celent aml trends 2011 2013 report

Neil Katkov, PhD

Trends in Anti-Money Laundering 2011

July 2011

This authorized reprint contains the full content of the Celent report Trends in Anti-Money Laundering 2011. This report was not sponsored by Fiserv in any way. This reprint was prepared specifically for Fiserv, but the analysis has not been changed from the analysis presented in the original report. For more information on Celent’s services, please contact Celent at [email protected] or +1.617.262.3120.

Content

3 Executive Summary4 Introduction5 AML Trends: The View from the Cockpit5 AML Drivers6 AML Operations: A Scale Game7 AML Compliance Costs9 AML Spending Trends

11 AML Compliance Cost by Function12 Technology Sourcing Trends15 Global Spending on AML Compliance15 AML Technology Spending17 AML Software Spending19 AML Software Vendors20 Market Consolidation23 Evolution in AML Technology26 Enterprisewide Compliance27 Integrating Anti-Fraud and AML: The Holy Grail28 The Case for Enterprisewide Compliance30 Centralized Case Management as a First Step to Enterprisewide

Compliance31 Internal Fraud32 Expansion of AML Markets32 Small Banking33 Insurance AML34 Nonbank Financial Services34 Regional Markets36 AML by ASP37 Conclusions39 Leveraging Celent’s Expertise39 Support for Financial Institutions39 Support for Vendors40 Related Celent Research

Copyright 2011 © Celent, a division of Oliver Wyman, Inc. 3

Executive Summary

This report incorporates the results of an exclusive Celent survey of anti-money laundering compliance departments at more than 75 financial institutions globally. The report benchmarks AML operations and costs, and analyzes trends in AML technology, including Celent’s estimates of global spending on AML software, vendor consolidation, and advances / product enhancements in AML technology. The report also examines the emerging trend towards enterprisewide compliance, in terms of consolidation of siloed AML operations and technology, as well as integration of AML and anti-fraud.

This is the first in a series of four reports covering the current state of the AML technology market. The other reports in the series are:

Evaluating the Enterprisewide Compliance Vendors 2011: Solutions for Anti-Money Laundering and Anti-Fraud, which profiles more than 20 providers of end-to-end AML/fraud solutions, and assesses them using Celent’s ABCD evaluation model.

Evaluating the Vendors of Watchlist and Sanctions Solutions, which profiles providers of both batch-based and real time OFAC/sanctions watchlist solutions and assesses them using Celent’s ABCD evaluation model.

Specialist Providers of Anti-Money Laundering Technology pres-ents an overview of advanced technology issues in AML and provides profiles of a variety of specialist vendors. Because these firms are working in different areas, an ABCD evalua-tion is not provided.


Introduction

Ten years after 9/11, the compliance regime surrounding anti-money laundering (AML) continues to evolve and expand, inexorably and across multiple dimensions. With each passing year, AML compliance covers ever more geographies, industry segments, and processes. In order to fulfill the increasing requirements, financial firms continue to grow and refine their compliance operations, often on a global scale. In turn, to fulfill the requirements of financial firms and compete in a crowded marketplace, the providers of AML software continue to enhance their technology. And then somewhere a new regulation is imposed, triggering another round of development.

Celent estimates that 2011 spending on AML compliance, including operations and technology, will reach US$5.0 billion globally. Opera-tions accounts for US$3.8 billion. Technology, including internal and external IT spending, makes up the other US$1.2 billion. Of the tech-nology spending, packaged AML software will reach US$458 million in 2011. Celent projects that the overall AML compliance burden will expand at a rate of 7.8% annually, reaching a global total of US$5.8 bil-lion in 2013. Global spending on AML software will expand at a rate of 10.4% annually, to US$557 million in 2013.

Such staggering sums imply that AML compliance is a complex domain with numerous subsections, each of which generates its own substan-tial costs. This report is intended as a guide to the AML compliance industry today, including emerging trends Celent has identified that we believe will be central to AML compliance in future.

The first section presents the results of a Celent survey of more than 75 financial firms globally. The survey presents the views of compliance officers on spending trends and captures benchmarking data for small, medium, and large firms.

The remainder of the report examines global spending on AML opera-tions and technology, the maturation of the AML vendor marketplace, evolution and improvements in AML software, and AML compliance across industries and geographies. Finally, we look at emerging trends that will shape the future of AML compliance, including integrating AML and anti-fraud to achieve enterprisewide compliance, and AML outsourcing, including BPO, ASP, and SaaS approaches.


AML Trends: The View from the Cockpit

Nearly ten years after 9/11, AML compliance continues to evolve, due to increasing regulatory demands on the one hand and developing orga-nization and technology best practices by financial institutions on the other. As a result, the cost of running an AML compliance program continues to rise. Faced with increasing pressures in terms of both compliance and costs, financial institutions are seeking efficiencies in operations and technology. This need to achieve greater efficiencies is driving a trend towards centralization and standardization of AML operations, as well as integration of AML and anti-fraud programs.

In a nutshell, this is the picture provided by a recent Celent survey of AML compliance in the financial services industry. In this section we present highlights of this survey, which polled more than 75 financial institutions of all sizes globally.

AML compliance is having profound effects on the culture, organiza-tion, and technology of banking. The importance being placed on AML compliance is ever increasing. As a result, AML operations are more complex, and technology plays a bigger role than five years ago.

Moreover, the influence of AML compliance on financial institutions often goes beyond operations and technology to the core of a firm. This was expressed well by the compliance officer of a US community bank which, when asked to characterize how AML compliance has changed over the past five years, said, “There has been a cultural change in the banking industry. Before we were focusing more on the customer, now we have to focus more on compliance.”

AML DriversAML compliance is usually thought of as a cost center, an ineluctable obligation imposed by the regulator. But there are other reasons for implementing a solid AML program, which touch on the business side as well as the regulatory. Foremost among these is reputational risk. Revelations of a financial firm abetting money laundering or terrorist funding, or simply a black mark on compliance from regulators, may drive current and potential customers away and result in loss of busi-ness. Strong AML compliance can also improve business results. For

6 Copyright 2011 © Celent, a division of Oliver Wyman, Inc.

example, an AML officer at a prominent bank in Asia cited a link between rigorous compliance and investor confidence in the bank, as reflected in its share price.

