This article will take a closer look at:

• Who can be considered a PEP;
• The risks banks need to mitigate; and
• What banks should be doing to oversee these relationships.

What is a PEP in Banking?

A PEP is anyone who has been appointed to a high-profile position by a government body, usually within the last 12 months. This can include: 

• Ministers of all ranks.
• Heads of government.
• Heads of state.
• Members of parliaments.
• Ambassadors. 
• High-ranking officers in the armed forces.
• Administrators and managers of state-owned enterprises.
• Members of courts and national judicial bodies.
• Those serving on the boards of central banks.

Crucially, PEPs also include the family members of anyone with such positions, their close business associates as well as any beneficial owner of their property.

According to the Financial Action Task Force (FATF), there may be foreign PEPs, domestic PEPs, and those entrusted with prominent functions by state-owned enterprises and international organizations. Notably, any PEP deemed a foreign PEP is simultaneously deemed a de facto domestic PEP in their own country.

In light of this, banks may consider their clients a PEP if:

• They receive funds in retainer form from government accounts.
• Communicate using official stationery from government organizations.
• News reports or conversations suggest they are linked to someone who could be considered politically exposed.

Put simply, if there is reasonably available information that could help identify a client as a PEP – in the public domain, through public registers, or via commercial databases – then regulators expect banks to take additional measures when dealing with them.

The Risks Associated with PEPs in the Banking Industry

When working with PEPs, the primary risks are that the proceeds of bribery and corruption can be laundered through banks, and assets from their country of origin can be obfuscated by complex financial misconduct. These clients are considered more risky to work with because of the access they may have to public resources and the influence they often wield over the movement of large sums of money.

Even if they aren’t participating in illicit activities of their own volition, they can often be the target of parties who want to manipulate the outcomes of legislation and contract negotiations.

•  They may try to launder funds acquired illegally through bribery and embezzlement.
• They may participate in financial crimes like wire fraud to hide the source and destination of their funds.
• They may use funds to conduct or hide broader crimes such as extortion and theft.

Given these sizable risks – and the myriad permutations of criminal activity they make possible – banks need to be able to readily identify and investigate any red flags thrown up by politically exposed clients to ensure their organizations aren’t exposed to the risks of economic crime.

The Regulatory Landscape for PEP Management in Banks

Even though there isn’t a global definition or regulation that applies to the treatment of PEPs around the world, the 39 member nations of the FATF implement the standards and procedures laid out in the FATF guidance.

More specifically, national legislations and international bodies that lay out rules for the heightened scrutiny expected of PEPs include:

• Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act) of 2006 outlines the identification process banks must undertake for PEPs as well as additional due diligence measures and risk management systems.
• Canada’s Proceeds of Crime and Terrorist Financing Act of 2001 lays out reporting and risk management requirements with domestic PEPs retaining their classification for five years after they leave office and foreign PEPs retaining it forever.
• The Financial Action Task Force of Latin America (GAFILAT) is an intergovernmental organization that oversees the implementation of AML and CTF procedures in 17 Latin American countries across south, central, and North America.
• The Middle East and North Africa Financial Action Task Force (MENAFATF) oversees the implementation of FATF’s 40 recommendations in the region.
• Singapore’s Monetary Authority of Singapore (MAS) Notice 626 similarly requires financial institutions such as banks to apply enhanced due diligence (EDD) of PEPs as well as their relatives and close associates (RCAs).
• South Africa’s Financial Intelligence Centre Act was amended to refer to politically influential people (PIP) to also account for private sector officials who have business dealings with elected officials in public services procurement deals.
• The UK’s Money Laundering Regulations set in 2017 mirror the FATF’s definition and recommendations in important ways, while the Financial Conduct Authority (FCA) and Joint Money Laundering Steering Group publish comprehensive guidance on how to manage PEPs.
• Article 3, Number 9 of the European Union’s Directive 2015/849 sets out the definition of PEPs, and several European nations adhere to the FATF’s recommendations.
• The US’ Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Asset Control (OFAC) implement the regulations set out for ‘foreign officials’ (known elsewhere as PEPs) in the Bank Secrecy Act and the PATRIOT Act with requirements for enhanced due diligence and suspicious activity reports (SAR).

The cost of failing to comply with these regulations and guidelines ranges from financial penalties to reputational damages and even sanctions that place banking organizations on worldwide black and grey lists. In some cases, a bank’s charter may even be threatened. 

Why Banks Struggle with PEP Screening

The process of screening PEPs poses a number of distinct challenges for banks trying to implement the appropriate AML processes:

• Customer onboarding processes can take longer when clients need to undergo EDD. This is particularly problematic for the customer experience when controllers have to oversee many false positives, and compliance officers have to rely on low-quality alerts, old data, and flat file uploads.
• Operationally, EDD activities rely on the integration of multiple data feeds, case management systems, and customer relationship management (CRMs). Without the appropriate connections, workflows become slow, and organizations struggle to report suspicious activity in time.
• Differences in regulations between different countries can also cause a lack of consistency in processes across branches. For instance, while domestic PEP screening isn’t mandatory in the United States, it is required in most other countries around the world. Banks need to be able to comply with local requirements.

How Banks Can Mitigate the Risks of Working with PEPs

There are a number of best practices banks can adopt to better manage and screen PEPs in a way that tackles the very real risks of working with them while still preserving the customer experience.

Central to these efforts is establishing protocols for EDD that can be applied either to all PEPs as well as their relatives and close associates or, at the very least, to those PEPs known to pose a higher degree of risk.

• Use higher-quality data: Banks need to be able to maintain their own PEPs list based on a synthesis of multiple different data sources because it isn’t always apparent which clients require PEP status.
• Augment the screening process: Banks should also be screening for adverse media coverage and negative news stories which might alert them to hidden risk.
• Implement a risk-based approach: Banks need to be able to offer different degrees of screening and due diligence to PEPs that pose different degrees of risk. This should vary based on the type of PEP and the jurisdiction they’re from. Crucially, banks should be monitoring this status on an ongoing basis.
• Invest in training: Ultimately, banks need to invest heavily in giving their compliance officers the training and education they need to appropriately analyze alerts and act on novel information. It means investing to improve their workflow so they can operate with confidence at speed.

Advanced PEP Screening Solutions for Banks

To effectively and efficiently manage screening PEPs – and more broadly, manage the challenge of anti-money laundering in banking – firms need access to intelligent automation and workflow solutions. Key features of an advanced PEP screening solution to look out for include:

• Access to real-time, global data with reliable processes that use machine learning to monitor more than 7000 structured data sources for PEPs, their relatives, and their close associates.
• Structured entity-based profiles that automatically capture changes in risk so they can be put through a formal process of approval and control that’s intuitive and quick for compliance officers.
• Sophisticated, configurable matching technology that makes it easier to identify typos and changes while also providing the ability to configure screening parameters based on a firm’s risk-based approach.

The post Understanding PEPs in Banking appeared first on ComplyAdvantage.

In many ways, fraud detection and prevention are just as vital to the long-term health of a bank as customer acquisition and retention.

This article will look at:

• The types of fraud banks have to contend with.
• Some of the methods used to detect and prevent fraud.
• How new technology enables better fraud detection in banking. 

What is Fraud Detection in Banking?

In banking, fraud detection refers to the ability to monitor all transactions and payments in a way that helps banks accurately and quickly notice any suspicious activity worth reporting.

A bank’s ability to do this relies on a combination of:

• Technologies that can work together to rapidly reduce the workload of transaction monitoring at scale by accurately detecting anomalous patterns of activity, from account takeover fraud to Automated Clearing House (ACH) fraud and every variant in between.
• Processes that can synchronize the efforts of customer-facing and compliance teams without subjecting staff to false positives.
• People who have the time and space needed to make clear judgments based on an encyclopedic knowledge of global and local regulations.

Crucially, this core capability is critical to the bank’s wider anti-money laundering and counter-terrorist financing (AML/CTF) efforts. 

Types of Fraud in Banking

 A big part of what makes fraud detection and prevention so challenging for the banking industry is the sheer range of criminal activity possible. Fraud takes many forms, including:

Even beyond these established methods of fraud, the inescapable reality of the modern financial system is that there will continue to be new forms of fraud and creative crime.

Fraud Detection Challenges for Banks

Fraud and attempted criminal activity poses a colossal, multi-dimensional risk to the banking industry. At the heart of this lies three core challenges:

• The volume and variety of fraud: Banks need to be able to monitor millions of transactions to identify thousands of instances of attempted criminal activity every month, from credit card fraud to synthetic identity fraud. Each attempt at fraud is designed to appear deviously different from the last, and compliance teams are inundated by false positives, false negatives, and everything in between. It takes sophistication, agility, and speed to tackle such a wide array of threats at the scale of billions of customer interactions.
• The impact on customer experience: As is so often the case, efforts to improve a bank’s security almost always have an impact on the customer’s convenience. Longer onboarding processes, frozen accounts, and complex authentication procedures all have a detrimental effect on a customer’s ability to move freely. But they’re essential to a bank’s ability to detect and prevent fraud. Even industry-wide developments like open banking create just as many exciting opportunities as they do vulnerabilities.
• The burden of technical debt: In many ways, banks are engaged in a long-term technological arms race against a global diaspora of criminals. But while criminals can simply adopt new technology to attempt new crimes, banks have the additional challenge of tackling new threats with older infrastructure. To reliably detect and prevent fraud, banks need to be able to balance an aggressive evolution of their technology stack with a pragmatic use of the assets they’ve already invested in.

