The global significance of the Swiss financial center has made it a focus of efforts to combat organized crime and money laundering. Banks and public authorities are finding themselves faced with a variety of challenges as a result. A new study by KPMG identifies six areas where action needs to be taken.
The global significance of the Swiss financial center has made it a focus of efforts to combat organized crime, money laundering and terrorism financing. This is presenting banks and public authorities with a variety of challenges – particularly with respect to preventing and identifying criminal financial activities.
The government plans to put regulations in place that will increase the accountability of financial intermediaries: they are to play a preventive role by more closely inspecting both the parties involved and the origin of new funds. Not an easy task, especially given the fact that new technologies and digital currencies are playing into the hands of criminals and international flows of money are becoming increasingly difficult to track.
Regulation, by contrast, is more reactive in nature since it lags behind recent technological advances. On the other hand, the risk policies and IT infrastructures of some banks have shortcomings as well. These are insights found in KPMG’s new “Clarity on Financial Crime in Banking” study based on a survey of 50 Swiss banks on topics including the challenges they face in their efforts to combat organized crime and money laundering as well as the regulatory framework.
This study identifies six areas where Swiss financial intermediaries need to take action:
Ultimately, Swiss banks would be the ones to benefit from a more targeted commitment toward preventing and identifying criminal financial activities. This would include more precise risk assessments that take each bank's specific business model into account and help identify and prevent criminal financial activities more effectively.
Current approaches toward monitoring risk, clients and transactions are inadequate to meet the challenges of today. Although 52% of banks are satisfied that their current client screening systems provide comprehensible, complete and up-to-date information, only 12% of financial crimes are identified by the existing transaction monitoring systems. 11% of financial intermediaries named coping with the excessively large number of false positives generated by the monitoring systems as one of the biggest challenges of the past two years.
Some banks additionally need to develop tools to effectively implement the respective risk approaches and improve the quality of their client databases which are outdated or insufficiently conclusive in many cases. Not only that, there is also a need to more effectively calibrate transaction monitoring systems. The use of artificial intelligence would help improve the quality of alerts while simultaneously reducing the number of false alarms.
Generally speaking, little account is taken of institution-specific risks, including those relating to unique features of the banks' own products and services. There is also a certain dependence on standardized, public or purchased data sets when identifying clients and transactions from high-risk countries or sectors. In fact, only one in five banks adapts monitoring data for high-risk sectors, whether public or purchased, to its own business and risk profile, and only 10% adapt monitoring data for high-risk countries. There is also a need for further action with respect to adapting sanction lists and factoring them into banks’ risk assessments.
Failure to do so has often opened the doors to situations in which external sources such as clients, media or the authorities have triggered the exposure of criminal financial activities and transactions. In 15% of the cases uncovered, for example, clients were the ones that made the financial institutions aware of irregularities or suspicious activities. Media reports were responsible for more in-depth investigations or exposing crimes in 13% of the cases, and investigations were prompted by authorities in 11%.
Greater investments in IT and staff are often cited as past investment priorities intended to boost banks’ ability to combat criminal financial activities more effectively: 40% mainly invested in hiring additional staff and 38% invested in their IT infrastructures. These investments are apparently insufficient, as around half of the financial intermediaries surveyed (46%) would like investments in these areas to increase. This concern hints at their ineffectiveness however. Investments in technical support and external recruitment to strengthen the in-house team, on the other hand, are much more promising.
Compliance programs that employ artificial intelligence offer another improvement in the fight against financial crime. Automated programs specifically support efforts to achieve strategic compliance goals, reduce compliance costs and ensure the effective implementation of regulatory changes.
Banks need a sound internal framework to counteract the risks of financial crime. After all, they are also exposed to financial risks and damage to their reputation as a result of their own staff’s criminal or negligent behavior. While a strong compliance culture and the "right tone at the top " are essential here - they are not enough to prevent financial crime on their own. Another indispensable aspect is to actually enforce penalties imposed against employees who violate compliance guidelines. If non-compliant employees go unpunished, that undermines a company's compliance culture.
Lastly, steps need to be taken to improve the reporting system since banks are responsible for submitting adequate MROS reports while also ensuring a high level of quality that benefits the entire financial center. Given the deteriorating quality of the growing number of reports, the risk to the Swiss financial center is also on the rise. The number of MROS reports submitted between 2016 and 2017, for example, rose considerably yet the quality of those reports remains largely unchanged.
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