Most respondents to our survey (42%) cited regulatory requirements as the main driver for AML compliance. However, a substantial segment (25%) named reputational risk and protecting the brand as the primary purpose of their AML efforts. In practice, these drivers are inter-depen-dent. In qualitative interviews accompanying the statistical survey, a number of firms saw the key drivers of AML compliance as interlinked. Regulatory compliance creates a need to guard against reputational risk, which improves business results by, for example, potentially increasing shareholder value.

AML Operations: A Scale GameAML is a scale business. While there is some variation among firms, the size and cost of AML compliance departments follow fairly predict-able patterns according to the size of the financial institution. The size of AML compliance departments is fairly constant among bank tiers, but especially represent a burden at the larger firms. Celent’s survey results indicate that small banks of less than US$1 billion in assets typ-ically have ten or fewer full time equivalent (FTE) staff engaged in AML compliance related tasks. Medium-sized institutions have to deal with AML across several lines of business lines, which increases the size of the total AML operation. Banks with US$1 billion to US$100 billion in

Figure 1: AML Compliance Drivers

Source: Source: Celent AML compliance survey

What is the main driver for AML compliance at your firm?

Reputational ris k/protect the brand

25%

Regulatory compliance

42%

Improve bus ines s res ults

8%

Other25%


assets will typically range from 15 to 50 FTEs working on AML compli-ance. Banks over US$100 billion in assets may have 50 to 200 AML staff, in rough scale to the bank’s size (see Figure 2 on page 7).

Compliance departments at insurance companies follow a similar pat-tern. Brokerages and asset managers tend to have smaller compliance staff relative to the size of the business.

The outlier to the scale rule is large multinational banks operating in dozens of countries. These firms tend to be universal banks with numerous lines of business including retail and wholesale banking, brokerage and asset management and possibly insurance. In addition they maintain on-the-ground AML staff in each country, as well as large AML operational and IT platforms. AML compliance personnel at such firms can exceed 500 or even 700 staff, distributed amongst a vari-ety of LoBs and regions.

AML Compliance CostsTurning our attention to the cost of AML compliance, it is fair to say that AML is a burden at any institution. However, Celent’s survey results indicate that the cost burden is disproportionately heavy at the smallest banks. Like the size of AML compliance operations, costs are also generally predictable according to the size of the institution. AML compliance costs, including personnel and technology, range from sev-eral US$100,000s at small banks, to tens of millions of dollars at large institutions (see Figure 3 on page 8).

Figure 2: Typical AML Compliance FTEs by Size of Firm

Source: Celent AML compliance survey

AML compliance organization by s ize of firm

0

20

40

60

80

100

<US $1bnas s ets

US $1 - 10 bnas s ets

US $10 - 100bn as s ets

>US$100 bnas s ets

Largemultinational

No.

of

Staf

f~500


If we look at the relative burden of AML compliance costs to a financial institution, as measured by proportion of AML costs to total assets, we find that the cost burden is a fairly consistent 0.005% to 0.01% at medium to large size banks (assets over US$1 billion). Small banks carry a disproportionate compliance burden compared to the other tiers, with AML costs averaging 0.4% of assets, or 40 to 80 times greater as a proportion of assets than at medium and large firms (see Figure 4 on page 8).

Figure 3: Typical AML Compliance Costs by Size of Firm


Figure 4: Relative cost of AML Compliance by Bank Tier


AML compliance cos t, by s ize of firm

0

5

10

15

20

<US$1bnas s ets


US$10 - 100bn as s ets

>US $100 bnas s ets

US$

mn

AML compliance cos ts as % of as s ets

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

<US$1bnas s ets



>US$100 bnas s ets


AML Spending TrendsThe results of our survey show, not surprisingly, that financial institu-tions expect AML compliance costs to continue to increase (see Figure 5 on page 9).

A majority of respondents, 58%, expected that AML compliance costs, including both personnel and technology costs, will increase by at least 5% over the next 12 month period. About half of these (26% of the total pool) see spending increasing by at least 10%. Respondents indicated that the greatest driver for the increase is new regulatory demands for additional processes and technology, such as implementation of risk-based scoring or identification of an account’s ultimate beneficial owner (UBO) during the customer due diligence process.

On the other hand, medium or large banks that have recently com-pleted substantial technology initiatives expect overall AML costs to fall dramatically, for the simple reason that costs were high during the implementation phase. Running costs for installed software can be only a fraction of the purchase and implementation costs. For these and other reasons, 11% of respondents expected AML costs to drop by 50% or more.

At the same time, a substantial portion, about one-fourth of respon-dents, saw spending as remaining flat. The reason for this differed by tier:

Figure 5: AML Spending Trends


Will AML cos ts increas e or decreas e over the next 12 months ?

>50% decreas e

11%

5 - 10% increas e

32%

11 - 20% increas e

26%

No change26%

5 - 10% decreas e

5%


Small banks in the US have recently fallen under the scrutiny of regulators, and so have had to ramp up their AML efforts, putting in place new technology and hiring additional staff. With this new compliance set-up in place, such banks project their current AML operations will be sufficient to handle any increased regulatory demands in the short term. For small institutions that have recently installed new AML software, because implementation costs at small banks tend to be low, overall costs are expected to hold steady, rather than dip at the larger firms that have recently implemented new technology.

Large banks, particularly multinational banks, see increased regulatory needs driving up costs on the one hand, and stan-dardization and realization of efficiencies reducing costs on the other, with these forces balancing one another.

Standardization of Processes to Keep AML Costs in CheckSome explanation will help put this balancing act at large multination-als in context. Large firms are continually seeking to refine processes, realize efficiencies, and reduce compliance risk. At large multinational banks, the processes and technology of AML compliance are being affected by the globalization of AML regulation. For large multi-nation-als operating in many countries, technology is becoming an increasingly global setup. This is driving a need to standardize pro-cesses across regions, subsuming country-specific regulations and regulators where possible. At the same time, such banks are applying more technology to processes, including processes that were largely manual, such as customer due diligence As a compliance officer at one large multinational bank put it, “The focus is now more on standard-ization and automation, while before it was on mere regulatory compliance.” While these banks can not, at least not yet, hope for com-pliance costs to fall, they are attempting to hold them in check through standardization and automation of processes.