Methods Used by Banks to Detect and Prevent Fraud

 In banking, fraud detection and prevention rely on a combination of analytic techniques and technologies.

1. Analytics technology

Commonly used analytic techniques include statistical data analysis methods like parameter calculations, probability distribution and modeling, regression analysis, and data matching. But banks increasingly rely on artificial intelligence through data mining, neural networks, machine learning (supervised and unsupervised), and pattern recognition.

2. Identification technology

Technologically, banks use cutting-edge methods to authenticate, verify, and identify devices and customers. This includes more recent capabilities like behavioral biometrics and device fingerprinting, but it also includes tried and trusted methods like two-factor authentication and encryption.

3. Workflow technology

It’s also worth noting the infrastructure and software needed to take the signals generated by all these exciting technologies and turn them into an accurate stream of useful alerts for compliance officers and analysts to make sense of. 

People still play a critical role in a bank’s ability to detect and prevent fraud. So it’s vital they operate with tools and technologies that make it easier for them to prioritize and remediate the vast number of potential fraud cases affecting their organizations in an easily explainable way to auditors.

The Importance of AI and Machine Learning in Bank Fraud Detection

Artificial intelligence (AI) and machine learning now play a central role in helping banks combat the threat of fraudulent activity. But it’s important to note that it helps banks in a number of different ways.

First, advanced techniques for anomaly detection, identity clustering, and graph analysis allow banks to see patterns in the vast amount of data they ingest. This kind of technology is vital here because the sheer volume of analysis being conducted would be impossible if it were done manually.

Second, automation helps banks scale up their capabilities to speed up their operations. By automating the creation of alerts and suspicious activity reports (SARs) based on the organization’s specific risk-based approach, banks are able to cover more ground than they could previously. Compliance teams clear more cases more quickly, and they can do so with fewer false positives that waste time.

Third, AI and machine learning allow banks to tackle fraud more flexibly. By enabling compliance teams to integrate more data sources and create their own rules for pattern detection, AI allows the bank to evolve and improve at a rate commensurate with criminals.

Advanced Fraud Detection Software for Banks

To combat the sheer volume, variety, and ferocity of fraud attempts they’re subjected to on a daily basis, banks need powerful AI and intelligent software. When validating vendors for fraud detection, banks may choose to prioritize solutions that offer the following capabilities:

• Rapid data integration to connect multiple streams across adverse media coverage, sanctions lists, politically exposed person (PEP) lists, and ultimate beneficial owners (UBOs).
• A powerful machine learning model that’s trained on proprietary customer, company, and financial risk data to detect more than 50 types of fraud – across all payment rails.
• Unmatched speed to value with out-of-the-box capabilities and proven processes to help banks go live in as little as two weeks.  
• Advanced capabilities like dynamic thresholds, identity clustering, and graph network detection to adapt to criminals, analyze linked accounts, and track funds across the system.
• Baked-in explainability so compliance teams can rapidly share every alert response with the relevant authorities.

The post A Quick Guide to Fraud Detection & Prevention in Banking appeared first on ComplyAdvantage.

They’re an integral part of a bank’s overall anti-money laundering (AML) efforts.

This article will look at:

• What KYC processes are in banking;
• Why they matter; and
• What banks can do to conduct these processes more efficiently and effectively.

Why Does KYC in Banking Matter?

KYC processes play a vital role in the banking industry because they serve to protect both banks and the clients they serve. For banks, KYC processes represent a legal requirement to create and maintain records on the profile of every client (as well as those who may operate on their behalf) so that the bank knows who they’re working with and can report any suspicious activity should it arise.

In this way, it reduces the bank’s exposure to the risk of criminal activity, such as money laundering and terrorist financing, while simultaneously giving crime enforcement authorities the ability and notice necessary to prevent criminal behavior.

For clients, KYC processes ensure that the bank they’re working with is only making recommendations that are suitable for their specific financial situation and needs. They ensure banks are aware of the client’s existing financial standing before suggesting a sale, purchase, or investment of any kind.

In this way, they protect clients from predatory behavior and untoward practices that might threaten their overall financial health.

KYC Regulations for Banks

Banks are subject to KYC regulations and standards all over the world, though there are some differences in when different countries first enacted these requirements as well as in what they precisely stipulate.

Some notable examples of KYC regulations for the banking industry include:

• The Australian Transaction Reports and Analytic Center (AUSTRAC) first established KYC requirements in 1989 with the Anti-Money Laundering and Counter-Terrorism Financial Rules Instrument amending those prescriptions in 2007.
• The Financial Transactions and Reports Analysis Center of Canada (FINTRAC) established itself as Canada’s financial intelligence unit in 2000 and then updated its regulations in 2016 to enact new methods for client identification that comply with new AML requirements.
• The Reserve Bank of India (India’s central bank) introduced KYC guidelines and standards for the first time in 2002 with a particular focus on anti-money laundering compliance.
• Banca d’Italia (Italy’s central bank) set KYC requirements for banks in 2007 and oversees the regulation of all banks and financial institutions operating on Italian soil.
• The UK’s Money Laundering Regulations of 2017 are the latest underlying rules for KYC, with further guidance provided for banks by both the European Joint Money Laundering Steering Group and The Financial Conduct Authority (FCA).
• The US’ Financial Crimes Enforcement Network (FinCEN) enforces the Financial Industry Regulation Authority’s (FINRA) Rule 2090 around Know Your Customer and Rule 2111 around Suitability.
• The Financial Action Task Force of Latin America (GAFILAT) oversees the implementation of AML and CFT requirements for KYC processes in 17 Latin American countries across south, central, and North America.
• The Middle East and North Africa Financial Action Task Force (MENAFATF) oversees the implementation of FATF recommendations for KYC, AML, and CFT all across the region.

Penalties for Non-Compliance

Altogether, banks worldwide have been fined billions of dollars for failing to comply with KYC, AML, and CFT requirements over the past few years. In addition to these financial penalties, banks have also had to contend with severe reputational damage, threats to their charters, and sanctions that ‘blacklist’ them around the world. 

The Three Phases of KYC in Banking

Around the world, regulations and guidelines for KYC in banking stipulate the need for three components, steps, or phases of vigilance. They are:

1. A Robust Customer Identification Program (CIP)

The need for KYC in banking starts when the relationship with the client starts. The first objective is to verifiably determine whether or not the client is who they say they are. This applies to all clients and, in the case of corporate clients, extends to the individuals identified as beneficial owners of the client business.

The documents and identity details required for this step include the client’s name, address, date of birth, and government-issued identification numbers found in passports and/or driving licenses. For corporate clients, this includes business licenses, articles of incorporation, partnership agreements, and financial statements.

Regulators need to be able to see that banks can promptly acquire and verify all this information using well-documented procedures that all staff are trained in.

2. A Risk-Based Approach to Customer Due Diligence (CDD)

The purpose of customer due diligence is to understand the extent to which any given client can be trusted. It’s about determining the degree of risk a bank should assign to their client so firms can administer the appropriate approach for different clients and circumstances.

To that end, most CDD programs are comprised of three distinct levels, each requiring greater diligence than the last.

• Basic (or standard) due diligence is what all clients will be subjected to and often includes steps to determine where the client is and what their typical patterns of transactions look like.
• Simplified due diligence (SDD) is for clients deemed to be of low-level risk. For these clients, banks need only undertake some of their diligence practices as long as they continue to monitor the client’s risk level over the course of the relationship.
• Enhanced due diligence (EDD) is reserved for clients deemed to pose a higher risk of criminal activity like money laundering or terrorist financing. It typically involves the need for more information from clients, external checks against publicly available data and internal investigations into the client’s accounts and transactions.

3. A Continuous System for Ongoing Monitoring

The final phase of KYC in banking is arguably its most critical – the ongoing monitoring of all clients throughout the course of their relationship with the bank. The goal is to keep track of whether or not a client’s risk profile needs to be adjusted based on their activity. Banks are free to determine how frequently these checks are made as well as how many resources need to be dedicated to this.

However, regulators require banks to track changes in the frequency, location, type, and pattern of transactions they’re clients are part of. Banks also need to monitor whether or not there are notable changes in the client’s status. For instance, whether there has been adverse media coverage of them should adjust their risk level. Or if they’re included in publicly available politically exposed person (PEP) lists and sanctions lists.

Common KYC Challenges for Banks

Banks face a number of issues when trying to implement effective KYC programs. Chief amongst these are three common challenges with wide-ranging effects:

• The customer experience suffers. The longer it takes a bank to verify a customer’s identity and risk status, the longer a customer has to wait to achieve their own goals. This friction can motivate banks to take shortcuts in these critical processes, but it can also motivate criminals to try and abuse those very shortcuts.
• The workload is hard to scale. Because of the amount of analysis and investigation required to accurately determine what any given client’s risk level should be, compliance officers are often slowed down by convoluted workflow for false positives. Banks need to constantly improve the rate at which they’re able to conduct checks.
• The diversity of regulations can be overwhelming. Banks operating in multiple jurisdictions need to adopt divergent practices depending on the local regulations that govern them. Compliance teams often struggle to keep up with both the changes in these regulations and the complexity of clients operating in multiple places.

