Developments in High-risk Entity Screening
As regulations require more diligent screening of customers and transactions, new firms, industries, governments and countries are continuously being introduced to various anti-money laundering (AML) solutions. This expanding segment of the marketplace is entering an AML screening arena that is experiencing new product trends. Together, these new developments are shaping the future of high-risk entity screening.
US and EU regulatory actions, along with international organizations, such as the Financial Action Task Force (FATF), Egmont Group and Wolfsberg Group, are moving the market towards an international standard for AML. At the same time, nations with increasingly important global economies like India and China (which is on track to become the second largest economy by 2025) are looking to enter the marketplace and comply with international standards. Additional investment by financial firms operating within and doing business with these markets is evident. With an increase in international AML regulations, demand for compliance solutions – particularly those that can sufficiently support these territories – is rapidly expanding. These markets face their own set of unique needs, which solution providers will need to address in order to serve them (i.e. regional government regulatory lists, foreign character sets and language translation).
Emerging markets are not the only reason for the increased demand for high-risk screening solutions. Demand is increased by regulatory requirements extending to firms outside the traditional financial services arena. These regulations require non-financial institutions (non-FIs) to put processes in place that can identify and report suspicious activity. Understanding the factors that might introduce risk into a business is a key determinant when deciding who and what activities should be monitored.
The heightened measures are required of non-FIs around the world. In 2001, the Second European Union Money Laundering Directive widened the range of professions that are subject to various money laundering control requirements, such as client identification, record keeping and suspicious transaction reporting. These professions included lawyers, auditors, accountants, notaries and real estate agents. Similarly, in the US, numerous new business categories have had varying forms of AML requirements imposed. These include casinos, futures commission merchants and commodities-introducing brokers, jewelers, precious metal and stones dealers, insurance companies and mutual funds. There is wide supposition that vehicle dealers, real estate companies and investment advisors will be the next industries to be regulated. These are multi-trillion dollar industries that will become important participants in preventing money laundering.
While these new markets are beginning to address the need to take a risk-based approach to compliance, several trends have emerged in the AML screening industry. These new advances will have an impact on the entire screening industry and companies looking to use screening solutions – effectively leading to the next generation of AML products.
Responding to legislation and enforcement actions, processes within FIs have shifted toward a customer due diligence program that encompasses customer identification programs (CIP), know-your-customer (KYC) screening and enhanced due diligence (EDD) research. Legislation has highlighted that AML programs must take a risk-based approach and products are being developed that include these elements.
With the shift to a risk-based approach, vendors are evaluating how their solutions can better address this movement. Enriching or supplementing with additional data can better support the identification of high-risk entities and provide needed detail to perform due diligence or risk rate an entity. For example, enhancing a dataset of businesses that introduce additional risk by adding the firm’s geographic scope, years in business, revenue and listing key company personnel will help create a more comprehensive product.
By adding extra screening data sets (arms dealers, for example) to a solution, vendors introduce a new level of risk protection for institutions that want to experience extra security. Using a government watch list enriched with synonyms, foreign language translations, passport numbers, dates of birth, social security numbers, etc. can provide an organization with assurances they are doing all they can to appropriately identify high-risk entities while optimizing their compliance staff resources.
Having the best screening solutions and data is integral for a successful AML offering. There has been an increase in the number of partnerships, alliances and interfaces developed in order to allow one solution to easily work with or integrate into another provider’s solution or data. Firms are partnering with best-in-class data providers thus ensuring better monitoring and compliance. Software leaders may partner in order to leverage the core competencies of AML specialists rather than develop them internally or, as a result of client demand, to work with an installed solution against which an organization has already invested resources. These relationships serve to provide best-in-class solutions to clients. For example, transaction monitoring and core processing software solutions may integrate another firm’s screening filter into their systems. In addition, clients are demanding solutions that are ‘data agnostic’ so that they may accommodate one or more vendors’ databases.
With an increased demand for high-risk screening solutions from emerging markets and non-FI firms outside the traditional arena, the compliance industry will continue to evaluate ways of providing effective AML products. Vendors of AML solutions will need to concentrate on the quality of their data and create world-class products to best match the needs of the ever-changing regulatory environment.