Combating Financial Crime in Asia
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We are grateful to the following interviewees for sharing their insights, and to other financial crime experts we spoke to who cannot be identified in this paper.
Key Financial Crime and Banking Fraud Challenges in South-East Asian Markets
The challenges that financial crime and banking fraud present to institutions and their regulators vary greatly, as you would expect in a region as huge, diverse and rapidly developing as South-East Asia.
Interviews with experts across the region suggest that differing approaches and speeds of development of financial regulation across the region result in a patchwork of local rules that vary widely. Saman Wijaya Bandara, Partner in EY Vietnam, and Global Ambassador for Vietnam, Cambodia and Laos for the Institute of Risk Management, says that in Vietnam, for example, regulators have produced credit and market risk models but provide extremely limited guidance on how banks should manage operational risk. “It’s up to every bank to decide what they should be doing, whether to have a fraud monitoring system that can monitor transactions electronically. It all depends on their digital agenda,” he says.
As a result, banks and financial institutions have widely varied levels of readiness and sophistication in their systems to detect and prevent financial crime and fraud. With a few exceptions, only multinational banks across the region are using automated systems to detect suspect transactions. The great majority of local institutions rely on manual, Excel and paperbased approaches that are slow and inefficient.
Fragmentation between different regimes across this huge region presents a major challenge; financial crime and money laundering operate seamlessly across borders, while governments and national regulators individually see only small pieces of the picture.
Weak Corporate Cultures and Prevalence of Bribery
Major Areas of Concern and Vulnerability for Banks
Advanced Data Analytics: The Next Frontier in the Fight Against Financial Crime and Fraud
In its 2017 report, From Suspicion to Action, Europol concluded: “The increasing digitalization of financial services results in growing volumes of transactions and extremely large data sets requiring computational analysis to reveal patterns, trends, and associations. The use of analytics is therefore becoming essential for both reporting entities and Financial Intelligence Units to cope with information and fully exploit its potential.”
Regulators in the region are increasing their emphasis on advanced data analytics as a key means of detecting and disrupting illicit activity in the financial system. In Singapore, the Anti-Money Laundering and Countering the Financing of Terrorism Industry Partnership, has launched a data analytics working group to leverage the collective experience of its members in using AML/CFT data analytics to improve the detection of suspicious client profiles, activities or transaction patterns. Banks in South-East Asia are also well aware of the essential role that technology will play in combating financial crime and fraud in an increasingly digital industry, but they are some way away from harnessing its full potential.
A senior risk manager based in the region argues that investment in technology is the only credible way to address the continuing cost inflation in risk management and compliance caused by huge volumes of false positives coupled with widespread skills shortages. “The cost of compliance keeps going up. That’s a big challenge and it’s where technology plays such an important part, because if you get it right you can make sure you can deal with the increasing pressure from the regulator without increasing your costs in line.”
This is not to suggest that banks in this region are failing to invest in technology. According to intelligence from IDC Financial Insights, they are increasing their IT investment at 7 percent a year, with security spending among the fastest-growing segments. Annual growth rates of 20 percent are normal for security-related IT spending, although Michael Araneta of IDC questions whether all of this investment is genuinely related to security.
“It often gets approval faster if it’s badged as security-related,” he says. Much of the banks’ outlay is driven by regulators; compliance accounts for about a quarter of the average institution’s IT-related spending, he adds
However, interviewees suggest that much investment is tactical – intended to address an immediate concern raised by regulators – rather than strategic. Banks face a relentless flow of regulatory changes, while most outside the major regional centers rely on older, more heavily manual techniques and Excel-based processes for controls and detection. Unless banks take a strategic decision to invest in the most advanced technology to combat problems such as fraud and money laundering, they are likely to continue generating high rates of false positives that will inflate their cost base and reduce their efficiency.
The Key Benefits of Moving to Advanced Data-Analytics Systems
Advanced technology tools offer a series of major advantages over traditional, manual processes:
Main Features of an Advanced Behavioral Data-Analytics Solution
Pressure from regulators across the region to improve operational risk management and the detection of financial crime can be expected to increase significantly over the next few years. There is already a major focus on AML and measures to counter terrorist financing, and greater emphasis on anti-fraud measures is very likely. Growing regulatory pressure, coupled with the continuing rapid shift to digital channels, will mean that institutions must expect the volume of transactions they must monitor to grow significantly. Given the very high percentages of false positives their current monitoring efforts generate – and the huge costs associated with processing these alerts – investments in the most sophisticated anti-fraud systems that harness Machine Learning techniques to improve the accuracy of their results offer by far the most efficient and effective way for banks to respond.
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