The Influence of AI and Machine Learning on KYC for Banks

Automation plays a crucial role in helping compliance teams at banks overcome all these challenges. AI and machine learning help teams by:

• Speeding up customer onboarding: Allowing compliance teams to complete more thorough checks more rapidly by traversing a vast number of data sources and flagging issues based on the bank’s specific risk-based approach.
• Replacing manual tasks: Allowing compliance officers to spend more time on exceptions and less time validating false positives by automating the processing of multiple cases more accurately and more promptly.
• Simplifying regulatory complexity: Allowing banks to deploy procedures and processes in new jurisdictions while still following their specific risk-based approach by ingesting more relevant data sources and adapting to local laws more quickly.  

Leading AML & KYC Solutions for Banks

Banks require intelligent solutions that can handle the complexity and scale of efficient AML and KYC processes. When evaluating vendors for KYC solutions, it’s important to consider the following key benefits: 

• Automation of ongoing monitoring, which delivers sanction updates up to seven hours earlier than official source emails, allowing compliance teams to identify critical changes in risk earlier.
• Seamless integration with a RESTful API that triggers immediate alerts and webhooks, enabling straight-through processing and the ability to instantly freeze any flagged transaction.
• Streamlined customer onboarding by reducing false positives and improving alert quality, based on a global and dynamic database of sanctions and watchlists.

The post What is the KYC Process in Banking? appeared first on ComplyAdvantage.

These challenges can be addressed with solutions that access updated and reliable sanctions data and configure alerts based on differentiated risks. Read on to understand the complexity of sanctions screening in banking, its benefits and challenges, and three key improvement areas firms can focus on.

What is Sanctions Screening in Banking?

The Sanctions screening process in banking compares customer and transaction data against organizations, goods, places, and people under government-issued sanctions or watchlists. They do this to ensure they don’t facilitate sanctions violations, which can result in fines and imprisonment. 

Banks often use transaction and customer screening tools for this purpose, which may be automated or manual. 

A sanctions screening program is essential to a bank’s broader financial crime risk management strategy. Without it, the bank risks heavy penalties. For example, US banks faced over $33 million in sanctions fines and settlements in 2023 alone – more than 18 times the figure for 2022. Between 2021 and September of 2023, sanctions violations cost individual banks an average of over $4 million.

To effectively comply with anti-money laundering (AML) in banking regulations, sanctions screening should be integrated throughout the entire customer journey as part of a comprehensive and ongoing customer due diligence (CDD) process.

Sanctions Screening Challenges for Banks

Banks must comply with their country’s sanctions regulations, including guidance by the Office of Foreign Assets Control (OFAC) in the US and the Office of Financial Sanctions Implementation (OFSI) in the UK. When facilitating cross-border transactions, they are also subject to international sanctions requirements. 

Banks face five crucial challenges in implementing compliant and effective sanctions screening processes. 

1. Processing times for faster payments

Customers increasingly expect banks to offer faster payments. Yet their rapid nature poses challenges for banks, who must continue to screen transactions according to their risks and regulatory obligations.

The Faster Payments Council defines faster payments as a payment taking anywhere from a day to seconds or less to process. It also acknowledges definitions can be more stringent than this. For example, it points out that for the Committee on Payments and Market Infrastructures of the Bank of International Settlements, a faster payment should occur on as close to a 24/7 basis as possible.

Under either definition, banks offering faster payments are under constraints regarding which services can qualify for the term. Sanctions screening solutions that are not risk-based and tailored to unique risk levels can stop or delay so many low-risk payments that the service may not qualify as a faster payment. This means that for banks to be able to offer the service while remaining compliant, a careful review of risks, processes, and existing tools and personnel is crucial.

2. Overcompliance

Sanctions violations can result in hefty fines, so banks might assume that it’s safer to be as risk-averse as possible – for example:

• Blocking all transactions involving a sanctioned country even if they aren’t prohibited.
• Blocking a refugee’s transactions because they’re citizens of a sanctioned country.
• Refusing business to a sanctioned person, when the business relationship wouldn’t violate sanctions.

But this approach, sometimes referred to as overcompliance, can violate international law and human rights, impede diplomacy and humanitarian aid, and even drive illicit economies. UN Special Rapporteur Alena Douhan urges firms to ensure their sanctions compliance program does not exceed sanctions requirements and recommends taking actions to protect the human rights of those the sanctions might affect – including ensuring they maintain legal access to life necessities and humanitarian assistance. 

3. Screening with outdated data & tools

The US Department of the Treasury’s guide on complying with OFAC requirements lists sanctions screening software failure as one of 10 key reasons sanctions compliance programs fail. Reasons for these failures include:

• Outdated sanctions list data.
• Missing data, such as SWIFT business identifier codes (BIC) for sanctioned entities.
• Ineffective name matching that misses alternative spellings.

Effective sanctions screening depends on reliable sanctions data and effective fuzzy matching techniques, which catch close but not exact name variants.

4. Divergence among sanctioning bodies

Sanctioning bodies do not always apply economic designations consistently. This inconsistency can pose a challenge for banks as they strive to comply with regulations and avoid doing business with sanctioned entities. Following Russia’s invasion of Ukraine, for example, a raft of restrictive measures was placed on Russian individuals and companies, but there was divergence among sanctioning bodies concerning who should or shouldn’t be designated. To mitigate the risk of sanctions circumvention, banks need to ensure they’re screening against quality global sanctions data gathered straight from the source so updates to sanctions lists are not missed.

5. Ineffective transliteration capabilities 

Transliteration, the conversion of names and entities from one writing system to another, is pivotal in the context of sanctions screening. Banks deal with a myriad of international customers and entities, each with names presented in diverse scripts. The challenge arises when transliteration is not executed accurately, leading to discrepancies and potential oversights in the screening process.

Consider, for instance, a scenario where a sanctioned entity’s name is originally in a non-Latin script. If the transliteration process fails to accurately represent this name in the Latin alphabet, the screening software may overlook a potential match. This can result in a critical compliance gap, exposing the bank to unnecessary risks and regulatory scrutiny. The complexity deepens as various languages and dialects contribute to the variety of names encountered in banking transactions. Inconsistent transliteration practices across different regions and languages exacerbate the challenge, making it imperative for banks to address this issue comprehensively.

To overcome the transliteration challenge, banks are increasingly turning to advanced sanctions screening solutions equipped with robust transliteration capabilities. These solutions leverage sophisticated algorithms and linguistic expertise to accurately convert names between scripts, ensuring a harmonized and precise screening process.

Tips to Improve the Sanctions Screening Process in Banking

While sanctions screening can present challenges, many of the most common ones can be addressed effectively. While each firm needs to consider its own unique business environment, five common areas of opportunities we see are: 

1. Review the calibration of screening parameters 

When screening isn’t calibrated to precise risks, firms are more likely to not only over-comply but also miss risks that would have been caught with targeted parameters. It’s therefore crucial for firms to work with subject matter experts to align their screening with precise risk indicators. This approach is more effective than casting a wide net by default.

For example, rather than indiscriminately screening any person or activity from a sanctioned country, the team could evaluate signs pointing to specific sanctions violations they’re at risk for. Are the customers they serve involved in high-risk sectors, such as semiconductors, dual-use goods, or pharmaceuticals? What jurisdictions do they typically serve? Setting parameters that could detect associations between multiple precise risk factors is more likely to catch relevant activity.

Similarly, evaluate whether the screening tool in question offers features like custom fuzzy matching. Fuzzy matching parameters allow firms to catch common name variations or deliberately changed name spellings when there’s a specific need to cast a wider net. (It’s not that wider nets are always unhelpful – they should just be used in a targeted, intentional manner).

2. Review and enhance data quality

Poor sanctions data not only undermines a risk-based approach and leads to inefficiencies, but also means firms can never be sure they are operating according to the most recent regulatory requirements. In our 2023 survey on the role of tech and talent in compliance, 47 percent of firms said they wanted to improve their sanctions and politically exposed persons (PEP) data in their transaction screening solutions. A third were frustrated with a lack of real-time sanctions updates. In our 2023 State of Financial Crime report, we saw that nearly a third of firms – 29 percent – were most focused on improving their sanctions compliance.

So what does this mean for firms? Those concerned about the quality of their sanctions data can examine their current solution with the following questions: 

• How up-to-date is the solution’s sanctions and risk data?
• What process is followed to ensure the solution’s data is up-to-date? 
• If its an ongoing process, how often is the data updated? How quickly does it become available? 
• Where is the data sourced from?

3. Assess solutions against the growing complexity of global sanctions

With the rising complexity of global compliance and sanctions data, legacy solutions can struggle to keep up. Firms using outdated solutions may find they don’t update key data in a timely manner, integrate efficiently with the rest of the compliance tech stack, or monitor risk effectively.

