CONNECT MAGAZINE - ISSUE 1

EDITION 1

AI Research Compliance Fincrime

Shifting Sands of Risk: Ushering in an era of rapid change

Emerging Risk Sustainable Finance

AI risk:

How university researchers and risk professionals are working to predict the future of risk management

FinCrime risk:

The challenges facing financial institutions combating increasingly sophisticated threats

Compliance risk:

Craig Spielmann asks whether smaller organizations are taking risk management seriously enough

Third Party risk:

Best practice for multiple TPRM when in-house services are in in short supply www.cefpro.com/magazine

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CONTENTS 2

The views and opinions expressed in this publication are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

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NEW BEGINNINGS IN AN ERA OF CHANGE

CeFPro Managing Director, Andreas Simou, welcomes you to our new-look magazine and looks at the pace of change in the risk landscape and asks whether we’re ready to meet new challenges

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LESSONS LEARNED - A SHIFTING REGULATORY LANDSCAPE AND NEW PRIORITIES Following the failure of three smaller banks in March 2023, we look at how the banking world is acting on the lessons learned

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This article is written with insight from Joseph Posavec, EVP, Bank Credit Risk Solutions, Newmark Valuation & Advisory

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IS AI ABOUT TO BECOME THE FINANCE SECTOR’S CRYSTAL BALL? Data is always in the past. Is that all about to change with the launch of a new research project?

Brandon Davies, former senior board member, Barclays & Ali Kabiri, Professior of Economics, University of Buckingham

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THE EMERGING BATTLEFIELD IN THE WAR ON FINANCIAL CRIME As the technological progress accelerates, we look at how the rules of engagement on financial crime prevention for banks are changing

This article is written with insight from Pallavi Kapale, the Senior Financial Crime Officer with Bank of China

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UNRAVELLING THE COMPLEXITIES OF FINANCIAL CRIME Technology may be the future of risk management, but will it ever replace human capital?

Riley Peterson, Head of Compliance & Money Laundering Reporting Officer at China Construction Bank(London Branch)

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THE BLACK HOLE OF RISK READINESS Are small to medium sized financial institutions taking risk seriously? Recent events suggest that lack of preparedness can come at a high cost

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This article is written with insight from Craig Spielmann, Risk Intelligence Leader at CNM LLP

EXPLORING EMERGING RISKS IN THE FINANCIAL INDUSTRY The risk landscape is constantly evolving, with new challenges constantly emerging, posing the question of how risk professionals should approach an ever-moving target

Deniz Tudor is Head of Modeling at Bread Financial

NAVIGATING THIRD-PARTY RISK MANAGEMENT FOR SMALL BUSINESSES: CHALLENGES AND OPPORTUNITIES Multiple third party relationships are a near necessity for smaller organizations without in-house expertise – but what are the opportunities and pitfalls that come with them?

Roxane Romulus is the former Director of Third Party Risk Management at Voya Financial

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SUSTAINABLE FINANCE: OVERCOMING CHALLENGES AND EMBRACING COLLABORATION Against challenging Net Zero 2030 targets, there’s a growing need for companies to blend technology with collaboration

This article is written with insight from Alessia Falsarone, former Partner & Head of Sustainable Investing, Strategy & Risk Oversight, PineBridge Investments

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New Beginnings in an Era of Change Challenge your thinking.

Lead with vision.

Delivering insights that elevate decision-making,broaden your expertise, and transform yourself into the professional your organization needs.

Publisher

Marketing

4

Editor

Mark Norman Head of Content CeFPro mark.norman@cefpro.com

Ellie Dowsett Content and Media Marketing Manager CeFPro ellie.dowsett@cefpro.com

After several years of bringing a regular magazine to you, it was high time we gave iNFRont a facelift and a new name to bring it into line with our existing Connect content platform, ensuring you get the best possible experience from the wealth of knowledge and insight CeFPro has to offer.

If you’re already a member of the Connect content portal, then this inaugural edition of Connect magazine should have a warmly familiar feel to it.

(And if you haven’t already signed up to Connect, what are you waiting for? It’s free, and you’ll have a wealth of articles, podcasts, audio clips, and learning materials at your fingertips.

Just click to register – it takes less than two minutes.)

Purely coincidentally, the process of change is a theme that runs through many of the articles you can read in this debut edition of Connect.

Whether it’s the impact that AI will have on all our lives, the rapidly developing landscape of compliance and regulation, the different requirements that financial organizations have from their risk teams, or the fast moving evolution of technology, change is being felt in every corner of the risk management discipline.

We all know that change isn’t always easy to embrace, but in this collection of articles – all of them either written or informed by those operating at the most senior of levels in their field – the message is abundantly clear: if you’re not preparing for change, you’re preparing to fail.

I hope the insight you’ll find on these pages can play a part in fuelling greater success in the future.

Magazine team Andreas Simou Managing Director CeFPro andreas.simou@cefpro.com

Andreas Simou Managing Director CeFPro

Hello, and welcome to your new-look magazine from CeFPro.

Sales & Advertising

Chris Simou Head of Sales CeFPro chris.simou@cefpro.com

Design

Natasha Marino Head of Design CeFPro natasha@cefpro.com

Enjoy reading. Our next edition is out on November 25th. In the meantime we’d love to hear your feedback – positive or negative – on the new look Connect.

If you have some thoughts to share, or you or your organization would like to contribute an article to the magazine, or explore advertising opportunities, please get in touch (all our relevant contact details are on the page opposite).

Andreas

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Is AI About to Become the Finance Sector’s Crystal Ball Ali Kabiri is a professor of economics at the University of Buckingham and Brandon Davies has spent half a century working in the financial services industry, held senior positions on banks, FinTechs, was on the management board at Barclays and has a passion for artificial intelligence and how it impacts our work, particularly in the financial services sector.

The project you’re working on together is really about how we can build future thinking into AI, not only in terms of how AI can improve risk modeling but also in terms of how it can inform future strategy and decision-making.

Before we get into the detail of that, perhaps you can explain how you came to work together and how the project came into being.

Ali: Since the crisis of 2008, I’ve had a deep interest in credit flows, known as credit frictions, and macrofinancial behavior in general – in other words, how the financial system interacts with the macroeconomy.

One of the main findings that came out of the 2008 crisis was that macroeconomics and finance were too far apart as disciplines, as areas that didn’t overlap well, but which are very important.

So a lot of my research has been about how credit behaves, and I suppose this led to understanding how credit and risk are intertwined.

I was working on a project looking at the Great Depression with Professor Harold James at Princeton where we tried to look at the psychology using computational techniques to extract the psychology around that time and human psychology extracted from the WSJ appears to have been a driver of credit spreads.

That then evolved into looking using advanced computational techniques to try to understand the current relationship between human psychology and risk in the financial system, using modern financial news data, with similar results.

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Brandon: Similarly, my interest is partly related to lectures I was doing at the University of Buckingham. A lot of my lectures were derived from the work I’d done in building models for use in dealing rooms which needed to incorporate concepts of dynamic and conditional correlation rather than using set statistical probabilities.

