Deloitte: The state of anti-money laundering (AML) in South Asia

07 September 2020 5 min. read

While more than 80% believe themselves to be compliant with anti-money laundering (AML) standards, most banks and financial institutions in South Asia find the growing complexity of the compliance landscape to be somewhat overwhelming.

Deloitte drew more than 120 responses from leading banks and financial institutions across India, Sri Lanka and Bangladesh to gauge their capacity to deal with the growing menace of money laundering. As pointed out in the report, anywhere between 2% and 5% of the global GDP is laundered every year, amounting to $800 billion at the very least and $2 trillion at most.

Add to this the fact that the digitalisation of finance – spanning payments, investments and banking procedures – has opened a whole set of new avenues to dodge regulations, making life tougher for banks and financial institutions that are obligated to mitigate money laundering. As explained by partner at Deloitte’s Forensic practice KV Karthik, the expectation now is “if you could have known, then you should have known.”

Confidence in AML compliance frameworks

For many in the financial sector, every effort is being made for compliance. Indeed, more than 80% of respondents to the Deloitte report indicate that their financial crimes prevention framework is compliant with regulatory requirements and expectations. That being said, most feel that staying compliant is becoming an increasingly mounting challenge.

Money laundering is always a looming threat. However, the majority of banks and financial institutions report that the biggest challenge to AML compliance is meeting the droves of new regulatory conditions that are emerging. For one, organisations simply lack the capacity to deal with this volume of regulation.

Talent gap

Examining the AML landscape in Asia back in 2018, Alvarez & Marsal’s Director for AML and Counter Terrorism Finance in Asia placed human capital at the centre of managing the complex money laundering minefield. According to Deloitte’s report, well over half of all banks and financials in Asia report a shortage of adequately trained AML professionals, signaling a key gap in compliance frameworks in the region.

What makes this scenario even more complex is that the regulatory requirements vary across jurisdictions. In an age of hyper interconnectedness, banks can assume that their customers will be engaged across several jurisdictions, putting the unique regulatory requirement of each area on their ever expanding mandate.

Biggest AML challenges faced by banks

One solution to this scenario is investing in regulation technology (RegTech), which sifts through large volumes of data to identify anomalies. Not everyone has access to the latest in RegTech, however, and the lack of sufficient technology in itself is among the biggest challenge for many players in the financial services industry.

Those who do manage to invest in RegTech struggle with the technology’s reliability. Artificial intelligence (AI) deployed to detect violations creates an alert at the slightest blip, throwing up a flurry of false positives. For Deloitte, this scenario of complex challenges translates into the need for strategic investments to improve compliance systems.

Karthik pointed out that a more customer focused due diligence is among the chief requirements going forth. “Such an approach that provides a comprehensive view of customers and transactions can make it difficult for criminals to exploit gaps between business systems, databases and countries,” he said.

Top priorities

Respondents to Deloitte’s survey appear to agree with this assessment, with nearly two-thirds putting customer due diligence as a key focus for AML compliance in the next two years. Efficiency and sustainability of control mechanisms are also at the top of the priority list for the next two years, while a significant chunk also plan to invest on the tech and human capital side of things. Investments and AI and AML training, more specifically, are on the agenda.

Top three priorities for better AML compliance

Other areas that according to the respondents need attention are: Business risk assessment; transaction monitoring systems; threshold tuning to minimise false positives; controls testing; and implementing sanctions screening systems. In the eyes of Karthik, this signals a more comprehensive approach to AML compliance, including more effective technology in the sphere.

“Historically, AML programmes have been incident-driven with lean teams to manage response to events, or changes in regulatory developments. These have created issues pertaining to the availability and quality of data, systems working in a siloed manner, and inherent module based limitations, leading to significant reliance on manual processes to close gaps in compliance. But that is no longer adequate today,” he said.

“Regulators today expect banks to have a consolidated view of customer transactions across businesses and jurisdictions, to identify any unusual transactions and behaviours, or potential sanctions violations. The current technology frameworks may pose a challenge to doing that and banks need to take a strategic and longer term view of technology investments,” he concluded.