Newer tools can use advanced screening algorithms and make data updates multiple times per day. This can help teams process sanctions risks more effectively, streamline their workflows, and ensure the process interfaces well with the broader compliance function. 

Firms looking to improve or update their current tools can look for robust sanctions data access, flexibility in risk screening levels depending on the customer or transaction type, and automation of crucial components such as daily sanctions list updates.

4. Implement entity resolution technology

Integrating advanced entity resolution technology is pivotal for refining the sanctions screening process. This technology enhances the ability to accurately identify and link entities, reducing the risk of false positives or negatives. By consolidating multiple data points and recognizing relationships between entities, banks can streamline their screening efforts and elevate the overall effectiveness of their compliance measures.

5. Integrate real-time monitoring and alerts

To bolster sanctions screening, banks should embrace real-time monitoring and alert systems. Traditional batch processing may have its merits, but the financial landscape demands a more instantaneous response to potential risks. Real-time monitoring ensures that any suspicious activities or matches are promptly identified, allowing banks to take immediate action. The integration of robust alert systems enhances agility, enabling banks to stay ahead of evolving threats and maintain compliance in dynamic environments.

Overcome Challenges with Advanced Sanctions Screening Solutions

With the rise of artificial intelligence, automation, and more powerful data processing, banks looking to align their sanctions screening tools with a risk-based approach have robust options. Solutions like ComplyAdvantage’s sanctions screening and monitoring offer advantages including:

• Configurable screening alerts: Compliance teams can account for name variants or misspellings and avoid missed sanctions violations using industry-leading screening algorithms and flexible fuzzy name matching.
• Flexible alert frequency for differentiated risk levels based on onboarding: Banks can follow a granular, risk-based approach to alerts, improving accuracy and reducing false positives.
• Automated source checks for sanctions list updates: These come straight from regulators and are checked for accuracy by human experts.
• Integrated workflows, from alert remediation to case management, using REST APIs. 

By integrating reliable data, streamlined workflows, and configurable screening technology, banks can take steps to improve sanctions compliance, cost-effectiveness, and holistic risk management for their companies. Along with regular EWRAs, these central components can ensure a risk-based approach while improving customer relations by supporting higher straight-through processing (STP) rates.

The post How to Improve the Sanctions Screening Process in Banking appeared first on ComplyAdvantage.

• Adverse media screening software to reduce your reliance on manual processes when onboarding and monitoring customers. .
• A way to quickly compare the top available solutions.
• A straightforward list of features and use cases. 

This article summarizes seven adverse media screening software vendors, listing their key strengths and features.

Top Adverse Media Screening Software Companies

1. ComplyAdvantage

Adverse Media Screening from ComplyAdvantage is a natural language processing (NLP)-based solution to help firms analyze AML/CFT risk through negative news at scale. It fulfills all recommendations given by The Wolfsberg Group for negative news screening solutions and enables continuous monitoring, dramatically reducing backlog. It’s based on four central capabilities:

• Structured screening: Instead of screening against an infinite stream of articles, it screens against structured, continuously updated entity and individual profiles. 
• Curated source lists: Financial crime experts collate specific source lists based on the reality of how criminals operate. 
• Contextual machine learning: The solution filters out non-adverse media hits with machine learning that’s trained on the specific context of adverse media. 
• FATF Taxonomy: It leverages an anti-money laundering and combatting the financing of terrorism (AML/CFT) taxonomy that’s aligned with the regulations and guidance laid out by the FATF. 

Top ComplyAdvantage features:

Adverse Media Screening from ComplyAdvantage is ideally suited to a range of organizations, including banks, insurance companies, and payment providers who need to shorten customer wait times, improve analyst productivity, and proactively manage compliance. 

The solution’s most important features include:

• Live profiles – Use live, structured profiles consisting of rich, dynamic information from millions of data points to reduce onboarding times by as much as 80 percent. 
• Streamlined workflows – Focus on the alerts that matter most with automation for labor-intensive processes and custom risk profiles that are quick and easy to create.
• Automated KYC updates – Meet even advanced due diligence requirements with automated updates for continuous know your customer (KYC) without manual rescreening. 
• Tailored alerts – Customize your program based on the risks that are most relevant to your business and select source lists based on recommendations from the FATF and EU money laundering directives (MLDs).
• Hassle-free API integration – Integrate the feeds, systems of record, and applications you rely on into a single search function.
• Natural language processing (NLP) – Use a contextual approach to filter out non-adverse media hits. 

ComplyAdvantage’s Adverse Media Screening customers include Allianz, Currencycloud, Holvi, raisin, and Luno. 

2. Quantifind

As per Crunchbase, Quantifind provides “AI solutions for anti-money laundering and fraud detection”. 

The top Quantifind features for adverse media screening include (1): 

• AI-driven continuous monitoring – Use AI to curate public data sources and receive push notifications when new signals emerge.
• Dynamic risk rating – Target specific concerns with granular risk typologies such as extortion, child exploitation, and elder abuse.
• Programmatic search – Anonymously and automatically search a massive array of public data sources.
• API integration – Get summarized results through API’s and a web-based investigation application.
• Native foreign language search – Use non-roman characters to boost the accuracy and quantity of available data. 

According to Quantifind, its customers include Financial Systems Polaris, Oracle FCCM, and Varo.

3. Quantexa

Crunchbase describes Quantexa as a “decision intelligence platform for the banking, insurance, and government sectors.”

Quantexa’s top features include (2): 

• Intelligence-led investigations – Automate first-line (L1) investigations and augment second-line (L2), third-line (L3), and financial intelligence unit (FIU) investigations with an integrated investigation platform. 
• Dynamic, real-time connections – Identify threats like money laundering and terrorist financing rapidly by surfacing connections.
• Continuous risk monitoring – Detect risks in real-time with end-to-end monitoring and alert management for investigations.
• Data governance – Manage and ingest data in a way that increases transparency and control across fincrime use cases.
• Transparent statistical models – Make it easier to explain to stakeholders how data is joined together and used for decision-making.

According to Quantexa (3), its customers include ABN Amro, Accenture, and Bronte Capital.

4. Dow Jones Risk and Compliance

According to G2, Dow Jones Risk and Compliance is “a global provider of third-party risk management and regulatory compliance solutions”. 

Its top features include (3): 

• Real-time, continuous monitoring – Get real-time alerts that present a holistic view of client risk.
• Identity resolution – Reduce false positives with identities resolved across languages using NLP technology that matches biographical details in client records.
• Continuously improving classification – Supervised machine learning classifies news articles into risk categories to reduce the burden of processing each alert.
• Open architecture – Use multiple APIs to integrate into your existing systems for both onboarding and continuous monitoring.
• Customizability – Reduce manual effort with configurable search precision, ad-hoc screening, batch processing, and real-time screening through configurable workflows.

Dow Jones Risk and Compliance does not list its customers publicly. 

5. LexisNexis Risk Solutions

According to Crunchbase, LexisNexis Risk Solutions “provides information to assist customers in industry and government in assessing, predicting and managing risk”. 

LexisNexis’ adverse media screening capabilities are packaged within its Bridger Insight XG solution. Its top benefits include (5):

• Faster screening and account opening – Reduce onboarding times and screen transactions with fewer manual reviews.
• Customer lifecycle management – Orchestrate relationships across a single, configurable, and accessible platform for financial crime lifecycle management.
• A single risk view – Combine global risk data spanning global sanctions, politically exposed persons (PEPs), adverse media, and state-owned companies.

LexisNexis’ customers include Zopa, Advantage Finance Limited, and Cashhome. 

6. LSEG Data & Analytics (Previously Refinitiv) 

According to Crunchbase, the London Stock Exchange Group (LSEG) is a “provider of financial markets data and infrastructure”. 

LSEG’s adverse media tool’s top features include (6) (7):

• A highly structured format – Identify entities and individuals reported in reputable media as being involved in specific offenses monitored by World-Check.
• One Media Check – A highly customizable screening tool that uses intelligent tagging and NLP to efficiently return relevant search results. 
• Pursue your own policies – Screen against the records that fit your own policies, procedures, and risk-based approach by filtering secondary identifiers, keywords, and more.
• Special Interest Categories – Select topics of interest for a more granular view of potential risks associated with both the pre- and post-conviction records included in the World-Check database.

LSEG’s customers include Union Bank and Sansan.

Best Adverse Media Screening SoftwareVendors: Side-by-Side Comparison

All information sourced from publicly available websites, and correct as of November 2023. If you’d like to request a correction, please e-mail content@complyadvantage.com and we’d be happy to review this with you. 

Next Steps: Explore Adverse Media Screening from ComplyAdvantage

Discover why businesses around the world choose ComplyAdvantage for adverse media screening, and book a demo to see the solution for yourself. 