So, we approached this project from two different angles – because if you’re actually going to teach people about markets, you need to teach them about endogenous processes, not just exogenous shocks.

And (endogenous processing) models incorporating endogenous processes have become an incredibly important aspect of looking at how extreme events materialize in the banking and wider financial system.

Can you talk about your collaboration and its purpose in a little more detail?

Building models based on language brings its own problems. For example, you’ve got the problem of assigning scores to specific phrases in large language models, and language is highly contextual.

The finance industry’s interpretation of words and phrases will be dwarfed by lots of other interpretations of it – so if THE model’s data is not well trained, the models can get confused and your results will suffer accordingly.

We also think that if we can apply human expertise through appropriate training of the model data we can bring the data requirements down to about one percent of what we would do normally just using a large language model without appropriate training.

And the same reduction probably applies to the analytics side as well.

And you’re using a lot less time because you’ve got a lot less data to use. So, your models become much more powerful. And, therefore, much more available to a lot more people, and a lot more of the industry. So, it has big implications.

Can you give us a broad example of how the financial services sector might use the work that you’re doing in a practical daily sense?

Brandon: From an industry perspective, I always contrast this with when I first went into a dealing room and all we had was analog data. Now that’s going to sound weird, but some of us will remember the old TV sets that were really just great big vacuum tubes and all they did was display an image. There was no data capture in that tube.

That was also true of dealing rooms, where every screen was an analog screen. But at the same time, we were getting more and more interested in analyzing the market and its behavior and, potentially, projecting where it was going. And for that we needed a lot of data.

The first step we had to take was to pixelate a screen in order to work out where the pixels for the data appeared on a screen, and then capture it into what we today would call a PC or a server.

And that was the beginning of a whole new industry, because then we had data. And once we had data, we had models, and once we had models, we could start to analyze specific scenarios and projections.

But the big thing missing from all models is future data, because there’s no such thing. All data has already happened – or it might be happening in front of you, but it isn’t in the future.

The interesting thing about using AI and, in particular, large language models, is that you’re getting a different picture of the future. It’s not a picture that’s just a projection from the past. It’s actually what people are thinking today about the future. And that is, I think, very exciting for future modeling of markets and future modeling in economics.

It means we can start to look beyond historic data and start looking at what’s going to happen and, and analyzing that, rather than just having our own educated or informed opinion, so to speak.

Ali: To a certain extent, we still don’t know exactly what we can get from the data, but our preliminary work suggests that there is very useful information about behavior that looks forward. So how would we contrast that to what is done presently?

There’s some excellent work being done using survey data to try and glean what people are thinking about the future. But survey data tends to be very infrequent, and this is a way of harnessing people’s thoughts and perceptions about the future almost instant second by second at a very high rate of frequency.

Ali: In this project we’re aiming to harness the expertise of financial professionals and the power of large language models – to train AI models.

Brandon: And that has lots of implications for the industry because one of the problems with very large language models is they tend to have to store the data on the cloud. I’ve had innumerable discussions with regulators over using the cloud and their concerns, particularly about losing control of data and possible single points of failure.

In my experience, they tend to much prefer the idea of everybody looking after their own data, because that way they are looking over multiple points of failure, and attacking lots of systems is much more difficult than one or two.

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Presumably, then, if you extrapolate the work that you’re doing and you look at how you might map that into a financial services organization, you’re talking about creating tools that will allow those organizations not only to refine their revenue generation activity, but also to make their risk management models more effective, more dynamic and faster.

I think AI is going to be the future of just about everybody’s career, just as the move from analog to digital was 40 years ago and getting an understanding of how that is going to be very, very important for the future of anybody’s career in finance.

Ali: One of the big debates in academia at the moment is the speed at which these models are advancing, which means that they are the highest end.

But right now, the models are behind closed doors, and so there’s a big effort in academia to keep these models visible.

Brandon: Absolutely. The ability to apply models changes out of all recognition, and this is where it’s going. It’s not just about replacing people with machines. That’s not what it’s about at all. It’s using a whole different way of thinking about analyzing potential and forthcoming events and trends.

What are your thoughts on the evolution of AI? It’s growing so fast that sometimes it feels a bit like a runaway train, doesn’t it?

Other models will have their role as well. I don’t think we’re going to see one model. Far from it. I think there’ll be thousands of them.

Ali: It’s moving very quickly. AI in general has many different aspects, so in many dimensions, I think we’re seeing exponential discoveries, and yes, it’s a very exciting area.

So what is it that you now need in order to inform the work that you’re doing?

Ali: We need domain expertise to help us train this model. Specifically, it involves taking part in a survey where respondents will be asked to look at financial news text and give responses on a scale of, say, minus five to plus five based on various questions.

Those questions will be about that text – how they perceive it, how they may react to it. That’s the main task – to get their knowledge into the large language model so their responses can essentially be used to train it as if it were seeing the data as they would see it.

And then it can be applied in real-time.

Brandon: The idea is to help the model to learn phrases and understand what they mean in order to apply them to new data. The model would have to probably need to be refreshed every so often, but we desperately need this kind of this kind of engagement.

Of course, we know the engagement has to go both ways. So, in return for their engagement, what we’re offering is the opportunity to learn, in quite some detail, how large language models operate, how we train them, how they can be applied in their own field, and so on.

Brandon: It’s very exciting. It isn’t, in my view, unprecedented. I can remember putting these initial computers in a dealing room. And at that point – and I have photographs of this – there are only about six desks in a 300-desk dealing room. Yet 12 months later, there was hardly anything left of the analog world, not least because the big information providers were also going digital.

The digital world took over at astounding speed and completely revolutionized everything we were doing across all the markets. We had digital data on everything from commodities and currencies to debt instruments, bonds, equities, you name it. we could develop new products we literally could not have thought of in an analog world. Well, the same thing is likely to happen here, I think.

AI in Financial Services: Risk Management Did you know that 68% of institutions have yet to implement AI into their risk management strategy? Don’t get left behind.

Download your free copy today Or visit www.cefpro.com/ai-financial-services/ for more information

So effectively, the message seems to be get on the train, or you’ll be stuck at the station.

Ali: I think so, but to a certain extent, nobody actually knows. It’s very complex. AI certainly will be part of everyone’s lives and undoubtedly a part of the future of the finance industry, as a leader in the technology area. But that’s why I think engaging with it is probably a sensible strategy.

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Research Accreditation

In addition to Brandon Davies and Professor Ali Kabiri, the research initiative featured in this article is a collaborative project involving the academics listed below, all of whom are considered globally to be leading experts in their field.

Professor Harold James (Princeton University) Professor John Landon-Lane (Chair, Department of Economics, Rutgers University) Professor David Tuckett (University College London - Centre for Study of Decision-Making Uncertainty) Dr Jacob Turton (University College London - Centre for the Study of Decision Making Uncertainty) Drr David Vinson (University College London - Experimental Psychology)

Get involved in the study

If you or your organization would like to be involved in this research project, which gives participants exclusive access to detailed information regarding the use and potential applications of AI in the financial services sector, please get in touch with Mark Norman (mark.norman@cefpro.com) or Ellie Dowsett (ellie.dowsett@cefpro.com) who will share your contact details with the research team.

