Digitalization can boost the fight against trade-based money laundering
SMEs are rapidly digitizing their businesses, turning to e-commerce and platforms to drive sales, with particularly high growth in developing regions. According to EY’s global SME survey, over the past year, use of online and mobile banking rose by 43% and 40% respectively, while visits to branches and offices declined significantly.
By tapping into the vast amounts of data created by digital customer touch points, banks have a great opportunity to deepen their understanding of SME clients, and to better monitor suspicious activities. Fintech innovations present an additional source of customer data, including accounting information, optical character recognition (OCR) of paper documents, and various specialized databases providing company information, complex legal entity relationships and ownership structures.
In addition to boosting the fight against financial crime, access to richer data enables more precise customer segmentation and enhanced knowledge of risk concentration. A large majority (82%) of SMEs taking part in EY’s global survey say they’re interested in sharing necessary intelligence with their primary financial services provider to facilitate a more profitable relationship.
By gradually transforming their trade finance controls, banks could better support SMEs through difficult economic conditions, as well as protecting them from potential criminal abuse or sanctions violations from new trading partners.
Transforming trade finance controls through technology
In the initial transformation phase, banks should focus on digitizing their trade finance processes, and move away from burdensome paper-based operations. Once they have established a strong foundational data platform to handle both structured and unstructured data, they can then seek to drive efficiencies through the adoption of advanced analytics and artificial intelligence (AI) capabilities. Applying AI technologies can help to automate repeatable compliance processes. Beyond providing TBML “red flags”, AI could extend to export or import controls, identifying dual-use and embargoed goods, checking sanctions and detecting fraud. Customer activity monitoring can help profile entities, prioritize which alerts to investigate, and further automate the alert triage process.
Technology has great potential to improve documentation, testing, and risk governance models, meet regulatory risk-based demands, improve anti-money laundering policies, and tighten up change control procedures.
Information available via Fintech solutions can be expanded to include clients’ accounting data or digitalized paper submissions, and up-to-date company information such as global ID, business name, address, telephone number, credit risk score, records on complex legal entity relationships, and ownership structures. And, through automated analysis and monitoring, banks not only enrich their TBML detection, but can also make faster and more informed lending decisions.
If banks fail to digitally transform trade finance controls, they risk losing market share to emerging financial services providers that can offer SME clients a superior experience. EY’s survey found that 55% of SMEs are dissatisfied with banks for taking too long to assess their credit risk, and 36% are considering switching to alternative financial providers.
All the more reason to seize the opportunity presented by the shift to digital trade and harness the subsequent growth in data to deliver improved TBML prevention.
Special thanks to David Cooperman, Executive Director, Business Consulting, Financial Services, Ernst & Young LLP United States and Abhay Chauhan, APAC Director, Corporate, Commercial and SME Banking, Ernst & Young Advisory Pte. Ltd. for their contributions to this article..