Importance of a Reliable AML Audit Trail in Banking
An accurate and consistent audit trail becomes an essential part of any compliance program as a bank strives to get a full understanding of each of its customers during the Know Your Customer (KYC) — an integral part of a standard customer on-boarding process. Traditionally, the auditing process was done manually by banking institutions. Besides being slow and laborious, the manual auditing process was prone to clerical errors, inaccuracies in customer data, and lacked proper processes for identifying forgeries purposefully carried out by miscreants.
1 Automated audit trails
In simple terms, a banking-related audit trail is a process that records the steps or procedures that lead to the origin or source of financial transactions and/or the entities responsible for them. They are used to verify and track financial transactions for any discrepancies or errors and enhance accountability.
An automated audit trail is a process-driven electronic environment that supersedes the manual auditing process by recording and maintaining data in an electronic format that can be retrieved, arranged, and viewed in various formats and types.
2 Automated audit trails for AML/CTF compliance
It is mandatory for all financial institutions today to stringently follow the anti-money laundering and counter-terrorism financing legislation instituted by FATF member states. Even though the FIUs of these countries levy hefty fines and financial liabilities to FIs for not complying properly with the required statute, it’s a fact that despite paying heavy fines, many of the institutions still fail to comply effectively with AML/CTF procedures owing to various reasons.
For banks and FIs, it is essential to follow an effective AML/CTF compliance process not just to fulfil mandatory obligations to their respective FIUs, but to also preserve the credibility and trust that their customers have while opening accounts. It is imperative for institutions to not just demonstrate that the compliance process has been effectively carried out, but to also ascertain that the process is stringently followed each time financial transactions take place between entities. This is where the role of an automated audit trail becomes very important.
3 Electronic Identity Verification (eIDV) process
The Electronic Identity Verification (eIDV) process makes it possible for banks to carry out instant and remote identity checks on customers with accuracy and reliability. A major advantage it offers is the creation of an automated audit trail, which makes the record-keeping process more robust, effective, and trustworthy as it provides a detailed account of every step carried out during the customer identity verification process.
The eIDV process also maintains records of when and how the checks and verifications are carried out, and what the outcomes of those processes were. As it’s an automated process, there’s no guesswork involved, nor any possibilities of important files being misplaced or lost since all relevant customer details are stored in a central electronic location that is easily accessible and reliable. eIDV also becomes a major contributor in facilitating a digital audit trail for data on Politically Exposed People (PEPs), Ultimate Beneficial Owners (UBOs) and inter-related parties within the customer database of a Financial Institution.
One of the major reasons a digital audit trail is very important to financial institutions is that the information it stores has a strategic value. The data it provides offers clear and actionable insights into use-cases, patterns, and other data points that can help to mitigate financial risks and enhance ROI for the banks.
4 How banks benefit through automated audit trails
Automated Audit trails comes with a host of benefits for any financial institution. Let’s discuss a few of those below:
4.1 Increased productivity
With process automation, institutions can carry out repetitive processes more frequently, efficiently, and effectively. Automated audit trails lead to an increase in productivity levels as banking personnel can record and process more instances while the auditors can verify the trail on-the-go.
4.2 Changing regulatory requirements
As criminals find new ways to launder money, banks and FIs have to redesign their AML workflows and make them more effective to identify and flag suspicious transactions. Moreover, the FATF and Central Banks also update their AML/CTF guidelines from time to time to properly address money laundering scenarios at a global level.
Automated trails can be easily redesigned and implemented within very short time span, thus they help to save time, efforts, and reduce operational expenses while regulatory frameworks dynamically change.
4.3 Data and risk assessments
Compliance personnel are often forced to invest many hours searching for customer-centric data from external sources to properly assess the risk ratings of their clients. Moreover, these ratings require to be frequently updated following regulatory changes and availability of new data. Audit trails help in saving time and in making risk ratings more accurate and reliable.
4.4 Cost of non-compliance
Even though the cost of implementing and maintaining compliance processes can be high, the cost of non-compliance could be even higher. While manual processes tend to increase the likelihood of human errors or even result in vital information being omitted, solutions that have the automated audit trail facility help institutions in saving upon penalties and reducing the churn rate of existing customers as they are more reliable.
4.5 Accuracy
At their core, AML detection processes comprise specialized algorithms and formulas. When these processes or algorithms are automated and made to “self-learn” using AI techniques, the resultant automation can self-learn, analyze and detect market-induced trends that help to identify anomalies.
5 Summary
As AML/CTF processes become more complex and cumbersome with time, it becomes imperative for banks and FIs to tap the power of automation in their manual compliance processes to make them fast, accurate, and more reliable. Automation of audit trails can go a long way in strengthening AML processes and help FIs in curbing financial crime.
The author is associated with Navaera Worldwide, a global knowledge management company that works closely with the financial services industry globally assisting them in enhancing their regulatory compliance and customer engagement processes.
