Designing for compliance and control: Financial crime

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Throughout global finance and payments, the structural burden of compliance and control in financial crime is forcing new approaches to organizational design. From the CRO to the CIO office, there is an increasing dialogue between financial institutions, governing bodies, regulators, process and technology operators to reduce detrimental impacts on business value chains, economies and international security.

Designing for compliance and control, targets a reduction in the expanse of effort required to protect markets, organizations, individuals, and national security through improved detection, accuracy and efficiency. The aim is to more effectively instill compliance and control throughout the ‘production process’ of financial services, avoiding expensive research, reviews, remediation and re-work.

As financial products and services expand at global scale, the complexities of risk increase. In the last few years, overall compliance headcount has tripled in tier 1 financial institutions and compliance costs can now represent 15-20% of total operating costs, with major investments in facilities, technology and skills. Furthermore, the unpredictable nature of associated cost drivers results in significant volatility in cost-to-income ratios and the overall risk profile for the organization.

The activities of financial crime, or the use of the financial system for illicit, syndicated activities, such as money laundering, corruption, fraud, cyber-crime, terrorism and arms dealing, run into multi-trillion dollar figures. Many top tier banks have seen the cost of combating financial crime increase by over 50% in the last 3 years, driven by a maze of data sources and specialized operations.

Though it is not only banks that are subject to government legislation surrounding financial crime. Increasingly, any organization that facilitates financial transactions may be in scope for regulation relating to Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT) and Know-Your-Customer (KYC). For example, life-insurers, digital payments companies and retailers, all conduct large-scale financial transactions on a daily basis. Furthermore, governing institutions are increasingly shifting the focus from mere technical compliance toward benchmarking the effectiveness of organizational controls.

Two key challenges in addressing financial crime are explored; Governance and control; and Operational inefficiency; with a view toward perspectives on important operational levers now available to financial institutions.

Key Challenge 1: Governance and control

Managing large volumes, complexities and fragmentation of multi-jurisdictional and interlinked regulation, creates significant issues in managing financial crimes compliance and the associated legal and reputational risks. Financial flows are really a function of information flows, such as acquiring, exchanging, processing, storing and deciding upon information. An inability to share high quality information throughout the global financial services infrastructure has a series of detrimental impacts on governance and control. In many cases, technology enablement is advancing faster than effective regulatory innovation and roadmaps for organizational design must be carefully considered against the organizational risk profile and the moving plane of global risk and regulation.

Key Challenge 2: Operational inefficiency:

The cost drivers associated with financial crime compliance and control are distributed deep and wide throughout financial institutions. Process inefficiencies are prevalent in interpreting and enforcing rules, scenario planning, reporting and investigative functions. IT and operations inefficiencies such as duplicative effort, operational rework and legacy infrastructure all contribute to compliance ‘bulk’. Effective compliance operations are dependent on complex information supply chains involving data standards, large scale data processing, surveillance and analytics. Meanwhile, regulatory domain expertise and skilled people to support these functions are an increasingly scarce resource and resource utilization is a pervasive issue.

Four integrated operating levers

Most financial institutions are lacking the time and capital to achieve transformational solutions for financial crimes and control. However, important operational levers are available as both componentized and integrated deployments and have the capacity to deliver significant returns and improved controls. We explore these below:

1) Outsourcing

While rigorous oversight by financial institutions is required for compliance outsourcing, a coordinated approach to the lower risk activities within 2nd and 3rd lines of defense can yield major benefits. Outsourcing to specialized operators can not only reduce costs and shift operations toward a variable cost structure, but also increase capacity, improve controls and help to predict cost drivers over time. By transitioning to a standardized, flexible delivery model, the activities of the retained risk and control functions can move toward higher value enterprise services, supporting objectives for growth and keeping pace with regulatory change. The global complexities of information sharing can be managed through coordinated approaches to critical data assets, data quality, lineage and security. Meanwhile, the pervasive issue of talent management across regulatory, technical and analytical skill sets can be greatly improved with access to talent pools, higher utilization and embedded metrics for operational excellence.

2) Automation

Robotic and cognitive process automation technologies (RPA / CPA) are revolutionizing many aspects of knowledge work and changing how organizations view their operations. In the financial crimes operations, manual activities associated with multi-channel research, data capture and preparation can be automated to free up capacity, while improving speed and accuracy. Robotic controls can be utilized in case management processes, the updating of records and system health checks. Indeed, robotic automation can promote effectiveness measurement for end-to-end alert and investigation processes, through the provision of automated statistics, accurate alert ranking, automated routing and stakeholder communications. Compliance and investigation staff can spend over a third of their time in routine, rules based activities and most often welcome the opportunity to engage in higher quality activities and outcomes.

3) Platforms

A platform based approach to financial crimes, enables the pooling of functions and technologies, lowering the costs of ownership and continuous management across infrastructure, software and hosting. Monitoring criminal activity goes beyond financial transactions, involving numerous semi-structured and unstructured data sources. A platform approach promotes the aggregation and enrichment of large data-sets, while high-performance processing and mining engines can perform analytics at a fraction of the cost of relational database processing. Real-time workflows and dynamic monitoring capabilities can be supported through improved interfaces and visualization. Crucially, coordinated platform implementations support improved information security and collaboration, and lay the foundation for driving further economies of scale through innovations in distributed ledger and cloud-based implementations.

4) Cognitive 

Cognitive capabilities enable the determination and packaging of insights for efficient scenario planning and decision making. The ability to process and interpret large data sets has increased dramatically with the onset of machine learning techniques. Organizations can now evolve through supervised to unsupervised machine learning, and thereby overcome the challenges associated with the availability of historical data for teaching algorithms. Cognitive techniques can be deployed to more accurately tune and model risk, reducing the overload of false alerts generated from outdated systems and processes, and drawing attention to risks previously unidentifiable by other means. Ultimately, cognitive technologies and network analytics combined support real-time predictive and preventative capabilities to enable more efficient and accurate detection.


In summary, these four levers have the potential to strengthen governance and control for global financial crimes activity, with dramatic improvements in operational efficiency.

Furthermore, these operating levers are by no means mutually exclusive, but can be integrated to optimal effect. For example, outsourced, centralized hubs can provide controlled environments for piloting ‘regtech’ solutions in a cost effective manner, helping organizations to navigate a sea of innovation in compliance technology. Well constructed organizational, data and technology architectures can enable the flexibility of an agile framework, implementing short term accelerators while accommodating for longer term innovation, complex integration and new regulation.  Skill sets such as automation management and analytics can be honed, through the application of deep domain knowledge, together with technology and smart, safe approaches to specific risk and regulatory issues.

Governing authorities rely on financial institutions to gain intelligence on financial crime activity, protect individuals and maintain international security. With more efficient and effective controls, a more accessible financial system can emerge, and with increased opportunities for capital formation and growth.

IBM Global Business Services and Promontory Risk Review are helping financial institutions, global payments and governing organizations with important structural change through the four integrated operating levers of outsourcing, automation, platforms and cognitive. Learn more about the importance of trust and reliability in RegTech. Watch the video.

For more information contact:

Ivan Sean Pulley

IBM Global Business Services

GBS Leader, Operations Transformation, FSS

+1 917-239-9624



FSS, Operations Transformation

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