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The Emerging Battlefield in the War on Financial Crime

Financial crime has rapidly evolved in recent years, driven by new technological advancements and social trends.

With financial institutions under mounting pressure to safeguard their operations, the role of financial crime officers has never been more critical.

In an exclusive interview with Pallavi Kapale, Senior Financial Crime Officer at the Financial Intelligence Unit of Bank of China, we explored key trends shaping the banking landscape and the evolving risk management strategies banks must adopt to combat these threats.

Money Mules and Sanctions Evasion: Rising Trends in Financial Crime One of the most pressing trends Kapale is monitoring is the increasing use of money mules, a tactic criminals use to launder illicit funds.

“The growth of money mules has become more prevalent, especially because of the rising cost of living,” she explained. Fraudsters are targeting individuals between the ages of 18 and 30, as well as older, vulnerable populations aged 50 to 75. These groups are often lured by the promise of quick cash, making them susceptible to fraud schemes.

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Pallavi Kapale is the Senior Financial Crime Officer with Bank of China and has more than nine years’ experience as a financial crime specialist in the banking sector She has extensive knowledge and expertise in a wide range of areas, including Anti-Money Laundering, Counter-Terrorist Financing, Transaction Monitoring, and more. The views she expresses in this article are her own and not necessarily those of Bank of China.

“It’s easy to see why this might attract students or people struggling financially. A fraudster may offer a small reward per transaction, making it seem harmless, but this is how they get trapped,” said Kapale.

Another alarming trend is sanctions evasion through complex networks. Kapale pointed out, “We’re seeing things like increased car sales in countries like Azerbaijan. It raises questions—how are these countries generating income? Often, it’s through circumventing sanctions.”

Fraudsters use border countries to move funds without triggering sanctions directly, making it difficult for banks to track the ultimate destination of the money. This has become a significant challenge for banks since they must ensure payments are not indirectly funding illegal activities in sanctioned countries.

Additionally, synthetic identity fraud is on the rise.

Criminals create fake identities using fraudulent documents to open multiple accounts, exploiting the slower onboarding processes in the UK. “It’s a real concern, especially post-pandemic. Banks need to enhance their Know Your Customer (KYC) systems and conduct more stringent customer due diligence,” Kapale emphasized.

The Impact on Risk Management Strategies In response to these evolving threats, banks have had to rethink their risk management strategies. Kapale highlighted the importance of enhanced customer due diligence, particularly when it comes to onboarding new clients.

“In the past, it was simpler—customers would present documents, register their business with Companies House, and that was often enough to open an account.

Now, you need to scrutinize where they intend to do business, who their third parties are, and whether they have the experience to run that business,” she explained.

Training also plays a pivotal role in adapting to these changes. Kapale has been conducting extensive training for front-line staff, helping them recognize red flags and know when to escalate issues. “There’s so much information overload. You can’t blame front-line staff for everything. It’s about fostering collaboration between the first, second, and third lines of defense,” she said.

She also emphasized the need for comprehensive risk assessments that address emerging trends and ensure that banks are proactively monitoring for new threats.

Leveraging Data Analytics and AI in Fraud Prevention

Services Regulations (PSR), which will emphasize fraud prevention.

Kapale went on to explain how AI and machine learning models can revolutionize fraud detection by continuously learning from new data to predict and prevent new fraud types, such as synthetic identity fraud.

“It’s not just about having the data; it’s about how you use it,” she explained. For instance, text and voice analytics can help spot fraudulent activity in call center conversations or emails by analyzing keywords associated with scams.

“AI can process large amounts of unstructured data and identify patterns that indicate fraud. This makes it a powerful tool in preventing account takeovers and phishing schemes.”

Network analytics is another key area where AI is making strides, helping to detect hidden connections in both fraud and anti-money laundering (AML) cases.

“These tools allow us to trace the flow of funds and pinpoint suspicious activity, especially when the proceeds of crime are dispersed across multiple accounts,” says Kapale, referencing also the growing problem of ransomware and other cybercrimes.

“Fraud is now responsible for 40% of crimes in the UK, and it’s been declared a national emergency. The days of hearing about burglaries are gone—now it’s all about ransomware and large-scale digital fraud.”

In today’s digital landscape, data analytics and artificial intelligence (AI) are indispensable tools in the fight against financial crime. However, according to Kapale, not all banks are fully equipped to harness their potential.

Collaboration and Regulatory Challenges in Financial Crime Prevention

“Some banks are still using legacy systems. While high-speed banks have adopted real-time monitoring, others are lagging behind,” she noted. This is a significant concern given the upcoming Payment

One of the biggest challenges facing banks today is the lack of clear regulatory guidelines on data sharing.

In the past, financial institutions could freely exchange information about mutual customers suspected of fraud.

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Financial Crime USA | NYC | March 25-26 However, as Kapale explains, “GDPR has made things much more difficult. We used to just pick up the phone and share concerns with other banks. Now, that’s impossible.”

Despite the challenges, Kapale believes that collaboration between financial institutions and law enforcement remains crucial. “We’re waiting for regulatory guidelines to give us a clearer framework for sharing data, but in the meantime, we rely on industry publications and organizations like the Joint Money Laundering Intelligence Taskforce (JMLIT) to share alerts and best practices.”

Thwarting Major Financial Crime Cases To offer insight into the what financial crime prevention looks like on the ground, Kapale recounted one of the most significant cases of her career, which took place during the pandemic.

The case involved an organized crime group exploiting the UK government’s bounce-back loan scheme. “A customer had opened a company on Companies House just two days before receiving a £50,000 payment. The money left the account almost immediately, raising red flags,” she recalled.

After further investigation, Kapale discovered that multiple companies had been registered at the same address, with all funds ultimately routed to a single individual abroad. “It was a massive case, but we managed to stop it in time by working closely with our KYC and onboarding teams.”

Anticipating Emerging Threats: Cryptocurrency and Cybercrime

“Instead of outright bans, banks should have real-time monitoring systems in place to track cryptocurrency payments,” says Kapale. “Why is a customer who’s never dealt in crypto before suddenly making these transactions?”

Kapale also pointed out the trend of using money service businesses to funnel money into cryptocurrency, making it harder for banks to trace illicit funds. “Banks need to enhance their KYC and know-your-transaction protocols, especially when dealing with cryptocurrency clients,” she advised.

Kapale stressed the importance of collaboration within the bank’s internal teams, between the first, second, and third lines of defense, to stay ahead of emerging threats.

“The key to effective risk management is fostering a culture of collaboration, leveraging advanced technology like AI, and staying proactive in identifying new risks. Only by working together can we protect the bank and our customers from financial crime,” she said.

Unite.

Defend.

Protect.

