FEC Risk Appetite

Many financial institutions struggle to strike a balance between pursuing growth and effectively managing Financial Economic Crime (FEC) risks. Traditional approaches often rely on generic compliance measures that may not be tailored to the organization’s specific risk profile. This can lead to inefficient resource allocation, inconsistent decision-making, and ultimately, increased vulnerability to FEC threats.

Background

A Dutch payment service provider was responsible for processing payments for small and medium-sized merchants in the Benelux, France, and other Northern European countries. The payment service provider was 50% owned by a large international bank and the other 50% by a major fintech company in the United States.

Due to the company’s structure, the Dutch payment service provider would not only manage its own client base but also take over the customer base of the parent company when detected, leading to inconsistencies in merchant profiles and acceptable risks and/or risk appetite.

Many issues stemmed from these inconsistencies. For example, due to the nature of the gambling merchants active within the Dutch company’s portfolio, the payment service provider would only process a portion of their transactions, which in turn resulted in numerous alerts in the transaction monitoring system. Consequently, this also led to a high number of unusual and/or suspicious transactions that needed to be reported to local authorities. As a result, these were very costly clients for the organization due to the extensive manual operations required.

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Solution

Our approach went beyond a generic solution. We provided:

Systematic integrity risk analysis (SIRA): Review and align further on the risks of the company, including those which were overlooked when the company completed its own (SIRA).
Develop Risk Appetite: Refined the companies’ risk appetite, updated according to SIRA, clientele, etc.
Improved Regulatory Alignment: Demonstrate a proactive approach to FEC compliance by clearly articulating your risk tolerance to regulators.
Stronger Governance: Promote a culture of risk awareness and responsible decision-making within your organization.

Results

Improved Efficiency
Streamlined risk assessments and consistent decision-making led to a more efficient use of resources and a reduction in administrative burdens.
Enhanced Risk Management
A more robust risk framework, aligned with the company’s specific risk profile and regulatory requirements, provided a solid foundation for ongoing FEC mitigation efforts.

Future Steps

Building on this success, the Dutch payment processor can consider further steps to solidify its FEC management:

Continuous Monitoring: Regularly review and update risk assessments and transaction monitoring rules to adapt to evolving threats and client base changes.

Training and Awareness: Implement ongoing training programs for staff to ensure a strong understanding of FEC risks and compliance procedures.

Technology Integration: Explore advanced data analytics and automation tools to further enhance transaction monitoring efficiency and effectiveness.

Conclusion

This case study demonstrates the limitations of generic approaches to FEC management. By taking a tailored approach that considers a company’s unique risk profile and client base, we were able to significantly improve the Dutch payment processor’s ability to manage FEC risks while optimizing resource allocation and streamlining regulatory compliance efforts. This approach can be applied to financial institutions of all sizes and risk profiles, fostering a more secure and efficient financial ecosystem.