Stock - AML / Money Laundering / Financial crime
Clearly, businesses will need cost effective solutions to taking cyber- and financial crimes. Hiring more personnel to do the job is only adding to the costs. Image Credit: Shutterstock/Vijith Pulikkal

Geopolitical conflicts and other issues such as cyberattacks have fueled an unprecedented and rapid increase in financial crime regulation.

Regulations undergo rapid and extensive updates, necessitating constant oversight and the ability to swiftly incorporate changes.

Challenge for financial organizations

Financial firms are confronted with a substantial challenge as they must not only fulfill compliance obligations but handle an increasing number of digital transactions that require investigation. According to the LexisNexis’ Digital Identity Network, there has been a 37 per cent year-over-year rise in global digital transactions as consumers accelerate transacting online, the growth of which was spurred greatly by the pandemic.

Digital acceleration is causing a significant gap between traditional compliance and operational workflows while creating more opportunities for cybercriminals to exploit digital platforms - and for individuals to become victims of scams.

In 2020, regulators issued an (Australian) $1.3 billion penalty to a large Australian financial institution for failing to implement effective transaction monitoring programs and submit International Funds Transfer Instruction (IFTI) reports to the Australian Transaction Reports and Analysis Centre (AUSTRAC).

An environment of heightened regulatory scrutiny, geopolitical tensions and an expanding transaction volume has resulted in a year-over-year surge in compliance costs, exacerbating the burden on businesses. In 2022, financial institutions spent $274 billion on financial crime compliance, compared to $213.9 billion in 2020.

Coping with the financial crime management environment requires investing in skilled people and leveraging specialized technology. This enhances transaction screening and helps manage regulatory risks while ensuring a flawless customer experience.

Heavy cost of hiring

As a result, labor costs have become a significant component of increased expenses, with businesses hiring to meet compliance demands. More than 50 per cent of global compliance spending is allocated to labor costs.

Digital acceleration and risk management

Organizations using multiple systems and siloed data face an ongoing challenge of balancing evolving compliance requirements, rising fraud and escalating customer expectations amid digital acceleration.

‘Risk orchestration’

To address these demands, many businesses are adopting ‘risk orchestration’ technology, which is gaining traction as a progressive new alternative to solve for legacy and siloed risk management products.

Legacy technology conducts numerous risk assessments and transaction screenings using multiple distinct systems that often lack communication with each other. In contrast, risk orchestration unifies ongoing customer onboarding and risk management processes into a single, easily configurable and scalable solution.

Traditional risk management results in a slower decision-making process and the inability to adapt to evolving regulations or customer requirements, placing businesses at a competitive disadvantage.

Additionally, the combined efforts of multiple teams to onboard customers and monitor transactions consume a significant amount of time and resources, potentially prolonging processes.

Financial services providers, on average, depend on five external vendors for data sources or solutions to combat fraud and financial crime throughout the customer lifecycle.

While some organizations may approach adopting new tech solutions with caution and fear disruptions to day-to-day operations, embracing innovation can bring significant benefits to their business.

Leveraging risk orchestration

Orchestration empowers firms to manage risk and combat fraudulent activities by streamlining compliance and fraud monitoring processes and integrating various workflows.

Small and medium-sized financial organizations that leverage orchestration can make more informed business decisions and improve customer experiences while reducing costs and achieving higher productivity levels through more rapid risk decision making.

As the financial sector aims to take bold actions to combat fraud and mitigate financial crime, effectively meet compliance obligations and enhance customer services, organizations are prioritizing cutting-edge systems.

An organization’s strongest transaction monitoring strategy is only effective when it operates within the capacity of its operations and dynamically reflects its risk reality.

A program that meets regulatory requirements and aligns with business-specific objectives can provide long-term value to the organization. Risk orchestration will play a significant role in helping organizations navigate ever-evolving global regulatory expectations and the rapid digitalization of transactions.