Money-Services Businesses and AML: Turning Obligation Into Advantage

Julie Conroy, Research director for Aite Group’s Retail Banking practice and covers fraud, data security, anti-money laundering, and compliance issues

Julie Conroy will be presenting at NICE Actimize’s ENGAGE Client Forum on November 8 in New York City as part of the event’s Anti-Money Laundering track.  She will provide an industry update on “The Changing Landscape of AML.” In this session, she will review recent regulatory changes, how they impact compliance departments, and discuss innovative technologies which prepare organizations for the future.

Did you know that 39% of the FinCEN enforcement actions since 2014 have been against money-services businesses (MSBs) and non-bank lenders? It makes sense that regulators have their eyes on this dynamic, rapidly evolving environment. The very nature of the MSB space entails the rapid transfer of funds, often across borders, so it is a business rife with opportunity for money laundering.

Recent fines have hit large established MSBs as well as bleeding-edge startups, highlighting how difficult MSB compliance can be. Not only does innovation propel the space forward, but regulators’ expectations are also constantly evolving. The regulatory landscape is particularly challenging in the MSB space, given the state-by-state oversight in the U.S. and the complexity of dealing with multiple countries’ regulation in the cross-border arena. Regulatory trends that MSBs need to keep tabs on heading into 2018 follow:

  • U.S. states upping the ante: As the federal government heads toward deregulation, many state attorneys general are taking it upon themselves to fill perceived gaps. Two examples of this come from New York in the form of the Anti-Terrorism Transaction Monitoring and Filtering Program Regulation, effective January 2017, and the Cybersecurity Requirements for Financial Services Companies, effective March 2017. Expect to see this trend continue in 2018.
  • Continued digital currency uncertainty: A number of MSBs have a digital currency component to their business model. The regulatory landscape here tends to be quite fluid, both state by state in the U.S. market as well as internationally. A bipartisan U.S. federal bill would strengthen a number of anti-money laundering (AML) requirements and includes a provision that would require a strategy to detect digital currency at border crossings and ports of entry. Countries and U.S. states are all over the map with regard to digital currency—some are hands-off, others very prescriptive, so the digital currency regulatory environment continues to be highly fragmented.

While the steep enforcement actions and the increasing regulatory activity can (and should) be daunting for anyone in the MSB space, technology can help. In some ways, many MSBs have an advantage compared to banks, because they often have fintech roots and can be more nimble with their use of data and technology. Here are a couple of key technology trends that MSBs need to incorporate into their strategies:

  • Machine learning analytics: While the AML arena has been somewhat late to the advanced analytics party thanks to regulators’ heavy focus on model risk management, a number of firms are now using machine learning technologies to help with AML. More transparent approaches to the analytics ensure that the models provide the requisite transparency, and firms making investments here are finding that regulators like the improved detection that the machine learning provides (while the firms reap the benefits of the enhanced efficiency).
  • Robotic process automation: Robotic process automation is another area that can provide process improvement and reduce the cost of compliance without adversely affecting detection rates. There are a number of opportunities for this in the paper- and process-laden AML space. Use cases range from automating the SAR narrative process to automating the data intake process.

Effective risk management doesn’t have to be purely an exercise in compliance or efficiency. As MSBs get better at understanding the customer and the risk of the transaction, this insight can be leveraged for product differentiation. Quicker access to funds enabled by more effective risk management can be a powerful differentiator in the increasingly competitive MSB industry.

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