AlixPartners, the consulting giant with a staff of more than 1,000, has published a global survey of compliance practices. Its results reveal an obsession with transaction monitoring IT all over the world and the rip-roaring rise of compliance spending in East Asia.

The group surveyed 361 financial institutions around the world on their anti-money laundering sanctions compliance programmes. The respondents represented 64 countries and worked in a wide range of AML and sanctions-related jobs. Most (86%) came from financial institutions that operate in more than one jurisdiction, thereby offering insights into cross-border problems. 65% were at banks, 19% at broker-dealers, and 4% at asset management firms. 63% were compliance officers, 15% were risk managers, 7% were board members and 6% were internal auditors.

Directors, due diligence and de-risking

One-fifth of respondents do not provide training to their board members or are unaware whether anyone is briefing them on the subject. Nearly one-third consider their AML and sanctions compliance budgets inadequate or severely inadequate. Nevertheless, transaction-monitoring systems for AML and sanctions compliance continue to be top-investment areas for financial institutions.

The trend towards 'de-risking' (shying away from business that tends to displease regulators - the bane of correspondent banking the world over) appears to have continued throughout 2017, as 63% of respondents said they experienced it in some form. Not every institution has started to 'benchmark' AML and sanctions systems and/or have them validated independently, although this is now accepted as 'industry best practice' in some countries. AlixPartners blames some unnecessary 'de-risking' on this failure.

Compliance costs are rising, and the expectation is that they will continue to rise for the foreseeable future. Compliance officers are worried about how best to allocate people and whether their budgets are adequate.

AlixPartners believes that companies should train their boards periodically on the subject of legal and regulatory requirements, the penalties for noncompliance, and their financial institutions’ overall AML and sanctions-related risks. Similarly, senior managers outside of the AML and sanctions compliance function should take an active approach to the management of risks. The 'tone at the top,' it believes, remains vital to the prevention and detection of wrongdoing. One survey respondent wrote: "Given the importance of AML compliance to ensure the future growth and geographic expansion of our institution, we believe in active leadership from the board."

On the subject of 'super equivalence,' i.e. the imposition of the highest standard a multinational corporation has to obey to its operations in all other countries, 62% answered 'yes' to the statement that "Our AML and sanctions compliance program is implemented globally." Only 22% wrote that "Each geographic region/line of business is responsible for its own AML and sanctions compliance programme." The other 16% had other, unspecified arrangments.

When asked to identify the most 'challenging' areas in AML and sanctions-related compliance, while not having to restrict their answers to one area only, the firms cited transaction monitoring systems (50%); risk assessments (42%); reviewing 'customer due diligence' or CDD (34); changes in procedures by which the firm 'onboards' customers (26); policies and procedures (21); sanctions compliance systems (21); the identification and management of politically exposed person or PEP risk (20); training (14%); the cost of regulatory reporting (12%); internal audit (7); outsourced compliance processes (5%); and 'other' (4%). All these figures are approximate.

When asked what phenomena they found very, somewhat or not 'challenging,' the plucky compliance officers chose 'somewhat challenging' most of the time for all subjects except one: nearly 50% of them saw variations in 'local country laws' (AlixPartners does not explain what it thinks a 'local country' is) on such subjects as data privacy as 'very challenging.' About 30% found that subject 'not challenging' and just over 20% found it 'somewhat challenging.' The only other area where there was any contest between 'somewhat' and 'very' was that of entering or doing business in highly risky regions. Most compliance officers found it 'somewhat challenging' to do CDD, 'due diligence on' third parties or other partners of their businesses, sanctions-monitoring systems and transaction-monitoring systems. More than 40% found the identification of PEPs and the monitoring of existing compliance programmes as 'somewhat challenging.'

Spending on compliance IT and compliance in general

As with all other such surveys, this one finds that compliance workloads are overstretched and firms are viewing better software as the great hope for the future. The consultancy writes: "Today, most financial institutions are becoming increasingly dissatisfied with their current automated monitoring efforts, and many are looking for software solutions that can lighten the workloads of AML and sanctions compliance departments rather than add to them."

This is expressed in AlixPartners' figures for respondents' top investment areas for the next 12-24 months. When asked about their AML efforts, 57% said that transaction monitoring systems were a very important spending priority (with 45% also saying that training was and 37% saying that risk assessments were, with obviously plenty of overlap). When asked about their sanctions-related efforts, 55% cited spending on sanctions monitoring systems (with 48% mentioning training and 47% risk assessments, again with overlaps). A lot of the IT-related costs costs lie not only in system implementation and maintenance but also in the analysis 'and utility' (a mysterious phrase that AlixPartners does not explain) of the output of those systems.

Among the compliance functions of the Asia-Pacific region, according to the survey, 57% said that their spending on AML and sanctions-related compliance had incresed significantly. Nowhere else was a figure so lofty found - in Europe, the Middle East and Africa it was 22%; in the Americas it was even lower. Indeed, in those other areas firms that reported a slight decrease in spending were in the 30-40% range, as were firms that reported a slight increase. The rip-roaring advance of East Asia in all areas goes on.

Transaction monitoring IT

Here, in AlixPartners' own words, is a list of the things that an automated transaction-monitoring system should be able to do.

• Complete an analysis of the universe for an understanding of the AML and sanctions transaction types the institution utilises that are at risk.
• Perform a comprehensive customer risk assessment and include customer risk in its monitoring efforts.
• Carry out a comprehensive assessment to determine the risks that certain products and product groups pose for money laundering.
• Incorporate 'know your customer,' CDD, and 'enhanced due diligence' or EDD information into transaction monitoring.
• Complete a cross-business and geographic analysis of the customer base to ensure that customers can be monitored across various lines of business and jurisdictions.
• Assess the scalability of the automated transaction-monitoring system with regard to product and geographic expansion.
• Develop and tailor risk-based intelligent detection scenarios for the identification of unusual and potentially suspicious activity.
• Develop an ongoing tuning process in order to establish baseline thresholds, and at the same time continuously adjust scenarios to meet customer and business realities.

Looking into the crystal ball

AML and sanctions-related compliance will continue to strain resources at financial firms. AlixPartners' advice for dealing with this problem is rather platitudinous: "The challenges would be best met through meaningful collaboration between financial institutions and co-operation with regulators in the areas of enhanced due diligence, exchange of information, and an open dialogue concerning prevailing risks so as to stem further de-risking. More work and co-operation are needed to reduce the likelihood of further record fines for AML and sanctions violations in the future."

As every student of recent AML control knows, it is as certain as the sun's rising that there will be further record fines and 'de-risking' in the future, no matter how strenuously firms try to redouble their efforts in all these areas.