Become a leader in the fight against financial crime.

Where the best minds in financial crime prevention meet to plan their next move.

As cryptocurrency becomes more widespread, banks must stay vigilant against new forms of fraud. Many UK banks have already banned cryptocurrency transactions, but Kapale believes a more nuanced approach is necessary.

With financial crime on the rise, can your institution keep up with the latest defenses? Prepare to step into the future of financial crime prevention. Discover how AI, machine learning, and fintech innovations are transforming anti-financial crime strategies and sanctions compliance.

Obtain critical insights and strategies from industry leaders:

Visit www.cefpro.events/financial-crime-usa/ to secure your seat and start climbing the ranks.

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Unravelling the Complexities of Financial Crime

Riley Peterson is the Head of Compliance and MLRO at China Construction Bank in London. He has previously held senior roles at MUFG and KPMG, and has extensive experience supporting and building a globally consistent AML and Compliance framework at one of the world’s largest financial institutions. He also has a specialist knowledge of trade sanctions, anti-money laundering, anti-bribery and corruption.

As financial crime becomes increasingly sophisticated, compliance teams around the world are grappling with new challenges and risks.

with compliance officers from other organizations.

We’re all working toward the same goal—protecting our organizations and the wider financial markets.”

From anti-money laundering (AML) frameworks to transaction monitoring systems, the role of compliance is more crucial than ever in safeguarding financial institutions. To understand how the banking sector is adapting, we spoke to, who offered key insights into the evolving landscape of compliance.

The Evolution of Transaction Monitoring Systems

Keeping Up with Emerging Financial Crime Threats In recent years, financial crimes have become more complex, and staying ahead of these threats is a constant challenge for compliance teams.

Riley Peterson, Head of Compliance and Money Laundering Reporting Officer at the London branch of China Construction Bank, emphasizes the critical role of technology in addressing these issues, but highlights that it is not just about the systems in place—it’s about the people who operate them.

“As far as strategies and technologies are concerned, the technologies are evolving extremely quickly. And it’s sometimes difficult to stay on top of them because compliance departments often have to plan their costs a year or multiple years in advance,” says Peterson.

“While we are trying to leverage technology as much as possible and using state-of-the-art vendorsupplied software, ultimately it really comes back to human capital—making sure that we have the right people and the right training on the ground.”

This human element is crucial in adapting to the rapidly changing nature of financial crime. According to Peterson, maintaining open lines of communication within the compliance team and fostering relationships with other financial institutions are also essential.

“At the end of the day, it’s about meeting people, getting to know them, and developing relationships

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Transaction monitoring systems are at the heart of AML efforts, but the effectiveness of these systems depends on continuous validation and tuning. Peterson points out that a significant shift is taking place in the way banks approach transaction monitoring.

“Previously, the mentality was that you buy a system, plug it in, it generates alerts, analysts review those alerts, and sometimes you file a suspicious activity report (SAR).

That’s how you ran a good program,” says Peterson.

“But now, the market is moving towards a deeper understanding of whether these systems are generating the alerts they’re supposed to generate.

“Is the data flowing from upstream systems in the way it’s supposed to? Data validation is a real challenge right now, particularly as the market shifts from a Swift MT message type system into an ISO 222 compliant system.”

Peterson also referenced the recent fine imposed on Starling Bank as a case study in the importance of system validation. “A lot of the fine was attributed to a lack of testing, tuning, and validation of their systems.

That’s why we’re making sure that our systems are adept at handling both the current and upcoming methods of making payments.”

Collaborating with Other Financial Institutions One of the biggest hurdles in fighting financial crime is the limited ability to share data between banks, often due to privacy regulations. Peterson acknowledges that

while these regulations serve an important purpose, they also pose challenges for compliance teams.

“The challenge we face is that banks have a lot of data, but they generally don’t like to share it. Data privacy regulations in markets like the UK, US, and Europe prevent this sharing, and while those regulations are well-intentioned, it makes it difficult for us to share best practices,” Peterson explains.

To overcome this barrier, Peterson suggests that financial institutions need to find alternative ways to collaborate. “What we have to do is work through industry bodies like the Association of Foreign Banks or UK Finance. Events like CeFPro conferences are also useful for sharing information.

Peterson. “For example, if there’s a ransomware attack and you tighten up your IT systems, you may introduce new risks around operational efficiency or data sharing.

“Financial crime, like a virus, evolves—and new methods of economic crime are emerging all the time, particularly with the rise of digital currencies.”

For Peterson, the key to staying ahead of these evolving risks is to remain adaptable. “Economic crime is far more sophisticated now than it used to be. We’re seeing potential threats coming from securities, digital currencies, and areas that didn’t even exist 17 years ago when I started in this industry.”

Keeping Compliance Teams Aligned

But really, it comes down to open and honest communication with shareholders and other organizations—meeting with them regularly to exchange insights and ensure that we’re all aligned.”

As financial crime evolves, so do the regulations governing compliance. Ensuring that compliance teams and senior management stay up to date with these changes is a crucial part of Peterson’s role.

Peterson drew an analogy to the global response to the COVID-19 pandemic, emphasizing that just as countries needed to share information to combat the virus, financial institutions must collaborate to address the evolving nature of financial crime.

“It’s all about communication,” Peterson says. “When there’s a major news event—like the Starling Bank fine—I make sure to brief senior executives on the background of the investigation and whether there’s any chance of contagion across our organization.”

“Risks are constantly mutating. You meet one challenge, and a related one pops up. It’s a constantly moving landscape, and sharing data is essential to staying ahead of these threats.”

Peterson also encourages frontline employees to take a proactive approach to staying informed. “It’s about encouraging staff to set up news alerts, get out into the industry, attend events, and network with colleagues at other organizations.

The Ever-Evolving Risk Landscape Financial crime is not a static threat—it evolves constantly, driven by advancements in technology and changes in global economic conditions. Peterson describes how, over the years, risk has shifted from one area to another.

“It’s easy to get bogged down in day-to-day tasks, but it’s important to make the time for these things because they provide valuable insights into best practices and emerging trends.”

“Once you’ve been in this industry long enough, you realize that you can’t ever really make risk go away.

You can only shift it from one place to another,” says

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Loan Risk Grades: Regulators are paying closer attention to how banks assess the risk levels of their loans. Adjustments in loan risk grades are expected to play a critical role in how regulators evaluate portfolio health.

To stay ahead, banks should perform comprehensive reviews of their CRE loan portfolios, identify potential problem areas, and develop strategies for addressing maturing loans with high-risk profiles. Proactive communication with regulators and borrowers will be essential in managing expectations and mitigating potential regulatory actions.

2. Third- and Fourth-Party Vendors: Ongoing Vigilance Managing relationships with third- and fourth-party vendors has been a regulatory focus for several years, and it remains a top priority. The continued reliance on these vendors for critical banking operations, from IT services to compliance monitoring, has raised concerns about risk management and oversight.

