Combine People, Processes, and Technology to Protect Against Predicate Offenses

Would a greater focus on predicate offenses make the fight against money laundering more effective? 

Until recently, the focus for many financial institutions (FIs) has been on detecting money laundering and retrieving the proceeds of crime. And given that the most high-profile enforcement cases center around the act of laundering money itself, it’s understandable that FIs and regulators alike have targeted their resources towards this issue. 

But this approach comes with its own risks. Given the legislative shift towards targeting the facilitation of and failure to prevent financial crime, Compliance and Operations teams are increasingly under pressure to understand and be able to flag the wider framework of crimes that are predicate offenses to money laundering. Failing to do so could expose them to criminality and regulatory rebuke. Legislation aside, there’s also a moral imperative on firms to help expose criminal activity – at least where it is reasonably possible for them to do so. 

To do this effectively, firms must look beyond simply identifying potential money laundering in customer activity and adopt a broader view that enables them to identify associations with predicate offenses and monitor customer risk on an ongoing basis.

Yet, this is no small feat. 2022 was a challenging year for Anti-Financial Crime (AFC) practitioners, and 2023 shows no signs of being any easier. Compliance teams are increasingly stretched thin. 

At a recent roundtable discussion at Transform Finance UK, I hosted representatives from a broad spectrum of organizations, including some of the largest global FIs. They provided insightful perspectives on the challenges they face around detecting predicate offenses and some recommendations for best practices. 

Here are my top three takeaways from the discussion. 

1. Pervasive short-termism inhibits problem-solving

Findings from our State of Financial Crime research suggests 69 percent of UK firms were planning to increase headcount this year – much higher than the global average of 58 percent. This was echoed around the table, with firms frequently opting to invest in headcount over technology as a quick-fix solution. Many raised long implementation times for vendor technology solutions as a barrier to adopting technology, pointing towards hiring as a quicker option to solve an immediate compliance challenge.

However, increasing headcount can lead to more problems than it solves. Not only are firms grappling with nationwide skills and labor shortages, which are driving up compliance salaries, but higher numbers of staff increase the burden on quality assurance processes and teams. This reactionary approach treats the symptoms and not the cause; to get to the root of the problem, FIs need a more considered approach.

Hiring decisions should be approached strategically, taking into consideration the in-demand technical skills that compliance teams are often lacking. By creating defenses that blend the best that human talent and technology can offer, firms can more effectively detect money laundering and associated predicate crimes. Technology can be deployed to assess and triage risk at scale whilst also shouldering the burden of repetitive lower-risk cases so that humans can focus their finer skills on higher-risk, more complex compliance tasks.

2. Clear processes are needed to prioritize threats and ensure smooth information flow

The people challenges outlined above are compounded by the fact that there are many silos in financial crime compliance workflows – especially in very large organizations. It’s not uncommon for each compliance process – from client activity monitoring to sanctions screening – to be handled by separate, distinct teams. 

This is challenging for leaders who need their teams to be alive to the wider risk landscape, including predicate offenses. Processes and procedures need to make the implications of any alerts clear, break down barriers in communication, and ensure analysts know how to escalate alerts to the teams who would be concerned about them. 

Consideration should also be given to educating the wider organization on how to spot suspected predicate offenses to ensure suspicious activity doesn’t go unnoticed. Some approaches include training or better interaction with law enforcement to provide analysts with a better contextual understanding of how predicate offenses play out in practice. 

3. Investment in AI-driven tools that can help scale and automate financial crime risk detection will be critical in 2023

The implementation of technology solutions can result in soaring false positive rates if configured incorrectly – one firm I spoke to experienced false positive rates of 95 percent. Sadly this is far from unusual.

This is why it’s so important to deploy tools that leverage artificial intelligence (AI)  that can be calibrated to match a firm’s risk appetite and flexible enough to address emerging risks such as evolving sanctions regimes, politically exposed person (PEP) status changes, and negative news. 

Done well, technology can deliver significant efficiency savings. In one specific use case –  negative news screening – I’ve seen the use of AI reduce hit rates by up to 90 percent and onboarding cycle times by 80 percent; statistics that compliance teams would welcome, the wider business and customers alike.