AML Compliance Cost by FunctionCelent also asked firms regarding the breakdown of their AML costs in terms of operations and technology (see Figure 6 on page 11). Opera-tional costs (essentially personnel costs) involved in training, customer due diligence, and ongoing monitoring, analysis and reporting make up 77% of AML compliance costs on average.

Ongoing AML monitoring / analysis and associated reporting account for close to half of AML compliance costs, with customer due diligence at account onboarding and training together accounting for 30% of costs. Technology, including both internal and external spending, is an average 23% of AML costs at the institutions surveyed.

AML Functional Cost Breakdown by TierSome important differences emerge from the functional breakdown when analyzed by the size of the financial institution (Figure 7 on page 12). Ongoing monitoring and analysis make up the greatest proportion across all tiers, but are particularly high (60% of AML costs) at medium sized banks. Celent believes this is due primarily to the high retail transaction volumes typical of firms of this size, which operate in one major home market.

At the same time, customer due diligence at small to medium sized banks is 15% or less of AML costs, but a much larger proportion (24%) at large institutions. The greater weight of spending on CDD at larger institutions can be attributed to the considerable business they do in high-value accounts, both wealth management on the retail side, and corporate accounts.

Figure 6: AML Compliance Costs: Operations and Technology


Breakdown of AML compliance cos ts

Technology23%

Training14%

CDD account

onboarding16%

Ongoing trans action monitoring

47%


The proportion of AML spending directed to technology also varies widely among tiers. IT makes up a fairly small proportion of total AML costs at banks with over US$10 billion in assets (10% to 16%). This is due both to the economy of scale created by automating the monitor-ing process, and to the fact that analysis of generated alerts is still a very manual (although technology assisted) process. IT is a larger pro-portion of AML costs (28% to 37%) at institutions under US$10 billion in assets, again relative to the fairly small analyst teams needed at firms of this size.

Interestingly, the proportion of AML costs attributed to training is fairly consistent among all tiers, ranging from 12% to 17%.

Technology Sourcing TrendsCelent’s survey results indicate that financial institutions are continu-ing to actively acquire new AML software (Figure 8 on page 13). Over half of survey respondents installed new AML software within the last two years. This suggests that the combination of regulatory pressure, evolving AML technology, and accumulating bank expertise in AML compliance operations have been driving purchases of new technology in recent years.

Moreover, this purchase cycle has not run its course, as institutions with aging technology will seek to replace it in response to regulatory and operational pressures. Nearly one-quarter of respondents stated their AML systems were over five years old; such firms will have a need to replace them in the near future. Interviews with institutions also

Figure 7: AML Compliance Cost Breakdown by Tier


AML compliance cos t breakdown by s ize of firm

41% 39%60%

46%

15% 12%

15%24%

17%12%

15%14%

28%37%

10% 16%

0%

20%

40%

60%

80%

100%

<US$1bnas s ets



>US$100 bnas s ets

Ongoing trans action monitoring CDD account onboardingTraining Technology


revealed that some firms will replace an AML system if it is not enabling them to meet their compliance obligations. As a result, some of the 23% of firms whose software is three to five years old can also be expected to make new purchases.

In terms of deployment, a full 90% of survey respondents indicated they are running their AML software inhouse (see Figure 9 on page 13). Clearly it will take some time for firms and regulators in some jurisdic-tions to overcome their concerns over relying on external providers for AML compliance. At the same time, the 10% of firms that do use ASP-based AML systems reflects the emerging trend to outsourcing of AML technology and operations.

Nearly any institution, regardless of size, uses several providers to cover all their AML compliance needs. Recent years, though, have seen a trend to rationalizing technology suppliers for increased efficiency,

Figure 8: AML Technology Replacement Trendsz


Figure 9: AML Technology Deployment Trends


Age of AML s oftware

1 - 2 years31%

<1 year23%

3 - 5 years23%

>5 years23%

AML technology deployment

In-hous e90%

ASP10%


standardization and, potentially, lower cost. Even large institutions, which may have dozens of AML solutions scattered among the differ-ent silos and regions of the enterprise, are using AML suites where it makes sense.

This means more firms are using one vendor for the entire suite of AML functionality: CDD, ongoing transaction monitoring, watchlist fil-tering, case management and reporting. Indeed, 40% of survey respondents indicated they have or are intending to go the AML suite route in terms of technology sourcing (Figure 10 on page 14). At larger firms, this is due to the efforts to standardize and centralize operations and technology. For smaller firms, the choice of an AML suite is made simpler due to the availability of affordable yet highly functional soft-ware packages targeted at this tier.

Figure 10: AML Vendor Sourcing Trends


Technology s ourcing: vendor s trategy

Bes t-of-breed/multi-

vendor60%

AML s uite40%


Global Spending on AML Compliance

Depending on where one sits in the compliance value chain, the cycle of ever more stringent regulatory demands generating a need for ever more efficient AML operations may appear virtuous or vicious. Which-ever view you take, the scale of the AML compliance “industry” is impressive. Celent estimates that spending on AML compliance, including operations and technology, will reach US$5.0 billion globally in 2011 (see Figure 11 on page 15). Operations—training, analysis and reporting—accounts for about three-quarters of the total, or US$3.8 bil-lion. Technology, including internal and external IT spending, makes up the other US$1.2 billion. Celent projects that global AML compliance spending will increase at a compounded annual growth rate (CAGR) of 7.8% annually, to reach US$5.8 billion in 2013, with operations account-ing for US$4.4 billion of the total and technology US$1.4 billion.

AML Technology SpendingAML technology spending is dominated by vendor-provided software, as well as by internal spending by financial institutions (see Figure 12 on page 16). Celent estimates that of the US$1.2 billion spent on AML technology in 2011, internal spending will account for US$371 million, or 31%, while vendor solutions will make up USS458 million, or 38% of

Figure 11: Global AML Compliance Spending

Source: Celent

Global AML compliance s pending

3,319 3,579 3,810 4,109 4,431

9911,069 1,203

1,2971,399

0

1,000

2,000

3,000

4,000

5,000

6,000

2009 2010 2011 2012 2013

USD

mn

Operations Technology

4,3104,648 5,013

5,4065,830


the total. In addition to the software itself, Celent includes vendor- pro-vided professional services—which may reach 40% of an AML software vendor’s revenues—in our external software spend estimates.