Regulators want banks to ensure that:

Lessons Learned - A Shifting Regulatory Landscape and New Priorities Joseph Posavec is EVP, Bank Credit Risk Solutions with Newmark Valuation & Advisory. He has had a long and successful career that encompasses senior roles at a variety of financial organizations in the United States. He specializes in addressing compliance and risk challenges for some of the world’s largest banks and am known for identifying opportunities to revitalize banking technology with cutting-edge solutions.

As the banking industry moves past the tumultuous events of March 2023 and in response to the failures of Silicon Valley Bank, Silvergate Bank and Signature Bank, regulatory agencies have refined their oversight priorities in response to the lessons learned from those challenges.

1. Commercial Real Estate (CRE) Lending: The Top Concern The commercial real estate (CRE) sector continues to be viewed as one of the highest-risk areas for banks.

Regulators have flagged CRE lending as their primary concern for 2024, with particular focus on multifamily and office loan portfolios. Several factors are driving this increased attention: •

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Recent regulatory panels have highlighted several key areas where banks should focus their attention in the coming year.

These priorities are not only intended to prevent a recurrence of the issues that surfaced last year but also to strengthen the resilience and risk management capabilities of banks.

Below are four major areas of heightened regulatory scrutiny and how banks should prepare for them.

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Loan Concentrations: Banks with high concentrations of multifamily and office loans are under significant scrutiny. These sectors have shown signs of stress, particularly as postpandemic shifts in work patterns and housing demand impact their long-term viability.

Loan Maturities: A record number of commercial loans are set to mature soon, and regulators are wary of limited refinancing or “takeout” options.

Banks are expected to proactively address this issue and engage early with borrowers to find solutions that minimize risk.

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Vendor Selection: The process of choosing thirdparty vendors should be rigorous and transparent, with due diligence measures that assess the vendor’s financial health, data security practices, and business continuity plans.

•

Oversight and Management: Banks need to demonstrate strong oversight of vendor relationships, ensuring that vendors comply with the bank’s policies and regulatory requirements.

This includes monitoring service levels and performing regular audits to confirm that vendors are fulfilling their contractual obligations.

•

Risk Management: Identifying risks associated with fourth-party vendors—those that provide services to the bank’s vendors—is also critical. Banks must extend their risk management frameworks to account for these indirect relationships, ensuring that potential vulnerabilities are addressed.

Banks should bolster their vendor management programs, with special attention given to identifying risks within the extended vendor ecosystem. A clear, documented process for managing and reviewing vendor performance will be vital in future regulatory examinations.

3. Anti-Money Laundering (AML) and Bank Secrecy Act (BSA): Persistent Challenges AML and BSA compliance have long been priorities for regulators, and this trend continues into 2024.

Banks are expected to maintain strong processes

for detecting and reporting suspicious activity. Given the sophistication of money laundering schemes, regulators are emphasizing: •

Transaction Monitoring: Automated systems to flag suspicious activity must be continually updated and refined to stay ahead of emerging threats. Banks should also invest in technology that enables more accurate reporting and analysis.

•

Staff Training: Frontline employees and compliance teams must receive ongoing training to recognize potential money laundering tactics and to ensure that all employees understand their role in AML/BSA compliance.

With the growing complexity of financial crime, banks should anticipate increased scrutiny of their AML/BSA programs and be prepared to show that they are using the latest tools and techniques to safeguard against illicit activities.

4. Risk Management and Safety: Testing Resilience Ensuring the safety and soundness of banks is a longstanding regulatory focus, but there is a new twist this year: regulators are now asking banks to not only follow best practices but also to rigorously test their backup systems and risk mitigation frameworks.

Specific areas of concern include: •

•

System Testing: Banks should test their backup systems regularly, ensuring that they can function effectively in the event of a primary system failure.

This includes testing IT infrastructure, data recovery processes, and communication systems.

Backup Credit Lines: Regulators want banks to draw down on their backup credit lines to test their availability and operational readiness during periods of financial stress.

These measures are intended to ensure that banks are fully prepared to navigate unexpected disruptions while continuing to meet their obligations to customers and regulators.

Conclusion

As banks prepare for regulatory examinations in 2024, it’s clear that the focus will be on managing risk and ensuring resilience in an uncertain economic environment. By proactively addressing concerns around commercial real estate lending, vendor management, AML/BSA compliance, and system testing, banks can position themselves to weather future challenges while maintaining the confidence of regulators and stakeholders.

Debt Service Coverage Ratios (DSCRs): These ratios have deteriorated over the past year, signaling potential trouble in loan performance.

Banks must closely monitor DSCRs to mitigate the risk of default or downgrade.

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Make your mark on the evolution of fintech The financial services industry is undergoing a profound transformation, driven by innovative technologies and evolving consumer expectations. CeFPro’s annual Fintech Leaders Survey is not just a global research study; it’s a critical tool for understanding where our industry is headed and how we can navigate the future together.

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hampers the effectiveness of the risk function but also diminishes its perceived value within the organization.

Moreover, smaller institutions often lack the architecture needed to integrate risk management with business strategy effectively. Larger organizations, having been subject to greater regulatory scrutiny, have developed more robust frameworks for risk management.

As Spielmann highlights, many smaller organizations have weak training programs and a lack of leadership in risk management. This weakness can lead to compliance failures and increased regulatory scrutiny down the line.

The Importance of Top-Down Support Risk compliance requires not only strong processes and infrastructure but also support from the highest levels of the organization.

Spielmann recounts his experience at First Data, where CEO Frank Bisignano made it mandatory for senior executives to undergo risk management training.

The Black Hole of Risk Readiness All financial services organizations understand that regulation and compliance are king and queen when it comes to managing risk.

“Frank made every senior executive take that class,” Spielmann recalls. “He gave them three dates, and he said, ‘If you don’t make date one, then you better make date two. And if you don’t make date two, you’d sure as hell better make date three.’”

Craig is Risk Intelligence Leader at CNM LLP and a proven Enterprise Risk Management expert and ESG advocate with an established track record of driving enterprise wide initiatives for the world’s top financial institutions. He leverages vision, leadership, innovation and relationship management skills to achieve success and his expertise includes leading global initiatives to align risk management practices with business goals.

arises. Here, we explore the challenges faced by these institutions and why they are underprepared to meet modern compliance demands.

Yet, while bigger institutions appear to have learned from bitter experience how important their risk function is to their bottom line, there have been many instances in recent years – not least the $3bn fine received by Toronto Dominion Bank after it pled guilty to money laundering charges – where smaller organizations have been found to be severely lacking in their risk management processes.

One of the primary issues faced by small and mediumsized financial organizations is the lack of strategic value derived from their risk information.

According to Craig Spielmann, Risk Intelligence Leader at CNM LLP, many of these organizations lack the necessary structures, processes, and cultural priorities to ensure their risk management programs are both efficient and effective.

Spielmann notes that many risk functions merely provide information without actionable insights. “Are you giving them information that really helps them drive decision making?” he asks. “Or are you just telling them stuff?”

