Challenge
Countering operational risk has long been a key management task. However, it gained specific management focus for banks with the Basle II accord and with prominent
bank failures, such as Barings Bank, and high profile irregularities in other industries, such as Enron.
In the financial industry challenges increase with the emergence of more and more complex products and increasingly interconnected markets in a globalised
world economy. As a consequence the financial industry is facing mushrooming regulations, designed to protect the individual country, the consumer or the market
participants themselves.
All too well-known examples are the Basle II accord, the Sarbanes-Oxley Act, The Market Abuse Directive, the Anti-Money-Laundering (AML),
Anti-Terrorist-Financing, and MiFID regulations, to name just a few of them.
Threats from the operational perspective range from mistakes done because of neglect and lack of knowledge or training to wilful damage, cheating and
other unlawful actions.
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 | Average Cost of Fraud - 6% of annual revenues (The ACFE 2004 report) |
| 60% of all frauds involves the organization's employees |
| More than 50% of frauds caused loss of $100,000+ |
| 65% of frauds are detected by tipping or by accident |
| The average scheme goes on for 18 months prior to detection |
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The impact of such actions may threaten the financial result, the bank's reputation and even its sheer existence.
Solution
The potential solutions are as plentiful as the potential threats and need to be individually designed and implemented according to the individual situation of the respective bank or financial institution.
They may range from awareness training to organisational measures such as re-assigned responsibilities
or strict workflow management & control
to specific monitoring software that allows identifying and tracking suspicious behaviour.
Although every solution will be different and specific to the individual institution, there are some common features:
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| Identification and prioritisation of requirements |
| Thorough analysis of the business environment, e.g. transaction networks in transactional banking, trade flows in securities trading, work flows, etc. in order to |
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| > | Identify enhancement options |
| > | Lay the groundwork for effectively implementing and adjusting specific control and monitoring software |
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| Organisational adjustments, especially regarding workflow management and control. |
| Implementation of specific software that monitors and analyses daily business (e.g. workflow steps, monetary transactions, trading operations) according to agreed internal or regulatory required business rules |
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| > | Complying with all regulatory requirements without specified software has become next to impossible and there is respective standard software with different focuses on the market. |
| > | The key challenge is not the software selection itself, but to implement it in a way that provides the most benefit to the company. |
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Our Approach
Our approach will be individual and tailored to the specific needs of the customer. However, it will consist of a combination of standard building blocks as they may apply to the individual project. Building blocks that might be applied and combined to serve our customer's needs include:
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Requirements definition, analysis and prioritisation - This includes working with the bank to review regulatory and other requirements, define gaps and prioritise needs and related actions. If the bank already has a clear vision of its requirements, this step may be skipped.
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Business process analysis and re-design - This includes reviewing the related work flows and, if beneficial - implementing systems to control and manage work flows and work loads. This will reduce the risk of staff members departing on unproven ground for processing business cases and transactions and keep management in control of what is happening regarding the day-to-day business. This allows the identification of critical situations as early as possible and helps to avoid missing regulatory requirements.
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Implementation of specific Monitoring / Compliance Software - Depending on the focus of the effort software to be employed may consist of
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| > | Transactional monitoring and logging software, e.g. Intellinx
allowing to track actions across various systems. This may be used to identify and track the root causes of specific results or transactions. Causes may be just incorrect
handling or errors but may also lead to in-dications of wilful manipulation and fraud. Monitored transactions may also be analysed according to defined business rules
to detect cases of e.g. money laundering attempts or insider trading. More 
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| > | Dedicated Compliance Monitoring Software, e.g. MANTAS, monitoring for potential cases of money laundering and terrorist financing (AML) or market abuse in financial markets (Trade Compliance Monitoring, TCM).
For more than two years we have worked on the various stages of implementation and worldwide roll-out of Mantas at a major London investment bank, working on the vendor side as well as on the bank side, giving us an insight into all key areas of such implementation
| - | Business analysis. Analysing understanding the different ways transactions may be initiated and processed through different front-, middle- and back-office systems to serve the requirements of the business and the customers |
| - | Data sourcing and data mining. Identifying sources for required data internally and externally, e.g. for market data, and identifying the different transaction types and transaction flows within the data |
| - | Staging area design and processing. This includes the detailed design, specification and any development needed to extract required data from the sources and prepare it in such a way for ingestion into the selected Monitoring Software so that the monitoring and case analysis will be most effective, which means minimising false alerts without missing any potential valid alert. |
| - | Software configuration, adjustment and customisation where necessary.
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| > | Special Reporting Systems based e.g. on Business Objects or other reporting software to analyse and present data according to specific aspects that are of interest.
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Effective Project Management ensuring project objectives are met on time and within budget
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