The high proportion of spending on these two areas is due to the increasing complexity and specialization of the software, as well as the onerous data management, customization / configuration and fine tuning often needed to meet an institution’s specific needs and pro-duce optimal results.

As a result, a relatively smaller proportion of AML IT spending goes to other external services (16%) and hardware (15%).

Figure 12: Global AML technology spending breakdown

Source: Celent

Global AML technology s pending

309 318 371 381 386

375 413458 504 557

157 173191

211233

150165

183202

223

0

200

400

600

800

1000

1200

1400

2009 2010 2011 2012 2013

USD

mn

Internal Spending External S oftwareExternal Serv ices Hardware


AML Software SpendingFocusing on the external software segment, global spending on pack-aged software and associated services provided by AML software vendors is projected to expand from US$458 million in 2011 to US$557 million in 2013, for a CAGR of 10.4% (see Figure 13 on page 17).

The AML software market in the Americas, which was characterized by flat growth from 2009 to 2011 due to the maturity of the market as well as spending contraction following the financial crisis, is undergoing a striking rebound. Celent projects that AML software spending in the Americas will grow from US$150 million in 2011 to US$178 million in 2013, for a healthy CAGR of 8.9% over this period.

Specific requirements from regulators, such as customer due diligence / risk scoring at customer onboarding and Fincen’s proposed cross-bor-der electronic funds transfer reporting rule, are one important driver. Another factor driving the spending growth is the broadening of regu-latory scrutiny to new segments such as small banks / credit unions, insurers and brokerages. Previously, many institutions including small banks handled AML requirements through manual processes, or evaded them altogether. On the other hand, large insurers built focused, lean solutions inhouse. This constrained growth in spending on AML software. However regulators are increasingly putting pressure on these industry segments to implement industry standard technol-ogy. Finally, the trend to integration of anti-money laundering and anti-fraud operations onto a common platform, the enterprisewide compli-ance approach, is gathering steam, with a significant number of

Figure 13: AML software spending by region

Source: Celent

Global AML s oftware s pending

138 144 150 166 178

145 152 160 171 18492 117

148166

195

0

100

200

300

400

500

600

2009 2010 2011 2012 2013

USD

mn

Americas EMEA As ia

CAGR = 10.4%


financial institutions adding new anti-fraud modules to existing AML platforms, or replacing legacy systems with software capable of sup-porting both AML and anti-fraud.

Looking at other regions, we see that the fastest growth in AML soft-ware spending will be found in Asia. Celent projects that AML software spending by financial institutions in Asia will expand from US$148 mil-lion in 2011 to US$195 million in 2013, a growth rate of 14.8% annually. Continuing the pattern of the past five years, this growth will be driven by the gradual adoption of more stringent AML regulation in scattered countries around the region, rather than a coordinated regionwide wave of regulation. The gradual trend to AML compliance in the region will ensure the healthy, long-term growth of the AML software market in this region.

Spending on AML software in Europe has also maintained steady, though more modest, growth. The original adoption of the Third EU Money Laundering Directive has been followed by subsequent regula-tion like the UBO requirement, country specific initiatives such as in the UK, and the gradual adoption of AML regulation in Eastern and Central Europe. As a result, Celent sees AML software spending in Europe expanding from US$160 million in 2011 to US$184 million in 2013, a CAGR of 7.2% (and following upon a 5.1% growth rate from 2009 to 2011).


AML Software Vendors

Anti-money laundering software comprises several distinct functional areas: transaction monitoring, watchlist screening (including real time screening of wires), customer due diligence (CDD), case management, and reporting.

Increasingly, AML vendors are expanding their product lines to include most or all of this functionality in an end-to-end solution, or AML suites.

A smaller segment of vendors concentrates on watchlist screening, either in batch mode for screening of transactions and customer lists, or in real time for screening and sanc-tioning of outgoing wires or other payments.

The need for ever more effective technology has given rise to an interesting ecosystem of specialist vendors focusing on various intractable problems in AML compliance, such as for-eign names transliteration, watchlist filtering optimization, case management, and media screening.

The AML software market is crowded, with numerous vendors entering and leaving the market each year. Among this crowded pool, Celent has identified a number of vendors which might reasonably be included in a financial institution’s software selection process (see Table 1 on page 20). Celent’s list includes both market dominant ven-dors, as well as smaller niche providers, regional vendors, and vendors catering to the needs of smaller financial institutions. Many of these vendors will be featured in our three upcoming AML vendor reports, Evaluating the Enterprisewide Compliance Vendors 2011: Solutions for Anti-Money Laundering and Anti-Fraud, Evaluating the Vendors of Watchlist and Sanctions Solutions, and Specialist Providers of Anti-Money Laundering Technology.


Market ConsolidationAML is a necessary business, but not necessarily a hugely profitable one. As described above, high-profile institutions are spending sub-stantial sums on AML, both due to receiving greater attention from regulators, but also their sensitivity to reputational risk. Regional demand in Asia, EMEA and South America is on the rise. More industry sectors and tiers are being required to automate their AML processes. However, due to the high cost of developing this specialized software, as well as a crowded vendor market, the steady demand for ever more sophisticated software does not necessarily translate into high year-on-year growth or profitability for any particular vendor.

This fact of life has given rise to a deep wave of consolidation (see Table 2 on page 21). In some cases, such as the acquisition of one AML firm by another in order to acquire its client base, this may result in the acquired vendor’s software being sunsetted. The motivation is very dif-ferent when a large technology firm acquires an AML vendor; typically the large firm wishes to offer the AML bit as part of a larger suite of ser-vices which they can market to their extensive client bases.

Table 1: Selected AML software vendors: A virtual long list

AML Suites Watchlist SpecialistsSpecialist

Technologies

3i Infotech Ocean Systems Accuity AML RighSource

ACI Worldwide Oracle / Mantas Attus Technology Basis Technology

Aquilan SAS Fircosoft Intersoft KK

BAE / Detica Norkom SunGard Innovative Systems KYC360

Cellent Finance Solu-tions

TCS Lexis Nexis / Bridger KYCNet

EastNets Temenos / Viveo Logica NetBreeze

Experian Thomson Reuters / Northland Solutions

Oracle / Datanomic Pegasystems

FIS Tonbeller Thomson Reuters / Complinet

Safe Banking Systems

Fiserv Top Systems Truth Technologies

Infrasoft Verafin

Jack Henry Wolters Kluwer

Nice / Actimize

Source: Celent


In such cases, rather than obsolescence the acquisition will more likely mean the long-term viability of the software. In addition to providing an attractive exit strategy for the vendor’s shareholders, acquisition by a large technology firm may substantially enlarge the potential client base / pipeline for the product. It may provide a new lease on life for more basic AML packages, making them more attractive as part of the more extensive service package of the large vendor.