Source material

(1) https://www.quantifind.com/use-case-adverse-media-screening/

(2) https://www.quantexa.com/solutions/aml 

(3) https://www.quantexa.com/featured-customers/

(4) https://www.dowjones.com/professional/risk/advanced-screening-monitoring/

(5) https://risk.lexisnexis.co.uk/products/bridger-insight-xg

(6) https://www.refinitiv.com/en/risk-and-compliance/financial-crime-risk-management/adverse-media-screening

(7) https://www.refinitiv.com/en/about-us/customer-stories#t-sansan

(8) https://www.prnewswire.com/news-releases/quantifind-announces-strategic-partnership-with-opoint-unlocking-unparalleled-global-news-data-301866886.html

(9) https://www.quantexa.com/partner-ecosystem/

The post Best Adverse Media Screening Software: 6 Vendors Compared appeared first on ComplyAdvantage.

• Politically exposed person (PEP) and sanctions screening software to improve your efficiency and accuracy.
• A quick comparison of the top available solutions.
• A clear list of features. 

This article summarizes seven PEP and sanctions screening software vendors, listing their key strengths and features.

Top Sanctions Screening Software Companies

1. ComplyAdvantage

Sanctions and Watchlists Screening from ComplyAdvantage combines rapid updates to global sanctions data with manual data quality checks by domain experts to help businesses accurately screen against sanction lists, watchlists, and PEP jurisdictions. Its five primary benefits are:

• Market-leading data – Independent reviews of our PEP coverage have consistently found our product offers coverage ahead of the competition.
• Higher alert quality – Manage alerts more effectively with our industry-leading search algorithms.
• Configurable parameters – Flexibly set risk-based alert frequencies and differentiate risk screening levels once a customer is onboarded. 
• Autonomous systems – Check all the sources that matter to you regularly, with updates coming in every few hours.
• Shorter remediation times – Match your workflow by integrating data feeds, case management systems, and CRMs.

Top ComplyAdvantage features:

Sanctions and Watchlist Screening from ComplyAdvantage is used by a large number of industries ranging from those offering financial services to those relying on counterparties and those enabling payments. 

The solution’s top features include:

• Case management – Provides all case context on a single screen, plus bulk decisions on onboarding/monitoring cases.
• Risk scoring – Advanced, automated risk scoring based on your risk policies. 
• Insights – Into team workload/performance, noise-generating sources, customer risk, rule performance & performance on SLAs.
• Search and monitor – Individuals, companies, organizations, vessels, or aircrafts.
• Audit logs – Comprehensive audit logging keeping firms prepared for regulator scrutiny at any time.
• Account configuration – Unmatched configurability at multiple levels and fuzziness setting for each source.
• User management – Easily set and edit role-based access for users.
• And more – Self-serve data exports, whitelisting, and a lot more.

ComplyAdvantage’s Watchlists and Sanctions Screening customers include ABInBev, AJBell, Zoopla, and Plaid. 

2. Quantifind

As per Crunchbase, Quantifind provides “AI solutions for anti-money laundering and fraud detection”. 

The top Quantifind features for sanctions screening include (1): 

• Name science-driven entity resolution – Get substantially fewer false positives with AI-powered name-matching accuracy.
• Search in real-time – Instead of relying on manually curated lists or storage of sensitive data.
• Pushed alerts on new sanctions – Based on comprehensive coverage of global watchlists and sanctions lists that are routinely updated.
• Advanced investigation applications – Improve productivity by helping analysts work in familiar environments.

Quantifind’s customers include Financial Systems Polaris, Oracle FCCM, and Varo.

3. Quantexa

Crunchbase describes Quantexa as a “decision intelligence platform for the banking, insurance and government sectors.”

Top Quantexa features include (2): 

• Intelligence-Led Investigations – Automate first-line (L1) investigations and augment second line (L2), third-line (L3), and FIU investigations with an integrated investigation platform. 
• Dynamic, real-time connections – Identify threats like money laundering and terrorist financing rapidly by surfacing connections.
• Continuous risk monitoring – Detect risks in real-time with end-to-end monitoring and alert management for investigations.
• Data governance – Manage and ingest data in a way that increases transparency and control across FinCrime use cases.
• Transparent statistical models – Make it easier to explain to stakeholders how data is joined together and used for decision-making.

According to Quantexa (3), its customers include ABN Amro, Accenture, and Bronte Capital.

4. Dow Jones Risk and Compliance

According to G2, Dow Jones Risk and Compliance is “a global provider of third-party risk management and regulatory compliance solutions”. 

Its top features for sanctions screening include (3): 

• ISAE3000 International Certification – Achieved based on stringent processes for internal quality assurance along with annual reviews by independent auditors.
• Continuous updates – All sanctions lists, official lists, and exclusion lists are monitored constantly to capture updates from international governments. Some lists are updated multiple times a day.
• Consolidated watchlists – Prevent duplicated alerts with aggregated lists that reduce the number of hits generated to keep search results relevant.
• Regulator-friendly transparency – Work with a team of content strategists who maintain an open dialogue with you to conduct ongoing analysis of the regulatory environment.

Dow Jones Risk and Compliance does not list its customers publicly. 

5. Moody’s Analytics

Crunchbase describes Moody’s Analytics as providing “financial intelligence and analytical tools”. 

Moody’s Analytics’ top features include (5): 

• Data management – Use master data management to create the best starting point for your sanctions screening program.
• Sanctions list screening – Ensure fast, accurate screening of all relevant global sanctions and watchlists.
• Comprehensive exposure – Conduct deeper investigative research into sanctions-related risk as part of enhanced due diligence.
• Ownership & control sanctions – Understand ownership and control of legal entities by identifying those sanctioned by the 50 percent OFAC rule and the EU & UK’s “control” rules.
• Noteworthy associations – Uncover hidden networks of ownership and control through family members or close connections. 
• Proactive monitoring – Update sanctions coverage daily and get alerts when there is a change. 

Moody’s Analytics (6) customers include Raiffeisen Bank and Erste Bank der oesterreichischen Sparkassen AG.

6. LexisNexis Risk Solutions

According to Crunchbase, LexisNexis Risk Solutions “provides information to assist customers in industry and government in assessing, predicting and managing risk”. 

LexisNexis’ Bridger Insight XG top benefits for watchlist, sanction, and PEP screening include (7) (8):

• Faster screening and account opening – Reduce onboarding times and screen transactions with fewer manual reviews.
• Customer lifecycle management – Orchestrate relationships across a single, configurable, and accessible platform for financial crime lifecycle management.
• A single risk view – Combine global risk data spanning global sanctions, politically exposed persons, adverse media, and state-owned companies.

LexisNexis’ customers include Zopa, Advantage Finance Limited, and Cashhome. 

7. LSEG Data & Analytics (Previously Refinitiv) 

According to Crunchbase, the London Stock Exchange Group (LSEG) is a “provider of financial markets data and infrastructure”. 

LSEG’s top features include (9) (10):

• ISAE 3000 design-effectiveness certification – A specialist research unit monitors major sanction lists 24/7, 365 days a year. 
• Deduplicated records – All information by sanction issuers is available on a single record with official sources for verification.
• Configurable search – Filter keyworded records easily and choose which records to screen based on your own risk-based approach, policies, procedures, and regulations.
• Narrative, implicit, and sectoral sanctions compliance – Benefit from additional qualitative research to uncover those entities and individuals within the scope of such sanctions.

Refinitiv’s customers include Union Bank and Sansan.

Best Sanctions Screening Software Vendors: Side-by-Side Comparison

All information sourced from publicly available websites, and correct as of November 2023. If you’d like to request a correction, please e-mail content@complyadvantage.com and we’d be happy to review this with you. 

Next Steps: Explore Sanctions & Watchlists Screening from ComplyAdvantage

Discover why businesses around the world choose ComplyAdvantage for adverse media screening, and book a demo to see the solution for yourself. 

Source material

1 https://www.quantifind.com/use-case-watchlist-screening/

2 https://www.quantexa.com/solutions/aml 

3 https://www.quantexa.com/featured-customers/

4 https://www.dowjones.com/professional/risk/sanctions-compliance/

5 https://www.moodys.com/web/en/us/kyc/solutions/sanctions.html

6 https://www.moodys.com/web/en/us/kyc.html#what-our-customers-say

7 https://risk.lexisnexis.co.uk/products/bridger-insight-xg

8 https://www.refinitiv.com/en/risk-and-compliance/financial-crime-risk-management/sanctions-screening

9 https://www.refinitiv.com/en/about-us/customer-stories#t-sansan

10 https://www.quantexa.com/information-security/

11 https://sustainability.moodys.io/privacy

12 https://www.lexisnexisip.com/resources/lexisnexis-patentsight-receives-iso-27001-certification-for-international-information-security-standard/

13 https://my.refinitiv.com/content/mytr/en/policies/information-security.html

14 https://www.dowjones.com/professional/risk/sanctions-compliance/

15 https://www.moodysanalytics.com/solutions-overview/data/sanctions-watchlists-data

16 https://risk.lexisnexis.com/global/en/financial-services/financial-crime-compliance/watchlist-screening

17 https://www.lseg.com/en/post-trade/regulatory-reporting#benefits

The post Best Sanctions Screening Software: 7 Vendors Compared appeared first on ComplyAdvantage.

In our Insurtech Financial Crime Guide, these challenges are discussed to help compliance managers address their compliance obligations whilst maintaining growth. This article outlines four common principles that can help insurtechs approach the growth vs compliance challenge effectively.

