Emerging solutions in AML technology
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18 May 2015Arin Ray
Numerous forces of change, not least economic and regulatory changes, are having profound effects on anti-money laundering (AML) culture and technology practices at banks and other financial institutions. Faced with pressures from growing compliance requirements and cutting costs, they are seeking to use technology to increase efficiency and free up resources. Furthermore, the need to ensure enterprise wide compliance is giving rise to centralization and standardization of AML operations, as well as integration of AML and anti-fraud programs. To capitalize on this trend providers are developing solutions that address complete client lifecycle management functions across different lines of business. In particular the Know Your Customer (KYC) function is receiving a lot of attention both from banks and solution providers as that is the first step in the client lifecycle process and successful due diligence and risk profiling of clients during the KYC stage can go a long way in ensuring compliance with AML rules and regulations. Banks typically use a combination of best of breed solutions to cover all of their AML compliance needs; but there is an increasing trend to rationalize number of vendor relationships and source technology from fewer vendors to standardize and centralize operations. Use of technology in AML related activities have traditionally lagged behind other areas of financial services. It was dominated by manual processes and in-house systems for a long time before banks started using third party end to end solutions. Outsourcing of AML operations is still rare. Since the crisis of 2008 banks are having to work under severe cost pressure and are looking to cut cost wherever possible through a combination of new models such as outsourcing, managed services and utilities – these are primarily seen in areas that are non-core, non-differentiating for banks, such as mid and back office functions (e.g., post trade operations). AML operations are not necessarily a differentiator for financial institutions, but due to high sensitivity of AML activities banks have traditionally looked to manage them in-house to have more control and oversight. To strike a balance between these two somewhat opposing needs – cost cutting yet not losing control – some supply side providers have developed outsourced AML offerings whereby the vendor takes charge of the complete or bulk of the AML process freeing up resources of the financial institution and lowering cost of ownership of their AML solutions. We are also seeing new and innovative solutions emerge that support parsing large volumes of data from different sources. Analyzing these data involve unstructured data analysis that is not usually supported by rule based methods followed by traditional AML software. These new solutions employ innovative tools and technology such as machine learning, Fuzzy logic, semantic analysis to not only analyze large volumes of unstructured data, but also carry out traditional tasks of name matching in original languages and scripts without requiring traditional means of translation or transliteration. We discuss a number of such new and emerging solutions in the AML space that address some of these issues in a recently released Celent report. One issue that is still at an idea generation stage is the case of cybersecurity. With growing instances of cyber fraud it is likely that a few solutions will eventually emerge enabling financial institutions to better manage their cyber security. It is interesting to note that some of these emerging issues (e.g., unstructured data analysis, cyber security) do not solely pertain to AML operations, but can be applied to a variety of businesses in a number of industries. Therefore we are already seeing vendors traditionally focused in other industries are entering the financial services space. If these tools and technologies become more popular in the AML space, it is likely that some of the incumbent solution providers would like to add such capabilities to their repertoire, and we may see strategic partnerships or even acquisitions among some of the players in the future.