From an industry perspective, consolidation of AML vendors may spur innovation and change in the industry, not from the start-up grass roots (which is already occurring, as will be shown in the upcoming Celent report on specialist AML technology providers), but from the top down. A large technology firm may invest in adding new functionality, for example by adding anti-fraud capability to create an enterprisewide compliance package. The trend is also driving an increase in out-sourced AML services for small to medium sized banks. For example, large core banking processors such as FIS and Fiserv are providing their acquired AML software offerings on an ASP basis to their core process-ing clients.

Table 2: Consolidation in the AML Market, by Acquiring Firm TypeBuyer Target Year

General Technology Firms

Oracle (i-flex solutions) Mantas 2006

Nice Actimize 2007

Oracle Datanomic 2011

BAE Systems Norkom 2011

FSI Software / Services Wolters Kluwer Finan-cial Services

Atchley Systems 2003

LexisNexis (ChoicePoint) Bridger Systems 2003

Experian Americas Software 2004

Lombard Risk Manage-ment

STB Systems 2005

FIS (Metavante) Prime Associates 2005

Fiserv NetEconomy 2007

Thomson Reuters Complinet 2010

Thomson Reuters Northland Solutions 2011

AML Specialists

Nice Actimize Fortent 2009

Private Equity

Warburg Pincus Searchspace (Fortent) 2005

Esprit Capital Partners NetEconomy 2005

Source: Celent


This trend to consolidation is important to financial institutions because it means that today's AML vendors will be around tomorrow, and they can count on continued support for their products. Rather than being a sign of weakness in the industry, the ongoing consolida-tion indicates the AML software market is entering a stage of maturity. Firms that may have been shaky on their own will be all the more sta-ble with these deep-pocketed owners behind them. Overall, Celent sees this as a positive, not negative, trend for the AML software industry.


Evolution in AML Technology

The ongoing evolution of AML compliance requirements and the devel-opment of best practices within bank’s compliance organizations, along with a crowded AML software market, is driving AML vendors to continue to upgrade their offerings with new functionality and improved look-and-feel and usability. Celent has always held that the most crucial element in AML technology is effective case management, and many of these enhancements involve case management or user interface functionality.

Recent product enhancements by vendors have focused on the follow-ing areas (see Table 3 on page 23).

End-to-end compliance suites. Vendors that previously offered single-purpose systems such as transaction monitor-ing or watchlist filtering have been adding modules including KYC, various types of fraud including insider fraud, and case management and reporting, in order to provide end-to-end AML compliance functionality.

Real-time processing. AML transaction monitoring has tradi-tionally been a process of investigating past activity for suspicious behavior; as such monitoring transactions in batch mode was sufficient. As AML vendors expand into anti-fraud, real-time monitoring capabilities become neces-sary in order to prevent or minimize remote channel fraud such as online / ACH fraud and ATM fraud.

Table 3: AML technology product enhancementsCompliance suites Technology Usability Analytics / scenarios

KYC / CDD Real-time processing Browser-based deliv-ery

Anti-fraud scenarios

Transaction moni-toring

Multi-channel capabil-ity

Navigability Channel-specific sce-narios

Anti-fraud Scalability: users Data slice-and-dice LoB-specific scenarios

Watchlist screening Performance: through-put

Configurability Advanced analytics

Case management Visualization tools Neural networks, Bayesian learning

Source: Celent


Multi-channel capability. For AML as well as anti-fraud, there is a growing need to monitor transactions through remote channels, and ideally to analyze transactions across these multiple channels in an integrated fashion. In response, vendors are enhancing multi-channel capabilities, including the development of specific scenarios designed to uncover suspicious activity specific to a channel (for exam-ple, common point of compromise for ATMs).

Scalability. Vendors with products perceived as less scalable have been seeking to increase the through-put, performance and scalability of their software in order to better compete for business from the larger financial institutions.

Look and feel. Up to a few years ago many AML systems were thick-client applications, although in some cases Java-based. To simplify version upgrades, facilitate enterprisewide distribution and support ASP or SaaS delivery, vendors have been migrating AML software to browser-based versions. Visual clarity and presentation has also been a focus.

Navigability. In response to FI demands for more effective and efficient case management tools, vendors have been enhancing their systems with improved workflow and navi-gability. This includes alert drill-down, data sorting, and other data “slice-and-dice” capability. To overcome the latency introduced by moving to browser-based systems, some vendors are introducing Ajax and other web technolo-gies to minimize delays caused by screen-refresh time.

Improved configurability. Five years ago, AML interfaces tended to be coded and modifications required development by the vendor or at best an institution’s internal IT team. Since that time, the configurability of many products has improved significantly. Administrator-configurable features include access and permissions, as well as some aspects of workflow such as email notifications and analyst queues. Features configurable by the business analyst (or other authorized user) include thresholds and parameters for rules, ad hoc rules, and scheduled queries. The more advanced products provide the ability to configure screens to present data tables in the desired format.

Visualization tools. A common gap in AML products is robust visualization to facilitate the rapid comprehension of complex data and patterns by analysts as well as compliance officers. Vendors have been enhancing their visualization tools by providing richer sets of data graphs, including graph-


ing for compliance dashboards, and interactive graphics with drill-down functionality to display the results of a network analysis.

Advanced analytics and scenarios. While business rules are still the most commonly used type of analytics in AML, more vendors are developing sophisticated capabilities such as historical profiling and network analysis, as well as advanced analytics such as neural networks and Bayesian learning. Most vendors continue to develop new scenarios, including AML scenarios for specific lines of business and scenarios to detect various types of fraud.


