This article first appeared as Compliance in Focus on Markets Media. Compliance in Focus is a content series on regulatory topics for financial markets and challenges compliance officers face in addressing surveillance and monitoring. Compliance in Focus is produced in collaboration with Eventus.
As seen in 2022 and continuing this year, the pace of market change financial institutions must endure is increasing. New regulatory proposals from the U.S. Securities and Exchange Commission (SEC), faster money movement globally (e.g. micro transactions) and added complexity from digital assets, all pose new Anti-Money Laundering (AML) vulnerabilities and challenges to compliance officers. This means compliance teams need to contend with a greater number of ingress and egress points as they closely monitor data and transactions across all trading and client activities, including both traditional and digital assets.
Jeff Bell, president at Eventus, shares how he is reimagining AML in a recent Eventus Quick Cuts video, where he discusses some of the top challenges compliance officers face today as they work to level up their AML activities to keep pace with market change and new client needs.
A common challenge traditional financial institutions face is the rising number of banking relationships they manage. This increase may be due to recent acquisitions of other firms with their own settlement banking relationships, organic growth, or entering into new markets, like digital assets. Whenever there are multiple banking relationships managed in a fragmented manner, a firm cannot solely rely on its bankers for AML checks but instead has to have a full view of activities itself. The markets saw this last year with the beginning of the Russia/Ukraine conflict, which restricted the number of countries firms could do business with and saw a number of individuals and companies (possibly their clients) land on sanctions lists. This made for a difficult environment for compliance teams, who were required to work with brokers, traders and administrators to identify affected clients and ascertain how to either offboard or suspend these clients. This was a hugely laborious process for firms.
Despite these new challenges, much of the focus of AML teams remains on basic money laundering activities, and not on sophisticated scenarios. For example, a common, and simple, money laundering scenario is cash transactions moved underneath the currency reporting thresholds to avoid detection. This is basic AML.
However, by integrating trade surveillance data into AML systems, firms can have a more advanced view of AML scenarios that include trading and client activities, and therefore better monitor for suspicious activities that go beyond cash movements, deposits and withdrawals, and look further downstream to where clients are actually trading those funds. For example, perhaps an insider trading alert occurred after an unusually large deposit for a customer, and that could indicate a financial crime or an account takeover. Or a high-risk trade surveillance flag could feed into an AML officer’s alert to give a better understanding of suspicious client activity.
This integration, along with the inclusion of signals-based technology to support alerts, is the crux of Validus AML – Eventus’ “reimagined” platform for both traditional finance and digital asset companies, according to Bell.
Firms need to have a better view of all trading activities to understand suspicious activity and look out for possible instances of market manipulation and insider trading – activities that are traditionally trade surveillance issues but also fall under the AML domain. Today, firms might file separate suspicious activity reports and then merge the two data sets together to get a fuller picture. With the Validus AML data integration, clients can have this broader view, explained Bell. If, for instance, a firm suspects market manipulation and wants to identify a party and activity from today, the system enables the firm to go back and look at previous money movements and activities.
Eventus also introduces a signals-based approach to the way alerts are generated. As the system executes alerts for a given scenario, clients can aggregate them with other types of alerts into “a meta alert,” said Bell. These “signals” are then rolled-up, which can reduce false positives and help to make the generated alerts actionable for compliance officers.
Ultimately, it is a compliance officer’s role to identify patterns and trends that come out from system alerts based on perceived riskier behaviors, which can possibly indicate financial problems that need further investigation and actions. Through the integration of trade surveillance data into the AML platform and the use of signals-based alerts, users are well equipped to more actively manage their AML operations today and improve monitoring capabilities ahead of any future market changes or events.
