Wanted: An Army of Compliance Officers

Ivan Schneider, Writer, specializing in financial technology | 11/7/2012 | 9 comments

Ivan Schneider
Transaction monitoring for money laundering, fraud, and other financial crimes can be automated to a certain extent, but there's still a critical human element involved in the process. At the annual Sibos banking conference, held this year in Osaka, Japan, a panel of compliance experts explored the implications of the growing need for analytics applications in financial crime.

Automated tools can detect suspicious transactions, but it takes active hands-on activity to follow up on leads, eliminate false positives, and discover ways people game the system. To be a compliance officer, you have to be able to think like a criminal, and you need the moral fiber to avoid becoming one yourself. You also have to be an effective team player within complex organizations. Compliance roles are not always easy to fill, yet the industry will have to find large numbers of compliance officers just to keep up with the high volume of transactions coming into the global banking system.

It's basic math with exponents. The overall number of transactions is increasing exponentially. Globalization has increased the number of potential trading partners. Mobility has made it easier to initiate transactions, and better core banking systems have enabled real-time processing. These factors have combined to spur a large jump in the number of transactions being processed through the banking system 24/7, across time zones and international borders.

Yet the people capable of monitoring the higher flow of transactions cannot possibly increase at the same blistering pace as the number of transactions. As a result, financial institutions are increasingly relying upon highly automated systems that minimize human-computer interaction. The open question is whether this increased automation has come at the price of being less responsive to new forms of financial crime.

The good news is that the expense of compliance technology can be shared across multiple areas of compliance. David Howes, global head of financial crime risk for wholesale banking at Standard Chartered Bank, said at the conference that, instead of having separate compliance teams for fraud, money laundering, and market abuse, you can establish a single compliance function that covers all those areas. However, you should ensure that the people within that team retain their specialized skill sets, even if the technology solutions work across disciplines. Cohesion in compliance should happen at the technology level, not the individual level. From an HR perspective, the need to retain multiple compliance teams accentuates the hiring challenge.

Even the best compliance software has to be managed with a hands-on process. Michael Cho, global head of anti-money laundering compliance at Northern Trust Company, said it's "not enough" simply to purchase software and turn it on. These products have to be tuned to the needs of your institution and the evolving profile of customers and their activities, Cho said. As such, there are both startup costs and ongoing maintenance costs in terms of human resources when deploying compliance software.

In addition, the compliance people have to be comfortable working within a complex organizational structure, having sensitivity to reporting relationships and oversight responsibility. For example, Howes cautioned banks to make business units responsible for integrating compliance into customer-facing parts of the business to avoid, say, having the compliance function designing your client on-boarding processes. Thus, compliance officers have to stand back and give the lead to the business units when it comes to designing the interfaces, but they should have the fortitude to step up and insist on strong compliance oversight when potentially suspicious transactions are involved.

Cho described how the business units and the compliance function might speak the same language in terms of the dollar value of compliance. One common measure of the value of compliance is "fine avoidance" -- the extent to which a bank can avoid getting in trouble with regulators. A better approach might be to assess how much work compliance is doing for the bank to support an individual trader, banker, or end client. For example, if a client generates an outsized number of suspicious activity reports, or if those reports generate a high number of inquiries or investigations, perhaps it's worth having a conversation about whether the client is worth retaining, even if the investigations turn up empty. With this approach, you may discover areas where it would help the business to ask the right questions in advance, so compliance doesn't have to get involved later at a higher cost.

The banking industry has to hire compliance officers with expertise in specialty areas, knowledge of the leading analytic tools and approaches, the ability to function in a multidimensional organizational structure, and an eye toward the economic impact of compliance efforts. Finding compliance officers with experience in these areas is hard enough. Now the industry has to attract a pipeline of qualified candidates to be the compliance experts for the immediate future of global, real-time, and mobile transactions.

In the comments, let's hear your ideas for building a compliance army.

