By Arin Ray, Senior Analyst, Celent.
Growing challenges in watchlist screening
Recent revelations through major document leaks such as the FINCEN Files, Panama Papers, and Paradise Papers, as well as several instances of regulatory fines and consent orders on financial institutions, have highlighted the shortcomings of the current AML screening regime and drawn heightened attention from regulators, political authorities, media, and the public at large. This has prompted regulators and supervisory agencies to strengthen scrutiny; their emphasis is shifting from technical compliance to improving effectiveness of outcomes.
Geopolitical tension among the major economic blocs is adding to the challenges as sanctions are increasingly used in international relations. This means financial institutions (FIs) now need to monitor individuals, entities, hostile governments, and unfavorable jurisdictions, as well as industries and business practices such as weapons manufacturing or drug trafficking in accordance with continuously evolving laws and regulations. There is added scrutiny on screening ultimate beneficial owners because this has emerged as a popular channel for criminals to obscure their operations.
Digitalization of financial services is creating new products, channels, and business models. New players such as digital banks, payment and remittance providers, and fintechs are emerging and competing with incumbents. Digitalization is also reshaping customer behavior and expectations as they increasingly demand rapid onboarding, instant funds transfer, and a frictionless user experience. The pandemic has intensified these trends.
Growing regulatory scrutiny, continuously changing watchlists, and the complexities of an increasingly interconnected and international financial services ecosystem are exposing the limitations of traditional screening technology. FIs are struggling to screen growing volumes of customer and transaction data against a variety of watchlists.