• John Dobson, CEO at SmartSearch


• 07.09.2021 04:00 pm
#RegTech

For years now there have been discussions of ‘digital revolution’, and how businesses are adapting to an online world. Challenger banks and start-ups have accelerated this need for being agile, with no clunky legacy systems weighing them down, they can offer better customer experience through the use of apps and technology. 

The pandemic has certainly highlighted the gaps between those that are flexible, and those that are stuck with systems unfit for the modern world. Lockdowns changed the way we operate, with work conducted predominantly remotely, and despite the end to lockdown restrictions, many businesses are shifting away from in-person meetings.

One area where these gaps are becoming an issue is the prevention of money-laundering. There are those still relying on antiquated methods of examining a physical passport, comparing it to a selfie, or in person, and deciding if they are who they claim to be. Not only is this method time consuming, it is also highly susceptible to fraud. 

Forged documents are now so sophisticated, that even experts can struggle to identify them. This problem is exacerbated by using photos of documents, which can be easily manipulated by those with even rudimentary photo-editing skills. 

As a result, there has been a spike in fraud. Opportunist criminals, never ones to miss out on capitalising on a crisis, have used the pandemic as an opportunity to launder money. 

Following this wave of illicit activity, the Financial Conduct Authority (FCA) recently wrote to banks to remind them of their obligations under the law to ensure their anti-money laundering (AML) procedures are up to scratch. 

This letter hopefully will become the catalyst for a drastic shift in the way regulated businesses approach their customer on-boarding procedures, moving away from physical documents, and adopting electronic verification.  

Time to shift away from manual onboarding 

The letter from the FCA highlighted common control weaknesses in areas including: governance and oversight; risk assessments; due diligence; transaction monitoring and suspicious activity reporting (SARs).

The fact these areas have been singled out, clearly signifies that a significant number of those in regulated businesses are still relying on outdated and unreliable forms of verification when it comes to onboarding new customers.

Due diligence, governance and oversight, and risk assessments are all areas where the introduction of technology and automation can ensure full compliance, and ensure these vulnerable areas become better protected. 

This is the message the FCA should be sending out to regulated firms. Businesses need to make the shift from manual methods of verification to a fully automated digital solution that is more secure, more efficient and cost-saving.

This is not the first time that the FCA has warned regulated businesses about their anti-money laundering obligations. Earlier this year the FCA said they have amplified surveillance in response to the increasing threat of money laundering. The executive director Mark Steward, speaking at the AML & ABC Forum 2021 said two of the FCA’s biggest sanctions in the last year related to failures to address financial crime and AML risks.

He also said the FCA currently has 42 AML investigations ongoing – 25 into firms and 17 against individuals, primarily focussing on systems and controls over politically exposed persons, customers with significant cash-intensive operations, correspondent banking and trade finance, and transaction monitoring.

Documents are dead

With digital processes replacing traditional analogue methods in virtually all other industries, it feels antiquated to rely on hard-copy documents, particularly in the wake of the FCA’s warning. 

Electronic verification is the answer to this threat. It doesn’t require ID, just a name, address and date of birth (optional) and from those few details, the latest technology can combine credit reference data, biometric facial recognition, and digital fraud checks as well as electoral roll data and other reliable public sources to verify identity. 

This means within a few seconds a business can establish who their customer is, and in the same process they are automatically screened against sanctions and Politically Exposed Persons watch-lists and monitored daily thereafter. The AML onboarding job is then complete and there is no need to worry about those regular changes to watch-lists, as the system will continually monitor these and update customer details.  

The technology can then identify the few cases that are flagged as suspicious, and avoid unnecessary back-and-forth with the 99% of legitimate clients. Electronic verification platforms ensure businesses are doing their due diligence and accurately conducting risk assessments. 

The pandemic has forced a lot of introspection and reviews of the ways we operate. Anti-money laundering procedure should certainly be an area that businesses look to make as efficient and agile as possible. The FCAs warning to the sector should be a wake-up call as those still reliant on manual methods will find themselves not only exposed to potential fraud and money-laundering, and the fines that result, but also lagging behind the more agile and forward-thinking organisations.