Financial institutions have faced massive cultural and operational hurdles in their efforts to comply with Anti-Money Laundering and Terrorist Financing (AML/TF) regulations that have been introduced over the last decade. Many have achieved regulatory compliance in these areas but at a significant cost through investment in people, processes and technology.

The challenge that many institutions face now is how to make their AML efforts more efficient and risk-based in order to cut costs and improve their service to HNW customers.

The Via Dolorosa

The journey towards an efficient AML regime at a private bank consists of the following steps.

1) An accurate identification of customer-related risks. The bank must ensure that its risk-rating methods are dynamic and take full account of the current financial crime risk posed by this-or-that customer. It must maintain and update its risk-rating methods by consulting its compliance department and front-line operations; the risk ratings must be an accurate depiction of the risks that the customer poses.

2) The elimination of inefficiency in the KYC process. Many a financial institution loses its struggle to "know its customer" while keeping the satisfaction of its customers with its service at acceptable levels. It can improve its understanding of the customer’s needs and the risks that he poses to it while reducing needless "customer touchpoints" by taking 'siloed' KYC and front-office functions and uniting them. Similarly, the use of specialist KYC teams at the bank that can handle more complex client reviews will improve the use of its KYC analysts' time, make better use of other skilled people and help it 'onboard' customers more quickly. A central, specialist KYC team can handle the more challenging cases.

3) The re-use of data to make AML operations more efficient. To improve efficiency and make its AML/TF efforts more 'targeted,' the bank ought to rely far less on judgment and take a clear risk-based approach supported by facts and valuable data about the AML/TF risks that it runs. It can take several practical steps to enhance the veracity of the data it holds by being consistent in its understanding and interpretation of data sets, by enriching and validating data through public and subscription-based sources to reduce unnecessary customer outreach, by exploring ways of automating things; and by understanding data flows, the better to assess the benefits of consolidations/redundancies.

4) A lighter reliance on manual processes and a heavier reliance on IT. Years of offline computing and manual processes at many private banks have led to sclerosis. The bank should invest in technology in the areas that promise the greatest return (in terms of time and cost). This, in turn, will allow its staff to concentrate their skills and specialist knowledge in the most valuable areas.

5) A shift from 'tactical' to 'sustainable' ways of doing things. Many financial institutions struggle to fight money laundering in a strategic and sustainable way because they are eternally ‘fighting fires’ and reacting to emergencies. They take 'siloed' approaches to money laundering, the silos being various business divisions, geographical areas and priorities. To move towards a more sustainable and forward-thinking way of tackling money laundering, every bank should concentrate its spending on the most crucial and valuable areas of its business model. Its senior managers should also make informed strategic decisions about its AML efforts after talking to people who truly understand the effect that its AML operations have on its other operations and on the experiences of customers.

6) The optimisation of the AML/TF operating model. The AML Target Operating Model (TOM, the desired state of the operating model of an organisation) must be written into a "living document" which can grow and adapt as the bank changes. The TOM should change with new regulation and the implementation of new technology/automation.

7) A shift in the culture of the institution. Many organisations’ front office functions have been slow to accept the idea that they ‘own’ the ML/TF risks that the bank runs.  The top people at the bank should tell them this and be accurate in delineating all the jobs in each line of the "three lines of defence" [functions that manage risk, functions like the compliance department that oversee it, and internal audit]. They should tell everyone to treat money laundering as an important area, not least because governments' AML/TF rules are here to stay and can only grow more stringent.

Private banks should step up their AML efforts and make them so efficient that they set an example to the rest of the financial services industry. By doing so, they will gain a competitive advantage over their peers.

* Matt Taylor can be reached on +44 207 024 7517 or at matt.taylor@protiviti.co.uk; Erin Gavin can be reached on +44 207 930 8808 or at erin.gavin:protiviti.co.uk