Enterprisewide Compliance

Over the years, financial institutions have tended to implement sepa-rate AML solutions for each of their major business lines. These AML systems typically have been installed at different times, in accordance with regulators’ timelines for the various financial services segments. As a result, disparate systems may be used in each of the business lines, such as retail, corporate and private banking, and retail and insti-tutional brokerage. In addition, AML operations are often similarly siloed. For FIs operating in multiple geographies, operations and soft-ware may also differ for each jurisdiction.

These multiple systems and operational units create a substantial challenge in terms of management and of course costs. More impor-tantly in terms of compliance, because AML efforts are siloed by business unit and geography, it is difficult for the institution to obtain an integrated view of AML risk across the entire enterprise. Moreover, this in turn makes it hard to manage and improve AML compliance efforts across the firm.

Financial institutions have also typically run their AML programs sepa-rately from their anti-fraud efforts—even though the technology and operational approaches required for AML and anti-fraud are similar in many respects—further complicating the management and costs of operations focused on financial crime.

In order to reduce the complexity and cost of operations, as well as improve the efficacy of compliance efforts, in recent years a number of financial institutions have been consolidating their disparate AML platforms, and in some cases their anti-fraud platforms. Elements of this enterprisewide compliance approach include:

Reorganizing siloed AML units into a centralized AML com-pliance department.

Consolidating multiple AML systems onto fewer, or even one, technology platforms.

Integrating AML and anti-fraud operations and technology.

Most of the effort to date has focused on consolidating AML operations and technology, both across business units and across geographies. Some larger banks have chosen a preferred AML vendor and are pro-gressively moving AML at multiple business units onto their preferred


platform. In terms of regional standardization, multinational banks such as Citi, HSBC and Standard Chartered have been working to stan-dardize AML technology across the dozens of countries in which they operate. Due to the specific requirements of different lines of business on the one hand, and local compliance requirements in each jurisdic-tion, total consolidation will remain an elusive goal. Nevertheless, some financial institutions have made significant headway in this direction.

More interesting in terms of the potential benefits for a firm’s overall financial crime operations is combining anti-fraud with AML, which will be explored in the next section.

Integrating Anti-Fraud and AML: The Holy GrailFinancial institutions are overloaded with a panoply of onerous and expensive compliance regulations, from Basel II and III to IFRS to BCP. The AML programs required by regulators in the US and many other countries are a particular headache. As described above, banks have invested hundreds of millions of dollars in AML technology alone, not to mention the personnel costs for the compliance teams, front-office staff training, reporting and other functions. The outsized compliance burden for AML has got banks to thinking about ways they can leverage their investment in AML systems and operations. As Celent has argued since our first report on AML trends in 2002, one way forward could be to integrate their AML and anti-fraud efforts. Over the past few years, banks have at last started to move in this direction to build an enter-prisewide compliance framework for financial crime.

While banks fret over the burden of AML compliance, at the same time they invest in and build anti-fraud systems—which are not much dif-ferent in kind than AML systems—quite willingly. This is of course because banks have a natural interest in preventing people from steal-ing money from them or their customers. In other words, anti-fraud is a business activity, with direct benefits to a bank's bottom line. By combining anti-fraud and AML systems, therefore, banks can poten-tially get a business benefit from the “AML burden.”

Software vendors have for some years promoted the idea of using one technology platform for both AML and anti-fraud. In particular, a num-ber of the larger AML vendors have developed anti-fraud products using their core behavior detection technologies (see Table 4 on page 28). This potentially holds out the promise of a sort of compliance holy grail: leveraging the compliance investment in AML for their anti-fraud efforts, thus producing some tangible business return from the invest-


ment. Some of the more forward-looking banks have started to take advantage of this to simplify their compliance and fraud systems and, potentially, lower costs.

Using AML technology for anti-fraud can be daunting though. It is not simply a case of writing new business rules in the software to cover anti-fraud. Anti-fraud often involves additional functionality, such as real-time transaction monitoring (AML typically makes do with moni-toring on a batch basis), additional data feeds, and of course getting multiple business lines to agree to use a common system.

Because until recently there has been little uptake by financial institu-tions of the anti-fraud modules to date, and vendors may use their first implementations of a product as a means of fully developing its func-tionality (transforming it from vaporware to a real product), the anti-fraud capabilities of some vendors might not be all they claim to be when you look under the hood. As more financial institutions move towards an enterprisewide compliance approach combining AML and fraud, this will drive further development in AML vendors’ anti-fraud capabilities, much as the many AML implementations of the past decade contributed to the evolution of AML technology.

The Case for Enterprisewide ComplianceThe benefits of consolidating multiple AML programs onto one plat-form is straightforward: reducing duplication of technology and operations can reduce costs, create efficiencies, and provide an enter-prisewide view of AML risk.

Although intuitively attractive, many institutions may find it more dif-ficult to build a business case for integrating AML with anti-fraud. While AML compliance is a cost center, anti-fraud is a business activity that generates a direct benefit to a firm’s bottom line by reducing financial losses due to fraud. Anti-fraud departments may then quite reasonably resist being tied in with the AML albatross. Therefore, get-ting buy-in from a firm’s executive management is crucial.

Table 4: Typical Anti-Fraud Product Offerings of AML VendorsChannel Fraud Sector Fraud Internal Fraud

ATM fraud Card fraud Internal fraud

Check fraud Insurance fraud Broker compliance / market abuse

Online fraud Red flags

Payments / ACH fraud

Source: Celent


The most direct business case for integrating anti-fraud and AML is demonstrating that putting anti-fraud onto a new technology platform will enable an increase in the dollar amount of fraud that is prevented due to this new technology. Fortunately, the compliance-driven devel-opment of modern AML software, analytics and case management has created a new generation technology that can often deliver better results than legacy anti-fraud systems. This is the reason why enter-prisewide compliance initiatives often replace legacy anti-fraud systems with the anti-fraud products of the AML vendors, rather than vice versa. An incremental improvement in fraud reduction of even five to ten per cent may be enough to build the case for moving anti-fraud onto the AML platform.

In addition to this ROI argument, integrating anti-fraud and AML can provide a number of other benefits:

The data management work needed to implement enter-prisewide compliance can also support business needs, including analytical CRM, customer profitability analysis and risk management.

The real-time monitoring capability necessary for anti-fraud can strengthen AML efforts as well (AML monitoring has typ-ically been carried out on a batch basis).

