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Laying the Groundwork for AML 2022: Shifting Attention to Entity-Centric Detection




By Adam McLaughlin, Global Head of Financial Crime Strategy & Marketing, NICE Actimize.

The year 2021 was defined by one unprecedented event after another – the COVID-19 pandemic, not least among them. While these events undoubtedly brought turmoil to many sectors across the economy for anti-money laundering and fraud, they catalyzed change beyond recognition.

But the changes that the industry saw in the previous year, including increased adoption of advanced technologies, compliance for the crypto space, and the shift from quality to quantity, all laid the foundation for the fundamental change to come this year. And as financial crime compliance operations acclimatize to the new normal, 2022 is the year the true overhaul of the AML space will be felt.

A move towards entity-centric detection

One of the biggest anticipated trends within the space is an increased focus on entity-centric detection. With significant emphasis on the symptom, the sector must focus on the cause: who responsible for the system alert, rather than the alert itself.

While legacy processes and systems and the need to ensure continued compliance may present stumbling blocks to this shift, technological advances will undoubtedly go some way in mitigating these obstacles and smoothing the path for change.

This shift to entity-centric AML will also enable the contextual assessment and monitoring of entities, resulting in better detection, investigations, and outcomes. Ultimately, contextual understanding boils down to having the correct data and intelligence.

All eyes on corporate entities

The transparency of corporate registers represents yet another barrier for the AML sector. Despite the introduction of the 5th Money Laundering Directive by the EU, many countries are still behind. Many EU countries have yet to fulfill the requirement to introduce public beneficial ownership registers of legal entities. As of December 2021, Finland, Romania, Greece, and Spain still have private corporate ownership registers; multiple countries continue to charge a fee to access all or some of the corporate information; and Lithuania, Hungry, and Italy still lack an accessible register.

Robust management of corporate entities within the regulated sector is of paramount importance – particularly from a compliance perspective. If a regulated company's risk is inaccurately or incorrectly assessed, the consequences can be severe – including significant failings or even a breach of compliance.

We expect that 2022 will emphasize ensuring data is available, precise, and up to date to mitigate this risk. By helping organizations better understand corporate entities and their risk, more accurate monitoring of those risks and continuous risk assessments can be conducted. In March 2022 FAFT announced changes to Recommendation 24 relating to beneficial ownership standards. The updated standards require countries to ensure that competent authorities have access to adequate, accurate and up to date information on the true owners of companies.

But there's a catch: this can only be achieved with the support of advanced technology. The benefits will be realized only if the technology can monitor real-time changes in internal and external data (including corporate structures, addresses, and contact information), transactional activity, adverse media, and other risk-impacting information.

A shift from reactive to proactive

The current KYC approach is outdated, exposing organizations to avoidable risks. Periodic reviews of customer risk on an annual, biannual, or three-year basis seems to be an established tradition, it is certainly not an effective one; it can result in organizations waiting months, or sometimes even years, to learn that their customer is now a high-risk customer.

Fortunately, a more proactive approach to compliance has already been established – partly in response to an increasing demand among industry professionals to fight financial crime because of advances in technology, ongoing regulatory scrutiny, fines, and increasing regulation.

This takes us full circle back to the first prediction: to take an entity-centric approach to AML, a proactive approach to AML must be adopted.

The marked shift toward proactive AML that 2022 will undoubtedly bring will likely be primarily supported by the implementation of technology that provides real-time or near real-time data assessment, thereby ensuring that the screening and detection of suspicious activity are continually optimized and in line with the up-to-date risk posed by the monitored entities.

What’s more, a move to continuous KYC will also be included in this shift. Continuous monitoring for data changes that will impact entity risk changes is a crucial next step in equipping organizations with a complete understanding of entity risk and, ultimately, empowering them to implement effective measures.

Via proactive AML, organizations will always have an up-to-date understanding of their risk exposure. Monitoring and detection systems will be informed by collected information, enabling entities to be appropriately segmented and monitored for the correct risks, ensuring that detection identifies only material changes in danger or true suspicion.

Proactive AML has various benefits: not only does it increase the efficiency of compliance teams and the cost-effectiveness of AML operations, but it also ensures law enforcement are armed with accurate information on real criminals in SAR reports. In addition, it will also enhance customer experience, as they will be saved unnecessary questions and blocked transactions due to false positives – thereby increasing revenue potential for organizations.

The road ahead

The changes that 2021 brought meant that now the AML landscape is ripe for change: the groundwork has been laid, and the processes to identify and report criminal behavior, to take more criminals off the street, and to protect more victims, are ready to be leveraged. And it only gets better from here – if these predictions come to fruition, each coming year will bring further incremental, cumulative change that will make our fight even more manageable.

Adam McLaughlin, is the Global Head of Financial Crime Strategy & Marketing at NICE Actimize. Adam possesses several years of operational experience identifying, investigating and mitigating financial crime risks. He previously worked as an AML compliance manager for J.P. Morgan and before that spent nearly 10 years as a Police Detective in the UK.