2014 AN EVEREST GROUP VIEWPOINT

AML and KYC Analytics

This report has been
licensed for exclusive use
and distribution by Genpact
Crossing the Hurdles of Fragmented Master Data And Multiple
Non-Cohesive Customer Views to Successfully Operationalize Analytics
Anupam Jain, Practice Director

Anti-Money Laundering (AML) and Know Your Customer (KYC) initiatives are fast
becoming important focus areas for all financial services firms across the globe
given the increasing cost of compliance, significant risk of non-compliance, and
the challenges associated with acquiring and retaining the right customers (see
Figure below).
Benefits
Reduction in false positives Business pressures resulting in increasing focus on AML and KYC
(~10% of SAR alerts are
Increasing and more Hyper competitive financial
productive) Changing business

complex money laundering services industry
A global bank reported environment Greater global regulatory Decreasing customer loyalty
reduction of KYC TAT from focus on AML and KYC and product differentiation
20 to seven days
A U.S. regional bank
reported 97%+ accuracy and
real-time turnarounds for Industry Rising cost of Significant risk of
Challenging to
acquire and retain
SAR11 and BSA compliance challenges compliance non-compliance
right customers

Keys to operationalizing
analytics in AML and KYC
Centralization of AML
functions into a single
platform
Domain and competency
training programs
Leveraging offshore delivery
Long-term planning to
improve system integration
and organizational agility
Fast reference
Why important........................1
Impacts of analytics.................2
Operationalizing analytics.......3
Conclusion.............................4
Emerging priority Increasing focus on AML
and KYC initiatives
Risk of non-compliance is now very real. Global collusion-based money
laundering, offshore tax havens, Ponzi schemes, and sanctions violations are
proving to be worthy adversaries of enforcement efforts. New regulatory
demands (such as FATCA5, FCPA6, FINRA7 rules, BSA8/AML amendments,
MiFID9, global PEP10 lists and several others) have emerged and continue to be
refined, changed, and made more stringent. Several high profile cases have
also come to the fore US$1.9 billion fine for HSBC1, Wachovias US$160
million settlement2, US$327 million settlement from Standard Chartered3, and
penalty of over INR16 crore on several Indian banks4. AML and KYC
compliance budgets have increased significantly over the last few years. Yet,
most banks feel their compliance departments are under-staffed and over-
burdened.

1 www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211
2 www.huffingtonpost.com/2010/03/17/wachovia-to-settle-money-_n_502959.html
3 http://money.cnn.com/2012/12/10/investing/standard-chartered-sanctions-iran/index.html
4 www.business-standard.com/article/finance/six-state-run-banks-fined-for-violating-kyc-aml-norms-113082300837_1.html
5 FATCA Foreign Account Tax Compliance Act
6 FCPA Foreign Corrupt Practices Act
7 FINRA Financial Industry Regulatory Authority
8 BSA Bank Secrecy Act
9 MiFID Markets in Financial Instruments Directive
10 PEP Politically Exposed Person
11 SAR Suspicious Activity Report

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 AML AND KYC ANALYTICS

Impact of leveraging AML and KYC analytics

90% of the alerts we receive are

false. It is worse in some
emerging geographies.
Systems implementation and the significant effort required to analyze the
outputs of Automated Transaction Monitoring Systems (ATMS) represent the
single largest cost component in AML compliance. But most systems produce
SVP, Top 5 U.S. Bank
only one productive alert for every 10 generated. Poor risk-based reporting and
manual reporting process makes the process inefficient and less effective.

Due to significant dependencies

on branch managers, a single
KYC can take up to 20 days.
Effective analytics solutions can reduce the complex and expensive burden of
compliance on AML and KYC departments. Further, the right solution helps
prevent the even more expensive implications of non-compliance. Several
reporting, descriptive, predictive, and prescriptive AML/KYC analytics use cases
Large Germany-based global
have emerged (see Figure below).
bank

