Customers: corporate asset or liability?

The Third Anti-Money Laundering Directive further tightens the screw on financial services suppliers to know their customers. It requires them to take a ‘risk based’ approach to screening customers against prescribed sanctions lists and to identify any client that is a politically exposed person (PEP). The legislation builds on existing efforts to prevent criminals access to the European Union’s financial systems.

There is little guidance from the Financial Services Authority (FSA). It is up to individual firms to decide where they draw the line in the battle against organised crime and terrorists. However, any company that is subsequently judged to have acted negligently in this respect faces heavy financial penalties, reputational damage and possible custodial sentences for the responsible management.

Regardless of the size of organisation, MLROs all face the same challenge: deciding where to draw the line in customer screening to strike a balance between operational efficiency and crime prevention.

Attitudes range from the sublime to the ridiculous. Best practice is exemplified by the MLRO who measures every decision by what she describes as the Cornflake Test – doing everything necessary to ensure her employer does not appear in the morning paper linked for all the wrong reasons. This is stark contrast to the MLRO who suggested doing nothing was a valid response to the risk-based approach required by the new Directive.

Risk-based approach or Russian roulette?

Anybody thinking of playing Russian roulette with Watch and PEP lists should bear in mind that World-Check, the leading supplier of consolidated lists, estimates its file will contain approximately 500,000 names by the end of 2007 when the new Directive comes into force. Financial Services companies will need to regularly screen their entire customer base to ensure compliance.

Datanomic’s own research – based on a review of more than 300 million customer records, more than half of which are in the financial services arena – reveals that Financial Services companies typically waste 75 percent of their time each month dealing with recurring ‘false positives’ produced by inefficient and ineffective matching of customer records with lists of known or suspected criminals and PEPs. An alarming number of Financial Services companies are unknowingly doing business with criminals, terrorists or money launderers.

The typical number of SARs (Suspicious Activity Reports) that an MLRO raises following an audit by Datanomic on just a sub-set of a company’s data is between five and nine SARs. A recent review of 30 percent of customer data from a large well known London-based investment house resulted in seven SARs. Typically, the company’s audit reveals around 4 percent of an organisation’s customers are matches to World-Check’s Watch and PEP List, and a quarter of these relate to financial crime.

The scale, cost and complexity of matching customer records against sanctions and PEP lists has become a major administrative burden for compliance departments. The legal requirement to continually, accurately screen entire customer bases means organisations have to continually review large volumes of customer data.

Datanomic’s Watch and PEP List Management solution enables users to define how closely any two records match. Its match rules mean manual decisions made on reviewed records will automatically be remembered next time the data is processed, unless either record has changed. This eliminates repeating the search on ‘false positives’ every time the records are checked. In fact, the solution reduces the entire manual review effort by a factor of four, freeing up resources to focus manual effort on more complex tasks and delivering a rapid return on investment.

In today’s commercial environment, the damage caused by publicity following a breach of the EU directive could be devastating. Certainly, any fine imposed by the FSA is likely to be only the thin end of the wedge.

Steve Tuck is Chief Strategy Officer, Datanomic Ltd, steve.tuck@datanomic.com, +44 (0)1223 228400.

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