining a customer’s identity.
It starts the risk and AML process because an organization can take no further steps until the customer’s identity is confirmed. The KYC process involves customer due diligence, i.e., assessing the risk of doing business with the customer during both onboarding and ongoing after that.
This process demands a balancing act of protecting the business and genuine customers while maintaining a seamless user experience. The right solution in place allows organizations to differentiate between good customers and fraudsters and, in doing so, build trust, prevent fraud, and maintain compliance with regulatory obligations.
Being able to onboard customers with a logic provider with minimal friction while maintaining safety is key to scaling KYC efforts.
Onboarding Orchestration at Unit21
Unit21 provides an open and flexible Onboarding Orchestration solution - the platform ingests any KYC, KYB, or custom data and automates decisions and workflows to quickly onboard users and reduce friction.
Unit21 provides an operating engine that can combine KYC data with other data signals. Moreover, we also help connect customers to leading KYC and KYB, leading data providers that fulfill compliance standards.
Additionally, get an evolving view of each customer, not just a point-in-time view, with profiles that update as user information changes and more data is collected for data monitoring. Unit21’s operating engine that lets teams combine KYC/B with other data signals in a customizable system is genuinely a differentiator that provides companies the agility they need in a changing environment.
Metal Pay, a crypto wallet provider, uses Unit21 to customize and automates customer onboarding workflows for growth and safety to quickly bring in customers and cut investigation times.
Good transaction monitoring proactively safeguards organizations from being targeted by criminals and helps maintain compliance required by regulatory bodies.
Legacy systems lack scalability and often overlook suspicious activities. Compliance alert systems based on standard regulatory technology trigger thousands of false positives every day, exceeding 90%. Transaction monitoring is a critical part of AML and needs to be robust to respond effectively to the illegal laundering of funds.
Transaction Monitoring software is at the core of risk and compliance. Once the customer’s identity is confirmed, transaction monitoring is the next step in fraud and AML management. This is the integral and continuous process for anomaly detection in which suspicious activity is identified and flagged.
Unfortunately, current systems often cannot incorporate additional data or predictive analytics to provide the insights needed for a comprehensive risk assessment. In addition, many non-monetary data sources can provide more context to transactions that are not often captured, such as behaviors and device information.
An effective transaction monitoring system uses rules to ask critical questions about a transaction or activity on an account: is it consistent with the customer profile, matches any financial crime typologies, or stands out as an anomaly?
Data Monitoring at Unit21
Unit21 goes beyond transactions and performs data monitoring.
The Unit21 platform monitors any data of interest in a customizable no-code environment to ensure fraud and AML teams have complete control and visibility of all suspicious activity on your platform.
Users can look at entities, IP addresses, and user behaviors to better understand the anomalous activity. Teams can customize rules and test rules with historical or future data to see what works to reduce false positives. In addition, the solution empowers teams to create complex and dynamic statistical models without engineering resources.
Crypto platform, Bakkt achieved a steady False Positive rate of 15% with Unit21 (compared to an industry average of 90-95%). And Intuit uses Unit21 to solve for scaling anomaly detection and explainability with the platform’s customization & automation capabilities. With Unit21, they avoided customization through costly professional services hours and building an in-house solution.
AML Case Management
In 2021, there were over 2.5 million Suspicious Activity Reports (SARs) filed to
FinCEN. Key regulators, such as FinCEN and the IRS, have developed various tools
for financial institutions to work with.
Most notably, American financial institutions must file a SAR whenever there is evidence of possible money laundering or other suspicious activities. Although SARs are crucial to block money laundering, the system could be much more effective.
The challenge lies in the outdated and largely manual processes that financial teams use to create and submit these reports. Though money laundering is still ubiquitous, there are several instances of SARs being successfully used to combat illicit activity.
A modern risk and compliance system is not complete without Case Management. Case Management is often the final part of an effective fraud and AML solution. Case management requires analysts to review and investigate any suspicious activity identified by either the KYC or transaction monitoring processes.
Companies can meet compliance regulations by creating an effective system for managing cases and investigations while reporting suspicious activities required by law. There are two main case types for financial companies: AML and KYC.
Although related, they are very different in scope. AML may be an umbrella term for all anti-money laundering regulations and operations. KYC guidelines are an essential part of the AML framework. The KYC scope focuses on verifying consumer and business relationships.
Case Management at Unit21
Unit21’s Case Management software streamlines investigations with a highly customizable and automated system of record for customer risk and reviews. To make it simple, the solution also automates SAR e-filing directly to FinCEN.
Connected to both Onboarding Orchestration and Transaction Monitoring, an integrated case management solution enables compliance teams to conduct their investigations far more efficiently.
Unit21 also allows teams to visualize how users are connected to others using network and link analysis. The advanced analytics in the Unit21 dashboard and pre-populated SAR templates differentiate Unit21 and boost investigations for our clients.
Intuit also uses Unit21 for case management and reduced investigation time by 65% with direct SAR filing and pre-populated narrative and action buttons that automate several tasks.
And Japanese media giant LINE’s payments arm reviewed vendors that would take months to complete their integration. Instead, they had a timeframe of weeks. They used Unit21’s transaction monitoring to reduce false positives by 60% in their first 90 days!
Using AML Technology to Enhance Your Compliance Program: Final Thoughts
With the volume of fraud and money laundering growing every year, managing
risk and regulatory compliance is an increasingly tall order; using the three key AML technologies discussed above for AML compliance management is table stakes.
To effectively meet compliance objectives, companies need a platform that provides a perfect balance of automation and control, with complete visibility and ability to audit across all aspects of KYC, suspicious activity detection, investigation, and reporting. Ultimately, you need to keep your entire compliance tech stack ready for threats!
Unit21 was created to put fraud and AML operations directly in the hands of Risk and Compliance teams. It empowers teams to detect and investigate suspicious activity on a highly-visible platform.
Unit21 also provides pre-built rules and models to ensure you are compliant on Day 1 — with the ability to customize those rules with no code easily. To add to Unit21’s ease of use, it automates workflows and SAR filings so your team can focus on what matters the most, saving costs on your AML compliance operations.
You can use Unit21’s platform to manage risk compliance throughout the entire customer journey, from onboarding — to ongoing customer due diligence with identity verification, transaction monitoring, and case management. Each is key to optimizing fraud and AML operations.
Money laundering continues to increase in scale, speed, and sophistication - threatening the revenue and growth of financial teams. Compliance teams need to modernize their AML technology to get ahead of bad actors. It can be extremely difficult to know when the best time is to adopt compliance software, but you'll want to do it earlier than later to ensure adequate security.
Don't wait to future proof your AML compliance and do right by your business, customers, and the world. Schedule a demo today!
Unit21 is dedicated to helping our customers empower their teams to make data-driven decisions in the fight against financial crime. Discover why customers switch to Unit21.
“The not so hidden costs of compliance,” Ascent Tech, 2020
“SEC Division of Enforcement Publishes Annual Report for Fiscal Year 2020” SEC, 2021
“Cryptocurrency-Based Crime Hit a Record $14 Billion”, Wall St. Journal, 2021
“FinCEN Penalizes U.S. Bank Official for Corporate Anti-Money Laundering Failure,” FinCEN, 2020
Confidence in Risk and Compliance: Modernizing Fraud and AML Management, Unit21, 2022