Compliance Challenges for Financial Institutions in the ‘New Normal’

The ‘new normal’ in the financial framework

The effects of COVID-19 in the financial world reflected themselves in the operational as well as the regulatory side. As the limitations in the on-location business and travel restrictions appeared in the face of the pandemic, it has become more challenging to meet the expectations of regulators. Ensuring a full compliance in this atmosphere requires faster, more subtle and dynamic risk management from the financial institutions because in this disruptive and unexpected period, new risks may emerge rapidly while already existing ones may turn into actual issues as a result of the operational problems in the previously working control structures.

It is the responsibility of the compliance teams within the financial institutions to take quick action, understand the changing atmosphere and work on the way to adapt their strategy to the “new normal”. The course of this process should involve a thorough analysis of the risks based on the operational, technological and/or regulatory alterations in the financial world and an agile method to activate the compliance program in order to successfully manage the risks with accelerated undertaking of the issue.

However, the operational burden and pressure on financial institutions and banks make it harder to ensure a smooth adaptation to the new normal, especially on topics like customer due diligence checks because the sources are limited in comparison to normal times and the onboarding process of the new customers has to take place remotely. On top of these, the financial institutions have to watch over enormous number of transactions every day to make sure that they prevent any financial crimes like money laundering or financing of terrorist activity. Therefore, digital onboarding processes have gained importance more than ever and the institutions are required to give special attention to operate a successful digital ID verification system during the time of pandemic. Digital Onboarding also offers the financial institutions advantages like better compliance, less cost, improved productivity and better customer experience in most cases.

Re-building the compliance strategy in remote environment

In the adaptation journey to the new normal, what is critically important is to re-assess and concentrate on the whole compliance strategy within a financial institution. To confirm that the focus is still on controlling the main compliance risks, it is crucial for banks and other financial institutions to collaborate with business teams that comprehend the changes in the risk profile and overall business strategy. Actually, institutions may even use these compulsory remote working conditions in their advantage by accelerating their digitalization processes like upgrades to electronic communications surveillance. Even the effectiveness and the efficiency may be increased during remote working as it offers an opportunity for improvements in locational strategies.

After deciding on the adaptation path and how to actualize the actions like transaction monitoring or trade surveillance that are normally not executed off-site, the next step is to ensure that the compliance team owns the necessary technology and admittance in order to be able to carry out the key functions for a successful and dynamic risk management while at the same time to stay connected to each other and the business as working on the same location is not possible.

It is also important to support the compliance teams reassuringly so that they feel and keep productive, constantly contributing because productivity is highly critical for areas like transaction monitoring as piling up of work may cause issues in the long term.

Adaptation process

As the regulatory requirements and obligations remain unchanged during these unexpected and unprecedented times for the business world, the financial institutions must stay focused on how to mitigate fraud and remain compliant with the regulations by ensuring the best use of their resources. If they act careless by relaxing compliance checks and fail to place compliance as the high priority matter for their business, then they will loosen up the strings of control for criminal activity to be created more easily which will cause both reputational and economical harm in the future. The solution is simple: maintain the controls with highest caution and make sure the communications are as transparent as possible.

Since the timeline of the ‘new normal’ remains indeterminate, the operations based on traditional methods like fraud detection and compliance will need to be re-thought and re-defined. The conventional trainings on the prevention of wire fraud and other criminal activities are to be evaluated under the light of the new circumstances and adapted to the new threats. Compliance teams are handling a big responsibility in this process as they have to elaborate on how to monitor the communications and to manage the sensitive data.

In addition to these, the existing technological services that detect non-compliance and fraud need to be recalibrated so that they can analyze the emerging fraud patterns while at the same time ensuring that they do not create false positives which can interrupt the business intercourse. For the regulators, this urge to move the financial institutions in the direction of using effective technology and data-driven monitoring controls has been the target for a long time. However, with the ‘new normal’, it has become even more important, urgent and essential since the existing data science models may fail to understand the new risks. The digitization of the workplace resulting from the current pandemic has offered an opportunity for many businesses to migrate to the data-driven approaches and placed them to an advantageous position in the business world. According to the FATF report on the effects of COVID-19 on Anti-Money Laundering (AML) activities, it is essential to allocate the time, effort and budget wisely by prioritizing the fundamental processes. That is why the existence and effective use of AI-based systems are of essence more than ever as they also help reduce the operational workload and detect risks that are impossible to analyze in such a short notice manually.

As the trend in the financial world is to adopt a holistic approach, it cannot be unseen that technology and analytics are not enough to provide the fully working solutions by themselves. Human supervision and intervention on compliance controls are also necessary. Therefore, financial institutions must seek out to create a balance in between technology and human workforce in order to be able to extend the effectiveness of their compliance teams and incorporate the best systematical and logical decisions. Under the pressure of the requirements and the threats of the ‘new normal’, this balanced approach is likely to help institutions remain compliant and operate more cost-wisely.

Steps to be taken

We are passing through uncertain times, therefore being result-oriented, practical and quick are the assets that are vital for many financial organizations. Employing a constant and dynamic risk management as well as a transparent and rapid communication within and among the institutions play an important role. With a rapid and logical planning and adaptation process for the new challenges and risks, the financial institutions can mitigate the threats and remain compliant by at the same time supporting the business strategy.

2020-08-31T10:41:44+03:00
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