As global businesses increasingly confront a multitude of complex risks, the demand for comprehensive entity verification within their risk management frameworks is becoming essential. Choon Hong Chua, Head of Financial Crime Practice Group for Asia-Pacific and Middle East at Moody’s, highlights this growing trend in a detailed analysis published by International Banker.
The contemporary business environment recognises that risk management cannot be relegated solely to legal or compliance teams. Executives are now tasked with understanding the full scope of their business relationships, particularly concerning potential risks associated with customers, suppliers, and their respective networks. One of the central questions for leaders is, "Do you know with whom you’re doing business?" This inquiry underscores the need for robust data capabilities to evaluate the risk profiles of various counterparts throughout the entire supply chain. Chua emphasises the importance of establishing data governance standards that effectively harness both internal and external information for informed decision-making.
Entity verification has emerged as a cornerstone of enterprise risk management (ERM). Despite traditional assumptions that this function resides primarily within compliance departments, recent findings from a Moody’s study indicate that finance and accounting divisions are now often responsible for entity verification, particularly in non-financial sectors. This shift reflects the importance of thorough due diligence across various business functions, including sales, marketing, and supply chain management.
A crucial aspect of entity verification is its role in compliance, particularly regarding anti-money laundering (AML) and countering the financing of terrorism (CFT). Financial institutions are mandated to conduct customer due diligence (CDD) which involves identifying beneficial owners and understanding complex ownership structures that may obscure true control. The decisions surrounding enhanced due diligence processes often require a delicate balance between operational efficiency and effective risk management.
Recent developments in global AML regulations illustrate increased scrutiny and requirements for businesses worldwide. The introduction of the Corporate Transparency Act in the United States and the EU's comprehensive AML Package are significant steps towards enhancing transparency in beneficial ownership. Moreover, initiatives in regions like Singapore and the UAE denote a broader commitment to strengthening AML frameworks and ensuring compliance. However, Chua points out that the Asia-Pacific region faces unique challenges due to a fragmented regulatory landscape that can be exploited by financial criminals, necessitating tailored approaches to risk and compliance across jurisdictions.
The pressure for accurate entity verification is mounting across industries, with findings revealing that 88 percent of organisations globally consider it an essential element of compliance efforts. Despite this consensus, many businesses grapple with data fragmentation and inconsistency, which he identifies as major impediments to effective risk assessment. The quality of data and governance practices are vital for businesses to create comprehensive risk profiles and mitigate potential threats.
Furthermore, Chua discusses the integration of artificial intelligence (AI) and machine learning (ML) technologies into the entity verification process. Research indicates a marked increase in organisations utilising AI to enhance compliance and risk management workflow, with 29 percent piloting AI and 11 percent actively employing it in their processes. In particular, 77 percent of respondents highlight AI’s role in improving the precision and efficacy of compliance efforts, which is more pronounced in the APAC and Middle East regions.
In conclusion, the imperative of entity verification serves as a foundational strategy for effective risk mitigation in a rapidly evolving landscape. As businesses navigate complexities including geopolitical shifts, supply-chain disruptions, and financial crime, those prioritising strategic investments in risk assessment and management are poised to gain significant competitive advantages. The insights presented by Moody’s emphasise that integrating comprehensive data practices into risk frameworks is crucial for safeguarding the integrity of business operations.
Source: Noah Wire Services