Range of AML/KYC analytics

Increasing business impact

1. Reporting 2. Descriptive 3. Predictive 4. Prescriptive

analytics analytics analytics
OFAC check and Suspicious activity Transaction red flags Simulation of
reporting monitoring and exception thresholds to identify
SPF account Customer profiling management to improper thresholds
monitoring and risk scoring handle false that are causing
SAR filing Account validation positives over alerting
documentation against watch lists Distribution analysis Analyzing and
Developing case and other third-party of historical scoring alerts to
summaries information transactions below enable smart
threshold to detect decisions on which
any systematic alerts to prioritize
money laundering and reduce reliance
activity and adjusting on in-house
thresholds specialists
accordingly
Customer
segmentation by
behaviors and
attributes to set
thresholds at a
group level versus at
a global level
A commercial bank A top 10 U.S. A commercial bank Interactive analytics
identified 800+ commercial bank identified 800+ enable experts to test
fraudulent attempts by optimized its account fraudulent attempts by and review current
analysis of historic data validation process, and analysis of historic data rules and thresholds on
and building exhaustive enabled evaluation of and building exhaustive an ongoing basis
procedures and key red thousands of names in procedures and key red
flag indicators a fraction of the earlier flag indicators
time taken

Increasing sophistication of solution

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 AML AND KYC ANALYTICS

Successfully operationalizing KYC/AML analytics

While there are clear benefits of leveraging analytics to support KYC/AML

initiatives, adoption continues to be in pioneer stage. There are two key
roadblocks that most financial firms face:

1. Investments required in strengthening master data: Effective KYC/AML

analytics require a robust and integrated security master, account master,
and customer master. Without strong master data management, it is hard to
analyze the flow of money, the structure of the instrument / business deal,
concentration of liquidity or exposure, and how one component relates to
another. However, building a strong data infrastructure requires significant
upfront investment

We have 22 different definitions

of what is a customer.
VP, Top 5 U.S. retail Bank
2. Lack of single view of customer: Banks operate in silos that prevent them
from having a single view of the customer. For example, the view of a
customer from the CRM system would not typically incorporate a risk profile,
performance history or regulatory data associated with KYC requirements
yielding an incomplete and possibly inaccurate view, of a customer. Similarly
an end-to-end process view is hard to build as back-office, mid-office, and
front-office processes are disjointed. This often delays the flow of
information that is essential to make decisions based on smart analytics.
Moreover, it delays the response time when suspicious activity has been
reported

Overcoming these challenges is hard and few (if any) claim to have reached
the end state. Successfully operationalizing AML/KYC initiatives is a journey and
most financial firms are taking incremental steps forward. The emerging best
practices are:

Centralization of AML functions across all geographies and LoBs into a

single platform: A Large global US-based bank established global systems
and processes to capture suspicious transactions and then report the same
to relevant regulatory bodies leveraging Oracle Mantas as the common
platform

Domain and competency training programs: Analytics is not only about

tools and technology implementation, it requires trained manpower capable
of undertaking business analysis something that most financial firms lack
or cannot continually refresh

Leveraging offshore delivery: Beyond cost arbitrage, offshoring offers access

to new talent pools, ability to leverage different time zones, and manage
volume fluctuations

Long-term planning: Last but not the least, long-term planning is required
for overall application & system integration along with an agile
organizational structure that can adapt and change quickly

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EGR-2014-11-V-1071

For more information about
Everest Group, please contact:
+1-214-451-3110
info@everestgrp.com
For more information about this
topic please contact the authors:
Eric Simonson, Managing Partner
eric.simonson@everestgrp.com
Rajesh Ranjan, Vice President
rajesh.ranjan@everestgrp.com
Anupam Jain, Practice Director
anupam.jain@everestgrp.com
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EGR-2014-11-V-1071
AML AND KYC ANALYTICS
Conclusion
AML/KYC analytics present a significant opportunity for banks to manage rising
cost of compliance and the risk of non-compliance. However, it requires
significant investment to build a strong layer of master data and organizational
transformation to create a single view of the customer. While there is no silver
bullet to reach the end state, several improvement levers exist to successfully
operationalize AML/KYC analytics.
This study was funded, in part, by support from Genpact
About Everest Group
Everest Group is an advisor to business leaders on next generation global services with a
worldwide reputation for helping Global 1000 firms dramatically improve their
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based approach driving outcomes, Everest Group counsels organizations with complex
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and industry resource services, Everest Group helps clients maximize value from delivery
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Established in 1991, Everest Group serves users of global services, providers of services,
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categories. For more information, please visit www.everestgrp.com and
research.everestgrp.com.
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