Regulators have started to include anti-fraud within their purview, due not only to the simple fact that fraud generates illicit gains, but also to the discovery of links between fraud and money laundering activities. As anti-fraud itself

Table 5: Drivers and Barriers for Enterprisewide ComplianceDrivers Barriers

Consolidation increases efficiency and effi-cacy

Siloed business lines and channels

Anti-fraud generates ROI to offset AML compliance costs

Cost of replacing legacy systems

Enterprisewide data management can also support business needs

Difficulty of data management needed to support enterprisewide compliance

Real-time monitoring for fraud also enhances AML

Anti-fraud requires additional functionality

Regulators taking holistic view of fraud and ML

Buy-in from fraud division may be elusive

Source: Celent


becomes an AML compliance issue, regulators will expect financial institutions to develop integrated approaches cov-ering AML and anti-fraud.

Due to this link between fraud and money laundering activi-ties, investigating both types of activity on a common case management platform may reveal suspicious patterns of activity that would otherwise remain hidden.

Although enterprisewide compliance makes sense, there are a number of barriers that can lead financial institutions to reasonably reject this approach.

Siloed business lines and channels can prevent adoption of a common operational or technology platform for organiza-tional, cost or political reasons.

Cost of ripping out existing solutions can be prohibitive.

Data management and sourcing data from multiple back-end systems can be a major undertaking.

Using AML technology for anti-fraud is not simply a case of writing new business rules, but often involves additional functionality, such as real-time transaction monitoring and additional data feeds

As a result, some firms will continue to take a siloed approach to AML and anti-fraud, both by business line (retail, corporate and private banking; cards; retail and institutional securities, insurance) as well as by system module (transaction monitoring, analytics, watchlist filter-ing, case management, reporting). While this best-of-breed approach is a viable technology choice, it will reduce the opportunity to realize effi-ciencies through implementation of one (or at least fewer), standardized platform.

Centralized Case Management as a First Step to Enterprisewide ComplianceDespite the logical elegance of the enterprisewide compliance approach, especially at larger institutions it is a complex, expensive initiative with far-reaching systems and organizational implications. At the same time, as C-level management becomes increasingly involved in AML efforts, executives are asking for an easy-to-access, enterprisewide view of risk. This is driving a need for compliance dash-boards, presenting a one-screen view of a firm's activities and exposure across the enterprise.


For these reasons, an effective, concrete first step to consolidating AML compliance across business lines and channels, as well as integrating technology for AML and anti-fraud, is implementing an “enterprise risk” dashboard, which can provide a business intelligence-driven view of AML and fraud indicators across the enterprise. The dashboard can be used by upper management, such as a Chief Risk Officer, to monitor risk levels and performance of compliance and anti-fraud depart-ments. Enterprise risk dashboards can also support centralized internal and external reporting.

A number of institutions have had some form of risk dashboard in place for some years. In its most developed form, however, an enter-prise risk module will be a full-fledged case management system that consolidates the output of siloed AML and / or anti-fraud systems into a central, enterprisewide case management system to allow investiga-tion of cases by a similarly centralized analyst operation. This enables the investigation of schemes involving the products of multiple busi-ness lines and channels, and that cross the boundaries of money laundering and fraud.

Enterprisewide case management requires access to clean, reliable data from a firm's siloed business lines, which involves considerable effort, time and expense. To date, relatively few financial institutions have managed to implement enterprisewide case management, mak-ing this a ripe area for future development.

Internal FraudFinancial institutions are also seeking ways to grapple with internal fraud, which requires a somewhat different technology approach than external fraud or AML. For example, internal fraud software needs to analyze access logs on employee computers to see what systems they are looking at and when. Sniffing technology can be employed to record employees’ activity on internal systems, keystroke by keystroke. On the case management side, audit trails will be designed not just to check analyst’s productivity, but also possible collusion with money laundering through, for example, putting a customer on the bank’s “good guy” list. Because insider fraud may involve paper-based mate-rial such as contracts, it is less amenable to purely analytic technologies, and the software is at an earlier stage of evolution than for AML. Vendors have only been providing solutions aimed at insider fraud for the past several years.


Expansion of AML Markets

Far from going away as a concern for financial institutions, AML com-pliance continues to expand, across financial segments, industry tiers, and geographies.

Small BankingIn terms of industry tiers, while the initial focus after passage of the USA PATRIOT Act was on larger financial institutions, over the past several years regulators in the US have been getting tougher on smaller institutions. In particular, community banks and credit unions are under scrutiny to implement more effective AML technology. AML soft-ware vendors have responded by offering versions of their product tailored to the needs of smaller institutions. Typically these packages are essentially not customizable and include a smaller set of scenarios and functionality. Core processors such as Fiserv and FIS are offering AML on an ASP basis to their existing client base. New entrants such as Verafin are also offering products aimed primarily at the small bank market.

In just the past few years, some of these firms have already achieved significant uptake in the small banking market, with clients number-ing in the hundreds. Given the large number of banking institutions in


the US, continued growth can be expected in this sector for some time to come. Celent projects that spending by small banks in the US will reach US$28 million in 2013 (see Figure 14 on page 33).

Insurance AMLThe AML needs of insurance firms have not been as great as in the banking and brokerage sectors. This is partly because “transactions” at insurance firms—policy applications, claims and payouts—are gener-ally on multi-day batch cycles, so there is more time to analyze and investigate them for suspicious activity. Regulators have also seen less risk for money laundering in the insurance sector, and so have not come down as hard on it. As a result, insurance firms have felt more comfortable implementing simpler solutions, and often building them inhouse.

In recent years, however, more insurers have felt the need to imple-ment world-class AML technology. In the US, this has been driven by an increased focus by regulators on insurance as a vehicle for money laundering. The growth of online insurance sales has been another driver, due to the easy access the online channel provides for money laundering, as well as fraud. In addition, the faster cycle times of online insurance sales, often delivering instant decisioning, is creating a need for automated due diligence and AML checks.

Figure 14: AML Spending Trends: Small Banks

Source: Celent

AML s oftware s pending

(US banks under US$1 bn in assets)

14 16 1824

28

0

5

10

15

20

25

30

2009 2010 2011 2012 2013

USD

mn


Nonbank Financial ServicesNon-banks have also been busy implementing AML technology. The large money services companies have some of the largest AML soft-ware implementations, spanning multiple operations around the globe in order to control risk for cross-border remittances as well as domestic business.

