By Vishal Ranjane, Managing Director
Risk and Compliance
Financial organizations have long embraced the advantages that information technology offers, and many are looking forward to larger digitalization initiatives to gain market advantage. Customers appreciate the convenience of digital offerings, while firms enjoy the reduction in operating costs that information technology enables. Of course, in the multifaceted, highly regulated environment in which financial institutions operate, mastering the complexity of this digital future is both rewarding and risky.
In any financial firm’s application landscape, data flows from system to system. In an ideal world, key data gathered at the front end (customer-facing systems) makes it to the back-end systems without hitches. In reality, in the application architecture of almost any financial institution, systems are sometimes imperfectly integrated, often as a result of multiple acquisitions, and data does not always make the journey from system to system without some amount of attrition or change. However, banks and other financial institutions that handle customer data must be able to demonstrate that the information which originates upstream, in customer-facing systems, is the same information found in the bank’s risk and compliance systems downstream. This is where data lineage becomes important.
Data lineage tells the complete story of how data within an organization was produced, consumed, and manipulated by the organization’s applications. It traces the data’s movement through systems.
Once, it was sufficient to demonstrate to regulators that the right policies were in place, that the right procedures were followed, and the right reports were generated and reviewed to protect against threats like fraud and money laundering. Now, financial institutions must be able to demonstrate to regulators that they are using complete and accurate data to monitor for these activities.
Asserting data legitimacy
An organization asserts de facto data legitimacy when it relies on the integrity of its data for key reporting or decision-making activities, such as those involved with risk and compliance solutions. It is imperative that data from upstream systems of record or points of capture arrives in these downstream risk and compliance systems in a manner that does not materially alter or obscure the content received from the system of record or point of capture.
De facto data legitimacy claims is an area of focus for regulatory authorities who require that these claims be documented and proven. The recent Part 504 regulation by the State of New York Department of Financial Services emphasizes the importance of data lineage in an AML context, stating that a covered institution must not only identify all data sources that contain data relevant to its transaction monitoring and watchlist filtering programs, but also must ensure that these programs include the validation of the integrity, accuracy, and quality of the data to ensure that an accurate and complete set of data flows into these programs. In addition, the regulation specifically notes data mapping as a key component of end-to-end pre- and post-implementation testing of transaction monitoring and watchlist filtering programs.
Going back to the firm’s application landscape, upstream data – data entered initially by the customer, for example – may not survive the journey downstream, and facts about the transaction may be lost with each hop from system to system. Can an auditor know if a particular transaction was made with a teller, a wire, or via an ATM, for example? Was a deposit made by check or cash?
Data lineage documentation can be done using a variety of tools ranging from simple to sophisticated. In smaller, less complex systems, simple spreadsheets and diagramming tools may suffice, while large financial institutions may deploy vendor toolsets to automate tedious and error-prone capture and documentation activities.
Data lineage as part of data governance
Establishing the data lineage should, of course, be more than just an exercise in documenting what’s already in place. Performing this level of analysis and uncovering previously unknown silent errors or gaps in the data being used to manage AML risks and generate reports should lead to increased accuracy and confidence in the reports and management information presented to senior management, internal audit and regulators. An additional benefit is getting better insights into customer behavior – a value for any business.
Having a sustainable data lineage initiative is only the start. To be sustainable over the long run, such initiative needs to be part of a larger data governance program that is firm-wide and involves all departments and functions. Data governance efforts are viewed well by regulators, who increasingly put pressure on financial institutions to formally document business processes, data controls, source-to-target mapping, and defend all activities around data management. A Protiviti white paper, “AML and Data Governance: How Well Do You KYD?,” provides more information and may be of relevance to your company.
Benjamin Kelly of Protiviti’s Regulatory Risk and Compliance practice contributed to this content.