Banks today are more than places to store or transfer money; they’re the front line in the fight against fraud and money laundering. This responsibility has only grown with new technologies and criminal tactics constantly emerging. It is impossible to imagine the banking system without rigorous compliance standards. Yet, despite the growing risks, the tools banks use aren’t always up to the task, which leaves the banking sector in a precarious position: constantly struggling to keep up with regulatory demands while losing vast amounts of money along the way. TD Bank Group paid Canadian regulators a $6.7 million fine and spent $366 million to fully overhaul its compliance systems as part of the ongoing investigation into its anti-money laundering (AML) program. Continuously fielding accusations from the U.S. financial watchdog FinCEN and the Department of Justice (DOJ), the bank has set aside $2.6 billion this quarter in preparation for possible penalties on top of an initial $450 million provision. This situation is not the only one of its kind. Regulators around the globe maintain that banks aren’t effectively managing money laundering risks. Many argue that the current systems and internal controls in payment institutions are too weak or that the banks don’t take AML seriously enough, leading to insufficient efforts in detecting and preventing crimes.
How banks can better protect themselves and their customers
Banks need to build strong(er) AML processes
Money laundering has long been a problem in the global banking system. It is a serious issue—one that is sometimes blown out of proportion. The number of high-profile money laundering scandals has decreased in recent years. Between 2022 and 2023, the total sum of AML penalties went down almost 60 percent, from over $2 billion to less than $850 million. As AML compliance standards grow stricter worldwide, today’s banking sector faces an altogether different issue: the overregulation of operations that often prevents compliant banking institutions from working efficiently. In certain regions, the issue of regulation and monitoring is more pronounced. Countries like Bulgaria, Croatia, Haiti, Monaco and others are facing increased scrutiny by the intergovernmental organization the Financial Action Task Force (FATF), due to a mix of weaker regulatory frameworks and higher levels of corruption. As a result, banks in these countries face growing pressure to ensure that their AML processes are strong enough to detect and prevent illicit activities.
Why banks bear the brunt of responsibility
Banks are uniquely positioned to monitor the flow of money in real-time, making them essential in the fight against fraud and money laundering. Logically speaking, banks are the most convenient point of rule enforcement from a regulator’s point of view—a responsibility that comes with significant challenges. Banks are often forced to step outside their direct roles as financial institutions to delve into complex legal issues that were once handled by law enforcement. Making matters even more complicated, regulations are often broad and vague, leaving much to interpretation. This forces banks to err on the side of caution, often at the expense of legitimate transactions and customer satisfaction. The financial burden of compliance also falls squarely on banks, requiring them to invest in expensive systems and hire specialized personnel. They also risk incurring regulatory fines, which can significantly impact a bank’s bottom line.
Current approaches to AML have limitations
There are two main ways banks address AML challenges these days. First, they build their workforce by hiring more compliance officers and account managers. However, as the volume of transactions grows and the manual workload increases, adding more people to the process can lead to diminishing returns and a greater risk of human errors. The cost of maintaining a large compliance workforce can also significantly strain a bank’s resources. For this reason, banks heavily invest in automating transaction monitoring, using A.I. and machine learning to sift through vast amounts of data. These systems are designed to detect patterns that may indicate illicit activities and flag them for further review by human compliance officers. This has the potential to drastically reduce the time it takes to identify and respond to suspicious transactions.
However, despite their advantages, these measures are far from perfect. The current systems for monitoring transactions are often cumbersome and inefficient. The rules governing these systems are typically manually written and adjusted by developers based on the input and recommendations of compliance officers. Each time a new rule is introduced or an existing one needs to be adjusted, it can take weeks or even months for the changes to be fully implemented, reducing the overall effectiveness of AML efforts. Additionally, many banks operate on outdated IT infrastructures that are incompatible with modern AML solutions. Updating these systems is costly, time-consuming and disruptive to normal operations, further complicating a bank’s efforts to maintain robust compliance.
Technological innovations offer hope
Despite the existing issues, A.I. and machine learning still show plenty of promise in detecting and preventing fraud. When adequately trained on a bank’s data, these technologies can operate 24/7, performing routine checks far more efficiently than any human compliance officer. They can identify suspicious transactions, highlight potential risks and even evaluate the effectiveness of existing rules. This allows human managers to focus on more complex tasks, such as reviewing flagged transactions and making final decisions, which significantly improves the accuracy of AML processes and the overall efficiency of a bank’s operations. As criminals develop more sophisticated methods of fraud, banks must be able to keep pace. Investing in modern technologies isn’t simply an option; it is a necessity. The cost of non-compliance is too high, with regulators imposing severe penalties and, in some cases, even revoking bank licenses.
Finally, banking is a competitive market, so the ability to process transactions quickly and accurately is crucial if you want to have a leg up on other players. Manual control means that transaction processing stays on the slow side, leading to customer dissatisfaction and potential loss of business. As A.I. and machine learning solutions evolve, they will be able to address these issues more effectively, allowing banks to maintain a high level of service while keeping their AML processes up to standard. The battle against fraud and money laundering is a perpetual one—banks shore up their defenses, criminals up their game and find new ways to exploit weaknesses and around it goes. But in order to stay ahead of the competition, properly protect themselves, and maintain customer trust, banks must make the effort to always be at the forefront of this fight. By investing in cutting-edge AML technologies, banks can stay ahead of the curve, ensuring that they are well-equipped to meet the challenges of the future. The stakes are high, but with the right tools and strategies, they can navigate this ever-evolving landscape with success.
