Speeches about money laundering have rarely been described as passionate, but this is the type of language observers are reaching for to capture the recent shift in tone from the global anti-money laundering body FATF.
The direct messaging from FATF leadership at industry events is spurring public recognition of a fundamental systemic challenge: despite strengthened regulation and sustained efforts by financial institutions, anti-money laundering outcomes are not being achieved.
Coupled with clear signals of intent from major jurisdictions, it is clear that pressure to tackle the poor levels of implementation of international anti-money laundering standards is only going to increase in coming years.
What this also means, however, is that gaps in the standard anti-money laundering toolkit itself are being put under the spotlight, with one of the most pressing being the need for firm-level risk metrics.
When it comes to tackling financial crime risk, many financial institutions lack the systems needed to assess whether their compliance systems are achieving desired outcomes, or in fact to adequately define what those outcomes are in the first place.
In a new paper launched today, we outline Elucidate’s contribution to plugging this gap, and why it matters.
Business and compliance systems are rarely operating on an equal footing. While business targets can be set and measured using a range of indicators, the absence of reliable metrics for financial crime risk means that decision-makers within firms can face misaligned or competing incentive structures. As a result, all too often immediate business priorities can override financial crime risk concerns.
Thankfully, rapid progress in data storage and analysis means that it is now possible to take full advantage of the data already held by financial institutions, enabling a shift towards a more focused, outcomes-based approach to financial crime risk.
Utilising standard financial crime risk metrics directly contributes to better outcomes, both by allowing the continuous improvement of compliance systems themselves, and by supporting the integration of effectiveness measures into business management systems.
The Elucidate FinCrime Index (EFI), for example, draws on the over 350 data points collected by the Wolfsberg Group’s Correspondent Banking Due Diligence Questionnaire (CBDDQ), and enriches them with publicly available sources, a financial institution’s own data and Elucidate’s proprietary data. On a monthly basis, financial institutions on the EFI platform receive updated metrics, including scores for each of nine risk themes, and underlying findings.
As the paper details, the expected benefits of regular financial crime risk metrics include continuous improvement in overall control effectiveness, more effective management of business relationships and greater alignment of individual incentives with financial crime risk.
Public authorities can also draw on risk metrics to support ongoing monitoring of national- and sector-level financial crime risk and more effective allocation of limited supervisory resources, among others.
The well-worn adage is that “you can’t manage what you can’t measure”. Conversely, with standard risk metrics becoming available, expectations that companies become more effective at managing their financial crime risk can only grow.
We look forward to comments and suggestions and to continuing the discussion about how to most effectively tackle financial crime in practice.