Compliance Technology - The Holy Grail

Bob Walsh, Deputy Chief Compliance Officer & Chief Financial Crime Officer, AXA Group
Bob Walsh, Deputy Chief Compliance Officer & Chief Financial Crime Officer, AXA Group

Bob Walsh, Deputy Chief Compliance Officer & Chief Financial Crime Officer, AXA Group

The pace of innovation in technologies relevant to regulatory compliance is profound, yielding many new ways to better address compliance problems.

However, perhaps our ambition should be higher. Perhaps we are within reach of the holy grail with compliance technology: instead of compliance processes that are additive to, or sit on top of, necessary business processes, let’s find ways to fulfill compliance requirements that are integrated with, that simplify or even improve, underlying business processes.

More than ever before this holy grail is now achievable. New technologies, artificial intelligence, and accelerating innovation in financial services business models are creating opportunities to converge business and compliance processes.

Before going further, it is worth noting that the technology opportunity for compliance - even without the benefits of integrating with the business-side - is immense. To pick just one compliance topic, anti-money laundering (AML), the estimated global spend is $8 billion and growing at 12 percent per year.

So let’s consider a couple of examples of possible integration with underlying business processes. For the first example we will stay with AML. A standard AML requirement is to verify the identity of customers. Sounds simple, but for financial institutions in most countries this remains a paper-intensive exercise, typically photocopying and submitting identity cards. These compliance processes are a source of delay, mistakes and immense frustration to customers and distributors. Zero-in on the last part: frustration to customers and distributors. Eliminating these frustrations means creating a commercial competitive advantage.

  In the sphere of compliance technology, there is tremendous new opportunity to provide innovation on business processes   

There are now a number of new biometric-based technologies being used to develop applications that offer a new solution to this AML requirement, for example facial recognition software connected to global databases of government photo ID. Fast, error-free, and simple for customers and distributors. A simpler and faster sales process, with the real prospect of creating a competitive edge.

Yet the take-up by financial institutions is remarkably slow. Why? Why is the take-up of innovative problem-solving compliance technology so slow?

Before answering, let’s consider another example. International developments related to Iran and North Korea have been in the headlines for a while. The United States in particular has been very active in seeking to prevent Iran and North Korea from developing nuclear weapons. In February 2018, the US Government issued a public advisory to put global banks, shipping insurers and others on notice of serious US regulatory problems if they provide services that enable illicit shipping involving North Korea. The US Government is essentially saying that when financial institutions provide their everyday international services, they must try to detect deceptive practices that may be hiding illicit North Korean shipping. Yet there are over 52,000 merchant ships in the world, huge ships with multiple cargos, constantly making port stops, picking up and dropping off cargo, and with opportunities for ship-to-ship transfers out at sea. What to do?

Well in fact, there are interesting new technologies and vendors who can track, in fact do track, all of these vessels, with extra focus on the more relevant ones.

But the opportunity afforded by these new technologies goes well beyond compliance needs. For banks, trade finance offers and pricing are founded on customer disclosures related to the characteristics of goods, shipping details and the parties involved. Similarly for insurance companies, marine cargo insurance pricing, and the validity of coverage and claims, is predicated on similar customer disclosures and due diligence. These new technologies offer materially relevant new information that can create competitive advantages in business selection and pricing. Yet, as with the AML example above, the use of these new technologies is nascent at best.

Again, why? The opportunities are obvious. I see three factors.

First, regulators and international standard-setters lag in their openness to innovation. Innovative approaches to compliance seem, in the first instance, to be met with cynicism. Vendors need to be prepared to work hard, sometimes in collaboration with client-partners, to educate regulators. And there does seem to be a new willingness to listen. As a participant in private sector consultative meetings of the Financial Action Task Force (FATF, the international AML regulatory standards setter), I can vouch for the efforts of such bodies to understand and consider new approaches.

Second, it is hard enough for vendors to understand and solve for just one of either complex compliance needs or rapidly changing business processes. It is doubly hard for vendors to develop a deep understanding of how those two sets of needs/processes interact.

Finally, the customers are difficult. Compliance officers generally are paid to solve compliance issues, and the business-side people at financial institutions generally are not wired to solve compliance needs when they develop their business processes. Perhaps that will evolve, particularly with new market entrants, but for now there is a need for thought leadership from enlightened vendors and consulting firms.

In sum, in the sphere of compliance technology, there is tremendous new opportunity to also provide innovation on business processes. However, technology companies will have to work harder, perhaps with new approaches, to exploit the opportunity.

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