1. Maintain a proactive understanding of regional and national regulations 

The regulatory environment for insurance can vary significantly across jurisdictions, making it challenging for insurtech companies to stay informed about changes in laws and compliance standards. While keeping abreast of regional legislation is essential, the savviest of firms will be proactive and aim to keep up with national and global regulations to help spot trends that may impact them down the road. Key legislation pertaining to insurance includes:

• United States: The Bank Secrecy Act (BSA) requires insurance companies with a nexus to the US to implement anti-money laundering and combating the financing of terrorism (AML/CFT) compliance programs.
• European Union: The insurance industry is regulated at a national level, but the EU’s anti-money laundering directives (AMLDs) aim to establish a consistent regulatory environment. 
• United Kingdom: In the UK, only life and investment providers are subject to AML/CFT regulations, but all insurers must follow the Senior Management Arrangements, Systems, and Controls (SYSC) framework, the Proceeds of Crime Act (POCA) 2002, and the Sanctions and Money Laundering Act (SAMLA) 2018. 
• Singapore: In Singapore, insurance providers, insurance intermediaries, and related institutions are regulated under the Insurance Act of 1966.
• Australia: The insurance industry in Australia is regulated by two main laws: the Insurance Act 1973, and the Insurance Contracts Act 1984. Insurance intermediaries, including agents and brokers, are regulated under Chapter 7 of the Corporations Act 2001.

A deep understanding of regulations enables insurtechs to identify and mitigate compliance-related risks early on. By adapting to these changes, firms can adjust their operations swiftly to comply with the new requirements. This adaptability is essential for maintaining a seamless business process and avoiding potential disruptions that may arise from non-compliance. 

2. Implement scalable risk management systems

By anticipating regulatory challenges, insurtechs can then implement risk management strategies that address potential pitfalls before they inhibit business growth. This proactive risk mitigation not only safeguards the firm’s reputation but also enhances investor and customer confidence – crucial elements for sustainable scaling. 

But what should these risk management strategies look like?

In recent years, technology, specifically regtech, has played an increasing role in compliance and risk management. These systems are designed to adapt to evolving regulatory landscapes while accommodating increasing data volumes. They often employ machine learning (ML) algorithms to analyze vast datasets, identify patterns, and prioritize potential risks. Through real-time monitoring and predictive analytics, regtech risk management systems can enhance compliance and minimize vulnerabilities, providing a robust and scalable solution for insurtechs. Automation is also a key feature of scalable regtech, as it not only enhances the speed and accuracy of regulatory requirements – like customer risk assessments – but also allows firms to allocate resources more effectively.

When implementing such systems, the Financial Action Task Force (FATF) encourages taking a risk-based approach, where standards are applied sensitively according to the customer, geographic, and product/service/channel risks. This approach allows insurtechs to calibrate their risk management tools based on the nature of their business.

3. Actively seek opportunities to collaborate with regulatory bodies

When working on aligning business strategies with regulatory expectations, insurtechs may also consider collaborating with regulatory bodies through strategic initiatives. Such collaboration could take multiple forms, including:

• Participating in industry forums to create a platform for networking. 
• Communicating regularly with regulatory authorities to advise on sector updates and trends.
• Joining advisory panels, pilot programs, or research initiatives to contribute first-hand knowledge from working in the industry.
• Participating in regulatory sandboxes to test innovations under regulatory supervision. 

By actively participating in this collaborative process, insurtechs can gain a deeper understanding of regulators’ priorities, positioning them as responsible and compliant entities – which can be advantageous when seeking approvals, licenses, or partnerships that may be necessary for future growth.  

4. Partner with an agile vendor that can meet changing requirements

Effective collaboration, however, goes beyond joining regulator sandboxes and information-sharing initiatives. Insurtechs that want to grow while staying compliant should focus on partnering with vendors that can adapt quickly to changing regulations. These agile vendors can help firms remain responsive in the face of evolving regulatory requirements.

Picking a vendor familiar with the ins and outs of the insurtech industry is equally important. Industry knowledge is crucial when it comes to tailoring solutions to address compliance challenges specific to insurance operations. It ensures that compliance efforts are not just effective but also attuned to the distinct demands of the insurance sector.

Additionally, opting for a vendor with pre-built rules for transaction monitoring and fraud detection can simplify implementation. These pre-configured rules, shaped by industry insights, make transaction monitoring more efficient and fortify fraud detection processes. This collaborative approach enables insurtechs to roll out comprehensive compliance solutions swiftly, allowing them to focus on core business goals and supporting sustainable scalability.

The post Growth vs Compliance: A False Choice? appeared first on ComplyAdvantage.

In chapter four of our Insurtech Financial Crime Guide, firms can score their programs against our fincrime checklist. Based on the list, this article explores five best practices that insurtechs can use to manage financial crime risks and regulatory compliance effectively.

1. Adopt a Truly Risk-Based Approach

A risk-based approach is foundational to financial crime risk management for insurtech companies. Instead of relying on a generic regulations checklist, insurtechs should embrace a more holistic strategy that assesses the specific risks they face and tailors their controls accordingly.

To embark on a risk-based approach, insurtechs should undertake an annual enterprise-wide risk assessment (EWRA). This comprehensive evaluation should encompass:

• Inherent financial crime risks: Identify the inherent risks associated with the insurtech’s operations, considering factors such as the types of insurance products offered, customer demographics, and distribution channels.
• Control effectiveness: Assess the effectiveness of existing controls in mitigating financial crime risks. Evaluate how well current practices align with the identified risks.
• Residual Risks: Calculate the residual risks that remain after applying current controls. This step is crucial in determining where additional measures are necessary.
  

By conducting an EWRA, insurtechs can gain a deep understanding of their specific risk profile and make informed decisions about risk management strategies.

Building on insights from the EWRA, insurtechs can develop a framework for managing financial crime risks. This framework should include calibrated policies, procedures, and controls tailored to the actual levels of risk. A practical example of this approach can be found in the Wolfsberg Group’s Guidance on a Risk Based Approach for Managing Money Laundering Risks. This framework has been successfully applied across multiple sectors and can serve as a reference for insurtechs looking to fine-tune their risk management strategies.

2. Conduct a Gap Analysis to Identify Vulnerabilities

Comprehensive anti-financial crime programs encompass a wide range of activities, including the appointment of senior compliance officers, the establishment of governance structures, and the formulation of policies and procedures. While these elements are critical, other core activity areas that insurtechs must address to meet their obligations and identify risks effectively include:

• Identity verification (IDV): Insurtechs must collect, verify, and securely store sensitive personal data that confirms the client’s identity. Robust IDV processes are essential to prevent identity theft and fraud.
• Customer due diligence/know your customer (CDD/KYC): This involves collecting, assessing, and securely storing documentation and data on the client’s financial circumstances. It creates a baseline understanding of how clients will likely use insurance products.
• Customer screening: To identify potential risks, insurtechs should conduct a thorough screening of client names against sanctions lists, politically exposed person (PEP) data, and adverse media sources.
• Fraud detection: Detecting and preventing fraud during applications, claims processing, or policy changes is a critical ongoing activity. It includes verifying the identity of the claimant or beneficiary and assessing the validity of the claim.
• Transaction monitoring: Regularly reviewing client transactions, such as premium payments and claims histories, can help identify unusual or suspicious behavior.
• Ongoing screening: Monitoring existing client names for updates to relevant sanctions lists, PEP status, and adverse media is necessary to stay informed about evolving risks.

While the Financial Action Task Force (FATF) and national regulators do not prescribe specific processes for these activities, they encourage firms to develop responses tailored to their business and risk profile. In practice, insurtechs must decide how much they should automate and digitize traditionally paper-based and face-to-face activities. Given the scale and growth of the insurance market, rising customer expectations, and the need to control costs, technology is often seen as the solution. However, challenges exist in adopting regulatory technology (regtech) solutions, particularly for digitally native firms like insurtechs.

3. Confront Implementation Challenges

Insurtechs need to be confident that the AML and anti-fraud measures they implement will mitigate risks to a level that will prevent criminals from taking advantage of them and their customers and satisfy the exacting demands of regulators. When it comes to implementing these measures, several common challenges require attention: 

• Remote access: Insurtech operations are often conducted online, and employees may never have direct contact with clients. This presents the risk of impersonation or using fake documentation to support fraudulent claims.
• Incomplete risk data: Many firms rely heavily on vendors for risk information. While reputable vendors provide valuable data, some may exaggerate the scope and scale of their information, leaving clients with significant risk coverage gaps during onboarding and ongoing monitoring.
• Time gaps: The dynamic nature of sanctions lists, with rapid changes, can pose challenges for insurtechs. Many vendors offer updates every six to 12 hours, but some firms only run batch checks once a day or overnight. This time lag can result in payments that should be blocked passing through due to delays in updating.
• False positives: Many automated platforms for fraud, money laundering, and sanctions detection rely on hard-coded, rules-based triggers and basic name-matching techniques. However, criminal behaviors are sophisticated and agile. Rules-based systems often generate many false positives, making the processes resource-intensive and inefficient.
• Lack of flexibility and integration: Legacy platforms may function as standalone offerings, struggling to interact with other systems within a firm’s technology suite. Siloed financial crime platforms and processes have, in the past, led to the oversight of real risks.
  