While large organizations have often been forced into compliance by regulatory pressures, smaller firms frequently remain complacent until a problem

According to Spielmann, many risk managers in smaller institutions fail to offer valuable input that can influence critical decisions. This gap not only

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A Lack of Strategic Value in Risk Information

This tone from the top, says Spielmann, is crucial to embedding risk management into the organizational culture.

However, smaller institutions often fail to establish such a tone, lacking the same urgency until they face significant regulatory issues. “I think until they get written up, they just think, ‘Well, we’ll just go along and do what we do,’” Spielmann says.

Unfortunately, this reactive approach often leads to serious compliance failures when regulators come in and expose the gaps in their systems.

Spielmann’s own experience with RBS in the UK exemplifies this point. “Some of the work they were doing was absolutely fantastic,” he says, “but no one knew about it.”

He encouraged his team to share their achievements with senior management, emphasizing that risk management needs to demonstrate its value to the business if it hopes to be taken seriously.

“Everybody pays for you,” he reminds risk professionals.

“If they see that they’re getting value out of it, you’ll grow.”

Risk Compliance as a Steering Center, not a Cost Center One of the most pervasive issues in smaller financial institutions is that risk management is often viewed as a cost center rather than a strategic asset. Spielmann argues that this mindset is deeply flawed.

“You’ve got to look at it as a steering center,” he says.

“The risk group should be working with the businesses to figure out how they make money and how they keep hold of it and not lose it in compliance penalties.”

High-profile regulatory penalties, such as the $3 billion fine levied against Toronto-Dominion (TD) Bank for its involvement in money laundering, highlight the costly consequences of poor risk management.

According to Spielmann, had TD Bank had a strong compliance function, they may have avoided such severe repercussions.

“Maybe that doesn’t happen if you’ve tightened the screws enough and raised it up to people who wouldn’t let that happen,” he explains. In other words, a wellfunctioning risk management team could have steered the company away from this disastrous outcome.

The Need for Marketing Risk Management Internally A surprising yet essential aspect of an effective risk management function is how well it “markets” itself within the organization.

Spielmann points out that many risk departments do excellent work, but they fail to communicate their value to the rest of the company. “A lot of these groups don’t market themselves,” Spielmann observes.

This failure to promote the value of risk management often leads to a lack of appreciation for its importance, making it difficult for these functions to gain the influence and support they need to drive meaningful change.

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The Role of Tension in Effective Risk Management

He also stresses the importance of periodic evaluations of the risk function. These evaluations should assess both efficiency and effectiveness, ensuring that the risk team is adding value to the organization while also identifying potential areas for improvement.

Effective risk management requires a degree of tension between the risk function and the business.

Regulators often expect risk teams to challenge the business, ensuring that decisions are made with a full understanding of the potential risks involved.

Spielmann likens this tension to a guitar string: “If you have a guitar string that’s just flat, it doesn’t make good music. You’ve got to tighten it up.”

As Spielmann explains, “Are they efficient and are they effective? Those are the two criteria that I always use.”

Finally, Spielmann encourages organizations to engage with their risk management teams regularly. CEOs and senior leaders should be able to articulate their top five risks and the corresponding action plans to mitigate them.

Regulators want to see evidence that the risk function is actively challenging the business, not just rubberstamping decisions.

“If you can’t answer that, you’ve got a problem,” he warns. Regular discussions with the risk team can help ensure that senior management remains informed and engaged in the company’s risk profile.

As Spielmann recalls from his time at RBS, regulators scrutinized meeting minutes to determine whether risk management had voiced concerns.

It was embarrassing, Spielmann admits, when regulators found no evidence of challenges from the business. This lack of tension can be detrimental, as it signals a passive risk function that fails to fulfil its role as a safeguard against undue risk-taking.

Proactive Steps to Improve Risk Management For small and medium-sized organizations looking to improve their risk management systems, Spielmann offers several recommendations.

First and foremost, he advises organizations to ensure they have knowledgeable leaders who have lived through regulatory scrutiny. “You really need people who know what they’re doing, who have lived in the role,” he says. Without experienced leadership, it is difficult for a risk function to be effective.

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It’s clear, then, that in Spielmann’s view, one of the primary reasons why small to medium-sized financial organizations are often underprepared to manage risk compliance is because they fail to invest in the right people, processes, and culture.

Risk management should not be viewed as a regulatory burden but as a strategic asset that can help protect the organization’s profitability and longterm success.

As Spielmann emphasizes: “It’s really shortsighted to not invest in a good risk function.” By taking proactive steps to improve their risk management practices, these institutions can avoid costly regulatory penalties and position themselves for sustainable growth.

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Exploring Emerging Risks in the Financial Industry Deniz has extensive experience in financial risk management, having held senior positions in a number of leading financial organizations.

Her expertise spans enterprise risk management, economics, scenario planning, compliance and governance, product management, data analytics, and AI/ML. Deniz has also taught Risk Management at MBA level in San Francisco. She holds a PhD from UCSD, a Master’s in Law (MSL) from Fordham University, and holds additional credentials from Harvard, MIT, and Yale.

In the ever-evolving landscape of finance, understanding and mitigating emerging risks is crucial for success. Chandrakant Maheshwari caught up with Deniz Tudor, to explore the challenges and opportunities that the rapidly changing landscape of emergent risk presents.Deniz heads the model development team, driving innovation across a diverse portfolio of advanced modelsand analytical tools.

What do you see as the most significant risks facing the financial industry over the next 3-5 years, and how should institutions prepare for them?

The financial industry is grappling with several significant risks, including cybersecurity, regulatory, and geopolitical threats. Cybersecurity breaches are on the rise, with increasingly sophisticated tactics employed by bad actors.

As AI becomes more integrated into systems, these threats will only escalate, compelling companies to invest heavily in robust cybersecurity measures.

Regulatory risk is another major concern, particularly with the evolving landscape of privacy and copyright issues stemming from AI usage. Finally, geopolitical tensions are unlikely to abate, adding another layer of uncertainty that institutions must navigate.

How can smaller institutions, which generally have fewer resources, effectively mitigate these cybersecurity threats?

Regardless of the size of the institution, there should be investments in IT and proper training to address cybersecurity threats. Proper training can go a long way in helping smaller institutions counter many phishing scams, for example.

With the rapid evolution of technology in finance, such as AI and blockchain, how do you think the traditional banking and finance landscape will change in the next decade?

I anticipate that AI, blockchain, and even quantum computing will significantly reshape banking and finance. These technologies will drive efficiencies and enhance productivity for firms willing to invest in them and upskill their workforce.

As competition intensifies, early adopters will emerge as clear winners, while others may struggle to keep up.

However, with the promise of these innovations comes the need for AI literacy and careful management of the associated risks.

What emerging regulatory challenges do you believe financial institutions should prioritize, and how can they best adapt to an increasingly stringent regulatory environment?

Financial institutions face a unique challenge due to the lack of uniform regulations across the globe.

It’s crucial for institutions to stay ahead of local rule-making while maintaining a global and ethical perspective. They cannot afford to wait for regulations to catch up with technological advancements.