View Comments: Newest First | Oldest First | Threaded View
Pedro Gonzales   Wanted: An Army of Compliance Officers   11/29/2012 10:39:43 AM
compliance officer on their way
I think being a compliance officer has many challenges, and the job challenges seem even more.  I think not many people know about this field, working with universities providing interships for computer science and even people in the accounting field will be a good way to promote such professions to others
Cyrus   Wanted: An Army of Compliance Officers   11/14/2012 3:13:37 PM
Re: Chicken or the egg?
@Lufu Your idea makes perfect sense in that people who have already committed these crimes know a lot about how to outwit the system. But, while you'll see these folks occasionally go into consulting (a la Frank Abagnale) and they can often have lucrative consulting careers, financial institutions themselve would never directly hire them. 

Financial instituions are scared to death about what can happen and focus all their efforts on policies, procedures and technologies to stop it. In a sense, they believe that if they through everything they can at something, it will never happen. So the last thing they want is someone who has the expertise and knowledge to potentially think of something they hadn't to come in and work for them. 

May sound crazy, I know, but that's the way the ball bounces.
WaqasAltaf   Wanted: An Army of Compliance Officers   11/9/2012 8:35:06 AM
Re: Turning out false positives
@ Ivan

"key question is whether there's a linear relationship between the number of transactions happening in a given time period and the number of compliance officers required to monitor those transactions."

You have raised an interesting question. IMO, there 'should' be a relationship between transaction numbers and compliance officers' army as the inherent risk increases. Another factor may be the type of account holders that are in a financial institutions. For e.g. if there is a larger % of salaried individuals, then the inherent risk is low however, if the % of businessmen esp those involved in foreign currency transactions is high then larger staff force of compliance officers will be required as judgmental monitoring will come into play.
Ivan Schneider   Wanted: An Army of Compliance Officers   11/9/2012 7:50:59 AM
Re: Chicken or the egg?
It takes a long time to train someone to be an effective compliance officer, making it an expensive proposition to scale the profession. Considering the crime itself often originates offshore, perhaps the solution is to attract offshore resources for compliance as well? 

User Ranking: Blogger
Ivan Schneider   Wanted: An Army of Compliance Officers   11/9/2012 7:48:45 AM
Re: Chicken or the egg?
Great example. Although in that case the people involved didn't have much of a choice. 
User Ranking: Blogger
Ivan Schneider   Wanted: An Army of Compliance Officers   11/9/2012 7:45:39 AM
Re: Turning out false positives
Yes, and the key question is whether there's a linear relationship between the number of transactions happening in a given time period and the number of compliance officers required to monitor those transactions. 

To an extent, a larger number of transactions may assist the automation effort by making the pattern recognition more sensitive, but there's still going to be a point at which it takes a person to interpret the clues.
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David Wagner   Wanted: An Army of Compliance Officers   11/7/2012 2:56:16 PM
Re: Chicken or the egg?
According to my wife, my brother-in-law spent a large part of his youth trying to plan the perfect crime, but he never committed one. Instead he is in...finance!

My guess is that the field always attracts the people it needs. there just may not be enough people like my brother-in-law in the world.
LuFu   Wanted: An Army of Compliance Officers   11/7/2012 1:34:05 PM
Chicken or the egg?

To be a compliance officer, you have to be able to think like a criminal, and you need the moral fiber to avoid becoming one yourself.

I wonder if it's easier to take a money launderer and train them to be a compliance officer or take an analytic-minded compliance person and teach them about criminal behavior? Here's an example of taking the a dozen criminal types and getting them to work for the greater good.

WaqasAltaf   Wanted: An Army of Compliance Officers   11/7/2012 11:40:13 AM
Turning out false positives
Truly, the compliance jobs do demand a lot of sense about how to differentiate between who is a suspect and who is not. There have to be good basic automated controls such as marking transactions flagged when they are outside the normal routine but further investigation depends on the staff and his responsiveness.

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