Insurtechs must address these challenges to ensure that the measures they implement effectively mitigate risks and satisfy regulatory demands. This requires a thoughtful and dynamic approach to risk management.

4. Explore Advanced Solutions Offered by Regtech Providers

To overcome these challenges and optimize financial crime risk management, insurtechs must explore innovative solutions and leverage the capabilities offered by regtech providers. But not all vendors are created equal. Capabilities to assess vendors for include:

• Cloud computing for real-time risk data and screening: Distributed cloud computing allows the secure storage of extensive risk data, eliminating physical storage limitations. Additionally, it enables real-time data updates in all locations simultaneously, ensuring that screening lists are always up-to-date.
• Machine learning (ML) for pattern recognition: ML algorithms are increasingly effective in identifying discrepancies in client documentation during onboarding. They can also detect subtle changes in client behavior, making it easier to spot potential fraud and other financial crimes. ML can significantly reduce false positives, lowering the costs associated with unnecessary alerts and unjustified payouts. Furthermore, ML can be employed for fuzzy matching of equivalent names in screening and to assess the likelihood of a match. These tools can identify duplicate records, resolve gaps, match names in multiple languages and scripts, and allow characters to be inserted, omitted, or replaced.
• APIs for flexibility and integration: Platforms that incorporate application programming interfaces (APIs) are well-suited for enabling flexible and integrated systems. APIs facilitate the pooling of risk data from multiple sources and allow different platforms to communicate important information promptly. This prevents missed opportunities that could lead to financial crime risks falling through the gaps.
  

Insurtechs should carefully evaluate these solutions and ensure that they align with their specific needs. It is crucial to select regtech vendors capable of delivering the most effective and appropriate technology for each particular task. By leveraging these innovative solutions, insurtechs can significantly enhance their financial crime risk management processes.

5. Play to the Inherent Strengths of Insurtech Business Models

While it’s easy for insurtechs to focus on the risks their innovative business models pose, it’s important not to overlook some of the advantages too. For financial crime risk management, these include:

• Cultural familiarity with technology: Insurtech companies are inherently tech-savvy and have a cultural appreciation for the value of technology. This cultural alignment allows for smoother integration of technology solutions into their operations.
• Richer and cleaner data sets: Insurtechs often benefit from more extensive and cleaner data sets compared to legacy insurance companies. This enhanced data quality can improve the accuracy and effectiveness of financial crime risk management systems.
• Agile technology: Insurtechs are typically more agile in their technology adoption and implementation. They can readily pivot to implement advanced regtech solutions, responding swiftly to emerging risks and compliance requirements.

Incorporating these advantages into their approach to financial crime risk management positions insurtechs as regtech adopters who can efficiently manage risks and meet regulatory demands. Their ability to innovate and stay at the forefront of technology adoption is a competitive advantage in the insurance industry.

By following these five best practices, insurtechs can build a strong foundation for financial crime risk management, ensuring their operations are both secure and compliant. As the insurtech industry evolves, staying committed to effective risk management is essential for building trust with customers and regulatory authorities while achieving long-term success.

The post Financial Crime Risk Management: Best Practices for Insurtechs appeared first on ComplyAdvantage.

But what are these requirements, and how can firms ensure compliance to help safeguard the integrity of Australia’s financial system? This article explores the nuances of Australia’s KYC requirements, offering compliance professionals guidance on mitigating the risk of non-compliance and improving their firm’s onboarding protocols.

What is KYC and Why is it Important? 

KYC is the process of verifying a customer’s identity before facilitating their transactions. By law, Australian firms must identify both individual customers and corporate entities by verifying their personal and company information using official documentation. Firms must also assess the risks of facilitating transactions on behalf of these clients or entities.

KYC is important for several reasons:

• Preventing financial crime: KYC checks help mitigate the risk of financial crimes such as money laundering, terrorist financing, fraud, and identity theft. By verifying the identity of customers, firms can reduce the risk of these illegal activities occurring with their systems.
• Regulatory compliance: Australia’s AML/CTF laws require regulated firms to implement KYC procedures. Failure to comply with these regulations can result in several penalties, including fines and legal consequences. 
• Risk mitigation: KYC allows FIs to assess the risk associated with each customer. Customers with higher-risk profiles, such as politically exposed persons (PEPs) or those from high-risk jurisdictions, may require more extensive due diligence to ensure they are not involved in illicit activities. 
• Enhanced security: Verifying customers’ identities helps protect businesses and legitimate customers from fraud and unauthorized transactions. It adds an additional layer of security to transactions and reduces the likelihood of account takeover or unauthorized access. 
• Collaborating with law enforcement: In situations where financial crimes do occur, KYC records can be invaluable for law enforcement agencies – in Australia’s case, the Australian Federal Police (AFP), the Australian Criminal Intelligence Commission (ACIC), and the National Anti-Corruption Commission (NACC) to name a few. Theses agencies can use the information to investigate and prosecute individuals or business entities involved in illegal activities. 

AML & KYC Regulations in Australia

The AML/CFT Act 2006

The Anti-Money Laundering Counter-Terrorism Financing (AML/CFT) Act 2006 outlines Australia’s framework for combatting money laundering and the financing of terrorism. It details expectations, regulations, and penalties for non-compliance. The Act applies to a wide range of businesses and professions, called reporting entities, including:

• Banks.
• Financial institutions.
• Casinos.
• Cryptocurrency exchanges.
• Bullion dealers.
• And more.

Under the legislation, reporting entities are required to conduct customer due diligence (CDD) procedures. They must also report any suspicious activity or large cash transactions to the Australian Transaction Reports and Analysis Centre (AUSTRAC). Additionally, firms are required to keep records of customer information for at least seven years after the provision of any designated services has ceased. 

The Privacy Act

Additional KYC legislation applicable for Australian firms includes the country’s Privacy Act, which covers all personal information that is collected and verified during the customer identity verification process. Since this type of information is considered sensitive, companies should consider storing the data with a higher level of privacy protection, according to the Australian Privacy Principles.

Chapter 11 of the Australian Privacy Principles outlines the steps that reporting entities should take to ensure the security of personal information gathered throughout the KYC process. These steps involve: 

• Implementing a culture of data governance.
• Maintaining the culture through regular training. 
• Employing data handling practices, procedures, and systems across business models.
• Ensuring robust IT and access security.
• Developing internal strategies in case of data breaches.
• Identifying a process for the destruction and de-identification in certain circumstances.

Australia’s Financial Regulators

Including AUSTRAC, there are three main financial regulators in Australia:

• AUSTRAC provides tools, AML/CTF guidance, and enforcement measures for entities under its supervision. The regulator was also instrumental in helping update Australia’s framework for combating money laundering.
• The Australian Securities and Investments Commission (ASIC) monitors institutions and markets to make sure they operate ethically and fairly. It regulates individual and institutional conduct and advocates for customers.
• The Australian Prudential Regulation Authority (APRA) oversees Australian financial institutions. It focuses on stability and safety in the financial system.
  

Components of the KYC Process 

There are three core components of every KYC process, including:

1. A customer identification program (CIP).
2. Customer due diligence (CDD).
3. Ongoing due diligence. 

Click here to learn more about each stage of the KYC process.

What are the KYC Compliance Requirements in Australia?

In light of the core components of KYC listed above, Australian firms are required to:

1. Verify a customer’s identity.
2. Identify and verify a customer’s SoF and SoW.
3. Conduct customer risk assessments.
4. Maintain records of customer identification history and all transactions.
5. Report suspicious transactions to AUSTRAC. 

1. Customer Identity Verification

Under KYC requirements in Australia, firms must verify a customer’s identity before allowing them to onboard and make transactions. That is, they must be sure the customer is who they say they claim to be. Customers are asked to provide documents such as a passport, driver’s license, proof of address, or other government-issued documentation. A big KYC challenge facing FIs and other reporting entities (REs) is matching the proof of identity to the client. Using trusted providers, many firms are moving towards a biometric model of KYC identity verification.

Firms must also be certain of the true owner or owners (also known as beneficial owner) of any non-individual customers or entities. This means the person or persons who ultimately own or control the entity.

Companies are required to provide:

• Full company name.
• Whether the company is registered with ASIC as a public or proprietary company.
• The company’s Australian Company Number (ACN) or Australian Registered Body Number (ARBN).

2. SoF and SoW Verification

Under the Privacy Act, Australian reporting entities are required to identify and verify SoF and SoW as part of their KYC processes. When developing SoF and SoW processes, AUSTRAC recommends firms ask the following questions to ensure all procedures align with their risk appetite: 

• Can the customer’s SoF or SoW be easily explained through their occupation, investments, or inheritance?
• Is the customer’s background consistent with their former, current, or planned business activity and turnover?
• Do the explanations for SoF and SoW match the information gathered through EDD and open-source checks?
• Do high-risk customers require the same level of verification for establishing their SoF and SoW?
• Should higher thresholds for “reasonable measures” be applied when dealing with a foreign PEP as a customer or beneficial owner?