Adopting a ‘do no harm’ ethos should be the guiding principle for compliance teams, especially regarding data privacy.

‘Do no harm’ refers to respecting human rights, the right to privacy, and addressing broader societal threats like misinformation and other systemic risks. AI can be a harmful tool in the hands of bad actors if not used properly.

In your experience, what role do you think collaboration between fintech startups and established financial institutions will play in shaping the future of finance?

Established financial institutions often find themselves constrained by regulatory concerns, while fintech startups are typically more agile and innovative. This dynamic presents an opportunity for collaboration that can benefit both parties.

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Startups may lack the capital for extensive projects, but they bring creativity and efficiency to the table. I foresee a trend of acquisitions over the next 5-10 years as traditional tech firms seek to capitalize on the innovative solutions emerging from the startup ecosystem, particularly in AI.

You mentioned that the partnership between fintechs and established financial institutions will be key. Can you suggest a successful example you have observed, so that readers may gain clarity?

There have been many acquisitions in the past where larger consulting companies have acquired smaller companies for their IT, platforms, etc. You can see similar acquisitions by consulting companies. I believe these trends will continue as more AI startups lead in innovation, while larger institutions that are usually slow to move internally realize the need to acquire these companies.

What trends or developments in the global economy do you believe will have the most profound impact on the financial sector in the near future, and why?

Geopolitical risks will continue to pose significant challenges, particularly concerning supply-chain disruptions. We are likely to see increased immigration from conflict zones, which will affect economies worldwide.

Additionally, the rapid pace of technological advancement raises concerns about income inequality. In an age dominated by AI, it’s essential that we promote AI literacy to ensure that no one is left behind.

The choices we make today will shape the societal trends of tomorrow, and AI has the potential to either bridge or widen the divide.

You have hit an important note in referencing growing inequality. What efforts do you think can be taken to tackle that in the present world?

The best way to deal with inequality is to upskill the existing workforce and educate the youth. I see many efforts in the corporate world to upskill the current workforce, but not enough effort in schools to educate the youth and prepare them for a changing world.

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5. Logistics and Shipping Providers:

Small businesses may partner with logistics and shipping companies to manage inventory, warehouse operations, order fulfillment, and shipping logistics for their products and services.

6. Legal and Compliance Services:

Small businesses may engage legal and compliance services to ensure regulatory compliance, draft contracts, handle intellectual property matters, and address legal issues that arise during business operations.

By partnering with these types of third-party providers, small businesses can streamline operations, tap into specialized expertise, and significantly improve their efficiency and effectiveness in their daily activities.

Navigating Third-Party Risk Management for Small Businesses: Challenges and Opportunities Roxane is the former Director, Third Party Risk Management at Voya Financial, having previously held similar roles at both InComm and SunTrust.

She has also worked for Deloitte & Touche and was a specialty markets consultant with MetLife. She is also the founder and CEO of Black Girl Drone World and is an FAA Certified drone pilot Have you ever considered the risks involved in starting a small business or are you already navigating the challenges of entrepreneurship?

In today’s business landscape, it is essential to recognize that third-party risk management is not solely a concern for large corporations; small businesses must also be vigilant in this area.

Third-party risk management refers to the process of identifying, assessing, and mitigating the risks associated with engaging external parties to safeguard operations and reputation.

These risks, such as compliance breaches, cyber threats, AI vulnerabilities, and geopolitical factors, are becoming ever more critical for small businesses that rely on third-party partnerships to support their dayto-day operations.

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However, for most small businesses, managing these services in-house is not only cost-prohibitive but also time-consuming, making these third-party relationships critical to their day-to-day operations.

Small businesses may not be fully considering the risks associated with outsourcing services to third-party partners due to factors such as cost savings, limited resources, and time constraints.

While outsourcing can provide numerous benefits, including increased efficiency and access to specialized expertise, overlooking potential risks can have significant consequences for customers.

For example, if a small business fails to properly vet an IT service provider and experiences a data breach due to inadequate cybersecurity measures, customer data may be compromised, leading to trust and reputation damage.

1. IT Service Providers:

Similarly, if a marketing agency engages in unethical practices on behalf of a small business, customers may be misled or alienated, impacting brand perception and loyalty. It is essential for small businesses to carefully assess and manage the risks associated with outsourcing to protect their customers and overall business success.

2. Accounting and Bookkeeping Services:

Maintaining a strong reputation is paramount for small businesses, as any misstep by a third party can tarnish their image. Compliance risks pose a significant threat, requiring small businesses to ensure that all third-party partners adhere to relevant regulations and standards.

Some common types of third parties that small businesses may need to leverage include:

Small businesses may partner with IT service providers for technical support, network maintenance, cybersecurity services, and software implementation.

Outsourcing accounting and bookkeeping tasks to third-party professionals can help small businesses manage finances, taxes, payroll, and reporting requirements efficiently.

3. Marketing and Advertising Agencies:

Small businesses often collaborate with marketing and advertising agencies to develop and execute marketing strategies, social media campaigns, and advertising initiatives to reach their target audience.

4. Payment Processors:

Third-party payment processors facilitate online transactions, credit card payments, and electronic fund transfers, enabling small businesses to accept various payment methods securely and efficiently.

Cyber threats, such as data breaches and hacking attempts, can have devastating effects on small businesses. Implementing robust cybersecurity measures and monitoring third-party access is crucial to mitigate these risks.

The rise of AI introduces new vulnerabilities, including algorithm bias and data privacy concerns. Small businesses leveraging AI must prioritize security and ethical considerations to avoid potential legal and reputational consequences.

the United States, they can access various benefits, including cost savings, access to specialized skills, expanded market reach, and potentially quicker turnaround times.

Offshore providers often offer services at lower rates than domestic providers, allowing small businesses to reduce operational costs and allocate resources more efficiently.

Additionally, outsourcing to international providers can provide access to a diverse talent pool with specialized skills and expertise that may not be readily available locally.

By leveraging offshore providers, small businesses can also expand their market reach and cater to a global customer base. Furthermore, working with providers in different time zones can enable around-the-clock support and faster project completion times.

However, there are also challenges associated with using third-party service providers outside the United States. One of the main challenges is the risk of communication barriers due to differences in language, culture, and time zones.

Miscommunication can lead to misunderstandings, delays, and errors in project execution. Additionally, legal and regulatory differences between countries can pose challenges in terms of compliance with international laws and standards.

Issues related to data security and privacy may also arise when sharing sensitive information with offshore providers, raising concerns about confidentiality and data protection. Finally, geopolitical risks, such as political instability or changes in trade policies, can impact the stability and continuity of services provided by offshore partners.

Overall, while leveraging third-party service providers outside of the United States can offer significant benefits for small businesses, it is essential to carefully evaluate and address the associated challenges to ensure successful outcomes and mitigate potential risks.

It is critical for small businesses to prioritize thirdparty risk management to safeguard their operations and reputation, especially as these relationships are vital for maintaining smooth day-to-day operations.

