Getting your arms around the Financial Reform Act and the Impacts to AML Compliance: What impacts to customer experience and convenience will this pose to you?

By Michelle Thiel, Sr. Compliance Analyst, Risk Solutions

We knew moving into 2010 we would see substantial changes in the regulation of the U.S. financial services industry. Given the lack of consumer confidence and public trust, the new regulatory reform could create requirements that are much more onerous for financial institutions to satisfy.

We cannot ignore the degree to which customer preferences force evolution in industry. Customer demand for increased convenience through innovative products and services can introduce greater compliance risks. Technology advancements present more channels and functionality for delivering financial services. For example, consumers' increased preference for feature-rich mobile devices presents the potential for unauthorized access or fraud. Innovation does not come without the introduction of risk and as a result, new business lines must be assessed for risk.

To complicate the scene further, financial institutions should expect new threats to develop as criminals devise new schemes to further their unlawful activity. Together, market indicators point to an exacerbated struggle to do more with less. There is even more indication now that the U.S. will take a more aggressive stance toward Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) procedures.

Examiners are currently showing the propensity to require assurance that your EDD procedures include steps for obtaining the correct information on high-risk customers. We can now expect increased scrutiny. Cease and desist orders already suggest the potential focus of reform and exams on having good risk-based account opening procedures, CDD and suspicious activity monitoring present. Procedures should include processes for confirming the identity and business activity of the customer; understanding the expected transaction activity; and ensuring the identification of the customer for the purpose of reporting suspicious activity.

There is scrutiny on having proper procedures in place to manage technological solutions. A 2006 cease and desist order resulted in the FDIC also requiring the bank to create an IT committee to address methods for the identification, development, acquisition and maintenance of IT solutions; the development of IT policies and procedures; and the testing of solutions.

An initial investment in a reliable CDD technology solution may save your institution from extensive manual labor and IT costs, as well as potential revenue drain caused by civil money penalties in the millions. In light of reform, any range of publicized deficiencies that cause investors and customers to lose trust in an institution leading to funds withdrawals and business loss.

Doing More with Less in Follow Up to Reform

Current scrutiny and reform will likely enforce a focus on account opening and CDD. Many institutions find it difficult to risk rate a customer on account opening. And in some cases, the risk that you associate with a new customer will change after transactions are made. However, it is necessary to have a clear picture of the type of activity to expect from the customer in order to properly monitor the account later. The largest challenge around this type of requirement is making sure that policy is clearly identified and moved into a process. However, some of these processes can be very manual and time consuming. Financial institutions will continue to struggle with the invasive impact these processes can have on the customer and the presence of additional manual steps and time to the process.

In order to be an effective aid to your CDD program, the CDD technology solution must be easily customizable, have flexible risk-scoring capabilities, manage sanctions lists, have a user-friendly work-flow process, and integrated research tools for EDD. Though this step seems rudimentary, institutions must ensure that their institution's definition of CDD is in sync and commensurate with the vendor or provider. If your vendor's approach to due diligence does not reflect your written BSA program, you run the risk of negative regulatory scrutiny and potentially negative publicity and loss of customer trust.

Addressing Regulatory Reform without Losing Revenue: Leverage your CDD Investment for New Profit Centers

An ever increasing percentage of an institution's budget goes toward AML compliance and CDD. In addition, specific EDD measures are increasingly being expected by exams. However, instead of being seen as a drain on your institution's assets, a sound due diligence program with a technological component can actually increase your profits.

With all the requirements today for identifying customers, CDD and enhanced DD, and monitoring transactions, and now the requirements pending new regulatory reform it would be nearly impossible to comply without the assistance of a high-tech system designed specifically for that purpose. Major financial institutions are extremely complex entities with vast branches in numerous cities and states. Under the law, in order to "know their customers" banks, investment firms, insurance companies and others must monitor countless transactions, often made with little or no face-to-face contact. To do so without an equally complex and yet flexible technology system would be impractical.

The information that is collected during the CIP process, customer and EDD procedures can be used for targeted marketing and sales; in order to up-sell and cross-sell to already existing clients. In this way, CDD products can turn your return on information into a return on investment. In addition, making an initial investment in a reliable CDD product may save your institution from incurring much larger regulatory and reputational costs in the future.

Although we don't yet know what the courts will rule on the recent regulatory reform, can be challenging but are not impossible. The implementation cost, both time and money, of adequately assessing risk, properly conducting enhanced due diligence, and choosing the appropriate CDD solution is well worth it. The value of a flexible system also lies in its leverage into other areas of your operations. These steps may ultimately save your institution's reputation and millions of dollars in lost revenue from customer retention and manual labor. In the end, these steps an also enable your ability to enter new profit centers.