Banks Maintain Status Quo in Fighting Financial Crime, Despite Risks

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A recent report by McKinsey highlights the limited disruption from the current state of financial crime management in banks. Despite the risks involved, many institutions are failing to adopt more integrated and effective approaches.

Limited Integration and Effective Approaches

The report found that while some banks have moved beyond a collaborative model to integrate cybersecurity and fraud functions, many others are still operating in silos. This lack of integration is hindering the ability to predict and prevent financial crimes, such as money laundering and cyberattacks.

Challenges Faced by Smaller Units

Attracting Top Talent

Smaller units are less able to attract top talent due to the limited scale benefits, which can lead to a shortage of skilled professionals in this area.

Convergence of Underlying Risks

The convergence of underlying risks, including cybersecurity and fraud, is also highlighted as a major challenge for banks. This requires an enhanced ability to attract and retain talent, as well as standard and common frameworks on what is being done.

Regulator Familiarity with Setup

Lack of Understanding

Regulators are less familiar with the setup, mainly focusing on cybersecurity and fraud, which can lead to a lack of understanding of the risks involved.

Strategic Prevention Approach

The report suggests that adopting a strategic prevention approach can significantly improve protection against financial crimes. This involves predicting risk rather than just reacting to it by redesigning customer and internal operations and processes based on a continuous assessment of actual cases of fraud and cyberthreats.

Key Takeaways

• Banks are maintaining a status quo approach to financial crime management.
• Limited disruption from current state.
• Separate reporting; no increase in transparency.
• No scale benefits.
• Smaller units less able to attract top talent.
• Convergence of underlying risks requires enhanced ability to attract and retain talent.
• Regulators less familiar with setup, mainly focusing on cybersecurity and fraud.

Recommendations

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Adopt a Strategic Prevention Approach

Predict risk rather than just react to it by redesigning customer and internal operations and processes based on a continuous assessment of actual cases of fraud and cyberthreats.

Improve Threat Prediction and Detection

Improve threat prediction and detection through integrated fraud and cyberrisk functions.

Eliminate Duplication of Effort and Resources

Eliminate duplication of effort and resources to improve efficiency.

Clarify Roles and Responsibilities

Clarify roles and responsibilities to ensure no gaps in the second line of defense.

By implementing these recommendations, banks can improve their ability to predict and prevent financial crimes, reducing the risk of losses and improving customer confidence.