With the support of industry experts, consultants, and specialized software solutions, small enterprises can effectively navigate reputation, compliance, cyber, AI, and geopolitical risks.

By actively engaging with these resources and implementing proactive measures to address potential risks, small businesses can not only protect their interests and enhance their reputation but also establish a solid foundation for long-term success in the dynamic and interconnected business landscape of today.

Geopolitical risks, such as trade disputes and regulatory changes, can impact small businesses’ operations and supply chains. When small businesses opt to use third-party service providers outside of

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Sustainable Finance: Overcoming Challenges and Embracing Collaboration Alessia Falsarone is the former Partner and Head of Sustainable Investing, Strategy & Risk Oversight at PineBridge Investments in New York. She holds a number of independent directorships and advisory roles, and serves as a member of CeFPro’s Advisory Board.

In the rapidly evolving world of sustainable finance, the landscape presents both significant challenges and promising opportunities for organizations seeking to achieve their environmental, social, and governance (ESG) goals.

Alessia Falsarone, former Partner and Head of Sustainable Investing, Strategy & Risk Oversight at PineBridge Investments in New York, provides an in-depth look into the complex challenges facing companies and industries as they strive to align with a 1.5-degree global warming target and meet their 2030 climate objectives.

The Complex Road to Sustainability “Let me just start by saying that a growing number of companies are publicly acknowledging that these challenges—whether financial, organizational, sectorspecific, or regulatory compliance-related—are not just roadblocks but tangible hurdles standing in the way of progress,” says Falsarone, These obstacles are not trivial; they are deeply rooted in the very fabric of industries such as energy, transportation, and heavy manufacturing, where reversing entrenched practices proves difficult.

In the energy sector, for instance, Falsarone points out that “companies are under immense pressure as they transition away from fossil fuels.”

The shift requires building new infrastructure, ramping up renewable energy sources, and phasing out outdated, polluting power plants. “But it’s not happening fast enough,” she notes, citing macroeconomic factors, labor shortages, and steep global competition.

These issues, along with persistent policy barriers favoring fossil fuels, make the transition far more sluggish than anticipated.

For the transportation sector, the challenge is similarly daunting. “Electric vehicles (EVs) still represent a tiny fraction of cars on the road,” Falsarone explains, highlighting that less than 8% of new car registrations in the U.S. in the first quarter of 2023 were EVs. The figure is even smaller—less than 1%—for all registered vehicles across the U.S. “The shift to EVs requires a complete overhaul of manufacturing processes, not to mention persuading consumers to make the switch,” says Falsarone.

The inherent complexity of transforming these sectors demonstrates the difficulty of achieving meaningful progress toward climate targets. “It’s easy to create climate targets, but actually creating achievable, realistic targets is a complex process,” Falsarone asserts.

The Importance of Implementation While setting ambitious climate goals is crucial, it is only the beginning of the journey. “Setting robust climate targets is a complex process, and even early movers in the space are refining their approaches,” Falsarone states.

She emphasizes the growing trend of companies moving toward science-based targets, which aim to align businesses with a 1.5-degree future. As of June 2023, the Science Based Targets initiative had validated the targets of 5,500 companies globally, demonstrating the increasing focus on credible and measurable goals.

However, Falsarone stresses that “the hard work begins with implementation.” This phase, where companies must develop credible roadmaps to meet their targets, is where many organizations face the most costly and complex challenges.

“It’s not just about setting ambitious targets,” warns Falsorone,”but about building practical strategies and organizational capabilities to deliver them consistently.”

She adds, “No company can solve this alone. The complexity is real, and that’s why collaboration is emerging as a key plan B.” Companies are increasingly working together, sharing best practices, investing in joint solutions, and advocating for stronger climate policies.

Additionally, the complex supply chains often associated with climate tech present another layer of risk. “Given the global nature of many climate technology partnerships, understanding varying regulatory landscapes is crucial,” she explains.

This is especially important in hardware-focused innovations, where dependencies on critical materials and suppliers can create vulnerabilities.

Collaboration, alongside building partnerships with startups, researchers, and other key players, is vital to overcoming the multifaceted hurdles of climate action.

Moreover, emerging risks related to artificial intelligence (AI) are coming into play. “The growing use of AI in climate tech brings new regulatory considerations,” Falsarone points out, highlighting the EU’s AI Act, which emphasizes transparency, risk management, and human oversight for high-risk AI systems.

Climate Finance and Emerging Solutions

As AI becomes more prevalent in climate tech, due diligence processes must evolve to incorporate assessments of AI’s ethical and regulatory implications.

Finance plays a pivotal role in supporting companies through the low-carbon transition, and climatefocused funds are growing at a rapid pace.

Looking ahead, Falsarone anticipates that “data privacy and security risks will emerge quickly” in climate tech, especially as it involves sensitive geospatial data such as energy usage patterns and carbon emission information.

“We’re seeing a surge in private funds dedicated to climate technology, from venture capital to impact investing and private equity funds,” Falsarone explains.

These funds back innovators in advanced renewables, carbon capture technologies, and more, providing the financial lifeblood for the transition to a sustainable future.

Governments are also stepping up. The UK, for example, has committed over £20 billion over the next 25 years to carbon capture and storage projects. Falsarone sees this as a positive step, noting that “the first two regional cluster projects could mitigate around 16% of the UK’s CO2 emissions.”

However, the road is not without its challenges. “There’s ongoing concern about greenwashing in the climate finance market,” Falsarone warns. “The need for clearer standards continues, especially in areas like carbon credit markets, where issues of integrity and additionality are still being addressed.”

These markets have faced criticism over concerns about the actual impact of carbon offsets, emphasizing the importance of transparency and robust standards in driving true emissions reductions.

The Role of Due Diligence in Climate Tech FAs companies partner with innovators in climate technology, due diligence becomes even more critical.

“Climate tech does bring up unique considerations,” says Falsarone.

She notes that companies must not only assess current technological capabilities but also understand

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the potential for scaling these technologies within their organizations and across markets.

Ensuring that partners have robust data protection measures in place is essential for managing these risks.

A Path Forward for Financial Institutions Despite the complexities, financial institutions have a crucial role to play in advancing sustainable finance.

Falsarone emphasizes the importance of collaboration, transparency, and innovation in overcoming the challenges.

“Investors and financial institutions are increasingly focused on building the practical strategies and organizational capabilities needed to deliver on climate goals,” she says.

As the sustainable finance landscape continues to evolve, Falsarone underscores the need for companies to stay agile and informed: “With the right approach, AI, finance, and technology can be powerful tools in the climate tech arsenal,” But she also warns that the journey will require ongoing learning and adaptation. “Every day is a learning day.”

The road to sustainability is long and complex, but with the right tools, strategies, and collaborative efforts, companies and financial institutions can make meaningful strides toward a low-carbon future.

The financial services sector, in particular, holds the key to unlocking the potential of sustainable finance, driving innovation, and fostering a more resilient and sustainable global economy.

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