According to AUSTRAC, “reasonable measures” means what is practical and necessary in line with the firm’s identified money laundering and terrorist financing risks.

3. Customer Risk Assessment

As part of the KYC process, Australian firms are required to carry out a risk assessment for their customers. This assessment takes into account the likelihood of the customer “being involved in money laundering or terrorism financing, based on factors such as the size, nature, and complexity of their operations.” Since every customer risk assessment is unique, there is no one-size-fits-all approach. To ensure compliance with regulations, firms must create a flexible AML program that is tailored to their individual customer’s profile, needs, and risks. Depending on the alerts raised or concerns identified during the risk-based approach, KYC procedures may need to be adjusted accordingly.

4. Record Keeping

FIs are required to maintain records of customer identification history and all transactions for a set time period. In Australia, this is for the duration of the business relationship and seven years afterwards. Under KYC compliance in Australia, firms must keep a record of how they verified a customer’s identy and what information they presented. 

Firms must keep robust records for independent audits, regulator spot-checks, and any future fraud enquiries.

5. Reporting Suspicious Activity

Firms are required by law to report suspicious transactions or activity to AUSTRAC as part of their role in investigating and preventing financial crime and terrorist financing. Reasons for suspicion may include larger or more frequent transactions, payments to/from an individual on a sanctions list, or several transactions just below the reporting threshold – which may indicate structuring.

In Australia, these reports are called suspicious matter reports (SMRs). In other jurisdictions, these are called suspicious activity reports (SARs).

The Benefits of Being KYC Compliant

Some key advantages of being KYC compliant include:

• Risk mitigation: KYC procedures enable FIs to assess the risk associated with each customer. By verifying the identity and background of customers, they can categorize them based on risk profiles. This risk-based approach helps firms allocate resources and monitoring efforts more efficiently to high-risk customers, reducing the likelihood of fraud, defaults, or other financial losses.
• Regulatory compliance: Regulatory authorities impose strict KYC requirements on FIs to combat money laundering, terrorism financing, and other financial crimes. Compliance with these regulations is critical to avoid fines, sanctions, or even the loss of a banking license.
• Enhanced reputation: Maintaining robust KYC standards builds a reputation for trust and integrity. Customers are more likely to entrust their assets to FIs that demonstrate a commitment to security and transparency, thereby attracting and retaining clientele.
• Operational efficiency: KYC compliance streamlines customer onboarding processes. With verified customer data readily available, firms can open accounts and offer services more efficiently, reducing administrative costs and speeding up time-to-market for new products.
• Fraud prevention: KYC procedures help identify and prevent fraud. By ensuring that customers are who they claim to be, institutions can detect and block unauthorized transactions and protect themselves and their customers from various forms of fraud.
• Cross-border operations: For firms looking to expand internationally, KYC compliance is crucial. It ensures adherence to various countries’ regulations, facilitating cross-border transactions and partnerships. Additionally, it enables institutions to understand the specific risks associated with different regions and adjust their strategies accordingly.
• Monitoring and reporting: KYC procedures include ongoing due diligence, which allows FIs to monitor customer transactions for suspicious activity. Early detection and reporting of unusual transactions to regulatory authorities can help in preventing money laundering and other illicit financial activities.

Penalties for Non-Compliance with KYC Requirements in Australia

Non-compliance with KYC requirements in Australia can result in significant penalties and legal consequences. The penalties for non-compliance are enforced by AUSTRAC and may include the following:

• Civil penalties: AUSTRAC can impose civil penalties on reporting entities that fail to meet their AML/CTF obligations. These penalties can range from fines, which can be quite substantial, depending on the severity of the non-compliance.
• Criminal prosecution: In more severe cases of non-compliance, criminal prosecution may be pursued against individuals and organizations. This could lead to fines, imprisonment, or both, especially if non-compliance is intentional or part of a broader criminal scheme.
• Enforceable undertakings: AUSTRAC can also enter into enforceable undertakings with reporting entities, which are legally binding agreements that outline specific actions the entity must take to rectify non-compliance issues.
• License suspension or revocation: AUSTRAC has the authority to suspend or revoke the operating licenses of financial institutions or other reporting entities that repeatedly or egregiously fail to comply with AML/CTF requirements.
• Reputation damage: Non-compliance can result in significant damage to an organization’s reputation, which can lead to a loss of customers and business opportunities.

Meet KYC Compliance in Australia using Advanced Solutions

It’s crucial for organizations subject to AML/CTF regulations in Australia to take KYC requirements seriously, establish robust compliance programs, and regularly update their policies and procedures to remain in compliance with the law. As new risks emerge and the AML/CFT landscape evolves, FIs need innovative software partners who understand the challenges of KYC. ComplyAdvantage’s automated KYC software utilizes a proprietary, consolidated risk database for automated screening and monitoring. Customizable matching technology means faster and more accurate KYC, enhancing customer experience and reducing onboarding time.

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Real Estate Fraud Types

The Financial Action Task Force (FATF) and US regulators stress that the starting point for all firms is to understand the financial crime risks facing their business and to respond appropriately. Chapter two of our Guide to AML/CFT Reforms in the US Real Estate Sector explores common industry risks. While criminal typologies evolve over time, this blog considers a range of fraud typologies that real estate businesses need to be aware of. 

Mortgage Fraud

Mortgage fraud is a white-collar crime involving deception or misrepresentation during the mortgage lending process. It typically occurs when individuals or entities, such as borrowers, mortgage brokers, appraisers, or even lenders, intentionally provide false or misleading information to obtain a mortgage loan or to influence the terms of a loan. 

Mortgage fraud can take several forms, five of which are highlighted in the graphic below.

Title Fraud

Also known as deed fraud, title fraud is a type of real estate scam where a fraudster illegally transfers the ownership or title of a property to themselves or another party without the knowledge or consent of the legitimate property owners. According to the Financial Crimes Enforcement Network (FinCEN), this type of scam has become particularly rife in the Greater Toronto Area, where at least 30 homes have been fraudulently sold since late 2021. 

There are five steps typically involved in title fraud that are highlighted in the graphic below.

REIT Fraud

Real estate investment trusts (REITs) are investment vehicles that allow individuals to invest in real estate without owning the physical properties themselves. These trusts own, operate, or finance income-producing real estate, such as apartment buildings, hotels, shopping centers, or office buildings. REITs are subject to specific regulations and offer certain tax advantages, making them attractive investments for many. REIT fraud occurs when bad actors try to sell REIT investments that turn out to be scams.

Some common tactics used in REIT fraud schemes are highlighted in the graphic below:

BEC Fraud

Business email compromise (BEC) fraud is a type of cybercrime where attackers manipulate or compromise email accounts with an organization to defraud the company or its employees. The 2022 FBI Internet Crime Report listed BEC scams among US networks’ top four major cybercrime threats. The report revealed that the real estate sector was the most targeted industry, with losses amounting to $2.7 billion. This marked the second consecutive year that the real estate sector was listed as one of the most targeted sectors. Security vendor Abnormal Security further highlighted the increasing severity of BEC scams in its H1 2023 threat analysis. According to the report, recorded BEC attacks grew by more than 81 percent in 2022.  

The methods used to perpetrate BEC scams, as well as common typologies and how to effectively mitigate risk are outlined in the graphic below:

The Importance of AI for Effective Fraud Detection

Fraud is a persistent and costly problem that affects real estate businesses of all types. As fraudsters become increasingly sophisticated, legacy, manual methods of fraud detection are no longer sufficient. This is where artificial intelligence (AI) plays a crucial role in bolstering fraud detection efforts. Reasons for its importance include:

• Advanced pattern recognition: AI algorithms excel at analyzing vast amounts of data to identify patterns and anomalies that might be indicative of fraudulent activity. They can spot subtle deviations from established behavior patterns, which are often difficult for humans or rule-based systems to detect.
• Real-time monitoring: AI-powered systems can continuously monitor transactions and activities in real-time, enabling rapid identification of suspicious behavior as it occurs. This proactive approach allows for immediate action to prevent or mitigate fraud.
• Explainability: Robust AI-powered fraud detection solutions can provide explanations for alerts, helping fraud analysts and investigators understand why a particular transaction or activity was flagged as suspicious. The transparency is valuable for making informed decisions and improving fraud prevention strategies.
• Scalability: Fraud detection needs can vary greatly, and AI systems can scale effortlessly to accommodate increased data volumes and transaction rates. Whether analyzing thousands or millions of transactions, AI can adapt to the demands of the business.
• Reducing false positives: Legacy fraud detection systems often generate numerous false positives, leading to unnecessary investigations and inconvenience for customers. AI can improve accuracy by reducing false alarms through its ability to analyze multiple data points and assess risk more accurately.
• Behavioral analysis: AI can analyze user behavior over time, creating profiles of normal activity. Any deviations from these profiles can trigger alerts, even if the fraudulent activity is novel and not previously seen.
• Integration with data sources: AI systems can easily integrate with various data sources, including internal transaction data, external data feeds, and historical records, to create a comprehensive view of potential fraud risks.

See how ComplyAdvantage’s AI-powered Fraud Detection solution measures up against six other vendors here.

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