Regulation  

Big Data to put small FS firms under microscope

At first glance, what’s happening to the European banks right now has nothing whatsoever to do with the average UK financial services firm.

After all, how can there possibly be a connection between major European banks receiving whopping great big fines for breaking anti-money laundering (AML) rules and sanctions violations, and the average financial services firm — a wealth manager, IFA practice or network, for example – going about its work?

Unfortunately, there is a connection — and it’s a lot stronger than you think.

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Big Data platforms

What is happening to Europe’s banks at the moment is symbolic of a very real development that is going to affect all financial services firms of whatever size and in whatever sub-sector moving forward: the use by regulators and authorities globally of Big Data platforms to uncover anomalies and financial crime.

Today, authorities and financial regulators globally are increasingly using Big Data analysis to scour the financial landscape for money laundering, terrorist financing and other illegal activities.

It’s exactly this kind of data-led investigation that has exposed a number of big European banks over the past five years. For example, Barclays, ABN Amro, ING, Credit Suisse, Standard Chartered and HSBC have collectively paid more than $5 billion in fines to settle charges by U.S. authorities regarding AML / CFT (combating the financing of terrorism) and sanctions violations.

And it’s exactly this that will expose many more FIs in the months and years ahead — if not on the same scale or with the same severity.

Red flag events

If you’re new to Big Data, and many still are, what these new technology platforms do is automate the process of scanning vast data ecosystems for red flag events. That’s dodgy activity to you and me.

They are able to rapidly make connections between events that are apparently unconnected and, as a result, can shine a torch light deep into the financial services world, exposing wrongdoing in even the darkest nook or cranny.

What’s certain is that, over time, even smaller firms that are involved in fraudulent or illegal transactions, if only unknowingly, will have the torch shone on them, too.

In the era of Big Data, the level of transparency will be unprecedented.

Know your customer

So what does this mean on a practical level for advisory firms, wealth managers and other FS firms? The short answer is that the importance of ‘Know Your Customer’ is set to increase dramatically. It has to.

Compliance departments are going to have to be even more forensic in their KYC processes and, where necessary, EDD (enhanced due diligence).

To properly defend their firms’ reputations and bottom lines, one-off, or infrequent, KYC will often not be enough. The fraudsters, money launderers and other criminal groups have upped their games and compliance departments need to up their own games accordingly. Or the torch will shine on them.