The growth of online alternative financial services such as P2P pay-ments and social lending is also creating a new market for AML software. Some of these firms facilitate very large numbers of transac-tions, for virtually any counterparty. The lack of a traditional KYC process in the online channel makes screening of client and counter-party names against watchlists crucial for achieving AML compliance. In addition, firms are implementing transaction monitoring with ana-lytics tailored to their business to look for potential abuse of the system.

Regional MarketsThe USA PATRIOT Act ushered in a new era of AML compliance, not just in the US but globally. US compliance approaches have had a ripple effect in jurisdictions ranging from the Euro zone and UK, to the Middle East, Africa and Asia-Pacific. In these new jurisdictions, regulators will often first focus on the implementation of watchlist screening capabil-ity, particularly for cross-border wires due to sensitivity to the US’ attention to overseas correspondent banks’ AML and counter-terrorist funding programs. Transaction monitoring will typically be imple-mented at a later stage.

This process is currently underway in, for example, Asia Pacific, as can be seen by the differing degrees of regulatory focus on compliance and implementation of AML technology in each jurisdiction in that region (see Figure 15 on page 35). The fact that many of the countries in Asia-Pacific are still in the early stages of AML compliance regulation sug-


gests that this region will see the highest growth in AML software spending in the medium term, as described in the AML Technology Spending section.

Figure 15: AML Adoption in Asia-Pacific

Source: Celent


AML by ASP

Outsourcing of AML operations and technology is still in early days. Large banks in the US have been generally unwilling to outsource their AML operations due to security concerns. In addition, larger institu-tions are more likely to keep their technology inhouse, and so with their AML software. In the US, the past few years have seen core pro-cessors such as FIS and Fiserv and identity verification service providers such as LexisNexis and Experian acquire transaction moni-toring or watchlist screening software vendors. These firms are targeting these outsourced AML services mainly at small banks, partic-ularly but not exclusively banks who already use their services. Such firms have hundreds or thousands of such customers, providing a large potential client base for the AML products. The capabilities of these products tends to be fairly basic when compared to the industry state-of-the-art technology, but for small to medium sized banks this is often sufficient. Fiserv has been providing AML services as part of its out-sourcing arrangements for some time and probably has the most experience in this area.

Compliance processes such as customer due diligence may be more difficult to justify to regulators and hence more difficult to outsource to a business process outsourcing (BPO) provider. And certainly AML can be a more sensitive area than commoditized back-system operations. Nevertheless, major BPO providers such as Infosys are providing sup-port for AML operations. In addition, a number of new specialist firms are offering outsourced AML services. In the US, for example, AML RightSource offers managed services for transaction monitoring / anal-ysis, customer due diligence and watchlist screening. In Europe, KYCnet provides customer due diligence for corporate clients as well as for compliance review purposes. In the area of watchlist screening, Thomson Reuters’ Complinet provides an ASP service as well as an Internet-based delivery channel. Innovative Internet-based models have also emerged to assist with negative media as well as KYC issues; examples include KYC360 and NetBreeze.


Conclusions

AML compliance presents financial institutions with a unique set of challenges in terms of operations, technology and enterprisewide management. The substantial and ongoing costs associated with achieving compliance also make it important for firms to seek efficien-cies in operational and technology costs, without sacrificing the efficacy of their AML programs.

Increasingly, financial institutions are responding to these challenges by adopting elements of an enterprisewide compliance approach, with the ultimate—and quite long-term—goal of integrating their AML and anti-fraud operations and technologies across business silos and, for multinational firms, geographical regions.

No matter what their size, financial institutions embarking on this journey will need to carefully assess the vendor solutions that can assist them. Aside from the vendor’s ability to deliver on implementa-tion and after service, the three main areas institutions will want to evaluate are scalability, sophistication of analytics, and case manage-ment capabilities. Needs in these areas will differ according to the size of the institution, business line, and existing solutions and compliance procedures already in place. Smaller institutions may not need, or even be able to effectively use, a very advanced solution, whereas top tier institutions may require sophisticated data mining and analytics just to keep track of their large volumes of transactions and accounts. Insti-tutions will know their own scalability needs, but should be careful to perform due diligence on the claims made by vendors.

Once a solution meets the institution's analytics and scalability requirements, strong case management functionality is crucial. The biggest headache compliance departments face is how to sift through the voluminous alerts generated by AML systems, divvy them up among their analysts, and investigate them effectively. These difficul-ties will be amplified when anti-fraud and AML are placed on the same platform, making strong case management capabilities even more urgent.

Building the business case for an enterprisewide approach to compli-ance is not easy. To justify the investment, compliance officers will need to gather evidence from case studies of other financial institu-tions that the new anti-fraud products of AML vendors are effective


and can produce incremental improvements in loss prevention enough to create an ROI. Top management and board buy-in to the initiative is important in overcoming political divisions and resistance from siloed P&Ls. Finally, a phased roadmap, perhaps starting with a centralized case management system to unite disparate legacy AML and anti-fraud systems, will help provide a workable and achievable blueprint for the journey towards enterprisewide compliance.


Leveraging Celent’s Expertise

If you found this report valuable, you might consider engaging with Celent for custom analysis and research. Our collective experience and the knowledge we gained while working on this report can help you streamline the creation, refinement, or execution of your strategies.

Support for Financial InstitutionsTypical projects we support related to anti-money laundering technol-ogy include:

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Related Celent Research

IT Spending in Financial Services: A Global PerspectiveJacob Jegher

Enterprise Operational Risk, Compliance, and Governance Solutions: Towards a Convergence End GameCubillas Ding

Internal Fraud: Big Brother Needs New GlassesJacob Jegher

Insurance Fraud Mitigation Technology: Beyond Red FlagsDonald Light

http://www.celent.com/reports/enterprise-operational-risk-compliance-and-governance-solutions-towards-convergence-end-game

http://www.celent.com/reports/internal-fraud-big-brother-needs-new-glasses

http://www.celent.com/reports/insurance-fraud-mitigation-technology-beyond-red-flags

http://www.celent.com/reports/it-spending-financial-services-global-perspective-1

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