Are you choosing the right firm for your look back?

Wednesday, January 3, 2018

We’ve all been there. The consent order gets finalized with a laundry-list (pun intended) of action items. Included is an item containing the following language:

“Within 30 days from the effective date of this ORDER, the Bank shall engage an independent qualified firm, acceptable to the Supervisory Authorities, to conduct a review of transaction activity for the period beginning [DATE], through the effective date of this ORDER to determine whether SARs and CTRs should be filed.” 

It’s the dreaded “look back,” or remediation, or whatever you want to call it. You now have to find the firm that can roll-up their sleeves, and review thousands of alerts in an effort to find suspicious activity. There is no shortage of firms available to do the job, and no shortage of problems that can come with them. 

I recently helped a mid-size financial institution conduct a look back of over 2,000 alerts. The team spent about three months reviewing the alerts, creating cases, identifying suspicious activity, and writing SAR narratives. When completed, we were able to identify 5.5% of the alert population that required an SAR filing.

The engagement, while successful, was particularly frustrating for the bank, because it had already hired another firm to complete this task. The results… zero SARs filed, and a regulatory review that required the bank to complete the task again. So what should a bank look for when choosing a consulting firm for their look back? Here are some items you should keep in mind:

1)       Do they have their own methodology? If the look back is regulator mandated (not proactive), ensure that the firm has their own methodology that has previously held up under regulatory review. We’ve observed instances of financial institutions requesting that the consulting firm use the financial institution methodology to complete the review. This approach can be problematic, because regulator mandated look backs require the consulting firm to be independent, and the chosen firm should have their own methodology that will be adjusted to fit into the bank’s procedures.

2)       Is the proposed price realistic? Everyone knows that look backs are generally expensive to conduct. Financial institutions could be tempted to use cost as the primary driver of the decision. Consulting firms know this, and they also know that once they start working on a look back, they will likely finish the work even when it goes over budget. Be sure to find out from your staff the average time needed to complete an alert and case. Do the math to make sure that the estimate is appropriate. Ask your staff to verify the time allotment that the consulting firm has allocated for the project. If they don’t have enough time scheduled, then either they are not asking the right questions, or they could be under-allocating resources to keep the initial estimate low to win the job. If the time allotment is correct, but the rates are far lower than most of the other bidders, you could be assigned inexperienced staff. Use caution. 

3)       Will the consulting firm over-staff? Most consulting firms will try to reverse engineer the proposal. Using what they learn from the bank, including deadline date, number of alerts, and average time needed, they will propose the number of staff needed to complete the look back on time. Anyone who has done this work in the past will tell you that it never works out that easily. Delays in onboarding and obtaining systems access occur frequently. Most firms will use a combination of full-time employees and contractors (necessary in the industry), but won’t anticipate that some contractors may leave the project with little notice. If they haven’t offered, ask your potential consulting firm if they can overstaff the project to start, and then scale back the number of resources needed as the project moves along. This allows flexibility for those unforeseen delays that occur on all projects.

4)       Will the consulting firm provide quality control (QC)? If the proposal does not contain a QC function, run away! Many financial institutions will attempt to do the QC portion of the project themselves to save money. QC by your financial institution will be necessary, but ensure that this review occurs after the consulting firm has provided their own QC. When a bank tries to complete the QC, they do not account for the bottleneck that occurs at the QC level due to bank employees having other responsibilities and/or being short-staffed. The end result is a QC review that occurs weeks or months after the consulting firm has finished the assignment.  If any cases need to be re-worked, it falls onto the bank’s staff to update the cases. Work with your consulting firm to determine the number of QC reviewers needed based on the alert population and staffing levels.  Efforts to save money in this area can result in failed look backs.

5)       Does the proposal include management information (MI)? Look back projects tend to be high profile within the financial institution due to high cost and regulatory pressure. The consulting firm that you choose should always offer a weekly update meeting with relevant MI statistics. Information in these meetings should include original projections of costs and items completed, as well as progress against those projections. Providing this information gives the financial institution transparency into the project and allows management to identify potential deadline or budget issues and make appropriate corrections.

I often tell my clients that look back projects are very challenging even when they go well. Don’t make the project more difficult by choosing the wrong consulting firm. Do your due diligence, talk to others in the industry, and don’t make your decision based on price alone. You could end up doing it twice!

 
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Gregory T. Peckham, Managing Director

Greg is a Managing Director based in Exiger’s New York office, where he focuses on Exiger’s Financial Crime Compliance practice. He currently leads Exiger’s Remediation & Look Back group. He has completed a variety of projects with retails banks, broker/dealers, and corporate investment banks.

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