20211117 To add speed, add lightness: applying engineering principles to financial crime risk and compliance.

Listen to this blog at Financial Crime Broadcasting


Let’s start with a statement that will upset the bubble people who pay attention only to those of like mind and will be applauded by those who truly understand the issue of financial crime risk and compliance both from the point of view of practitioners and in legislatures and regulators.

The reason that financial crime risk and compliance doesn’t work effectively is that it’s over-complicated and flabby. It is, in every sense of the term, ″not fit for purpose.″ There is, quite simply, just too much, too much detail and too much that is is counter-productive and counter-intuitative.

It’s a battle of philosophies. And it helps to consider our subject from the perspective of another discipline. We’re not looking at the management fad of ″fast fail″ but at the enduring legacy of a man who created fast cars.

There are many versions of a quotation from Colin Chapman, the founder and visionary genius who founded Lotus Cars and, if we are honest, modern Formula One.

One is the kind of thing you might see on a t-shirt: ″simplify; add lightness.″ I’m not convinced that this is not someone else’s paraphrasing.

The version that most Lotus insiders of the day say he actually said is ″to add speed, add lightness.″

In the world of financial crime risk and compliance, both versions make sense. They both have a part to play.

Speed is a product of efficiency: power efficiency, aerodynamic efficiency and mechanical grip efficiency. It is difficult to have efficiency without simplicity for the simple reason that every part brings with it weight, friction and other efficiency sapping characteristics. Moreover, complexity creates more opportunity for failure. That’s why racing teams spend extraordinary amounts of money trying to find ways to prevent failure when, it might be argued, the best solution is to remove the complexity.

In financial crime risk and compliance, we are not specifically looking for speed as the final objective. We are looking for the correct result with the least possible time and financial cost and with the least possible opportunity for error. In short, we are looking for efficiency.

So, in our context, in the Chapman quotation, we can take ″speed″ as a synonym for ″efficiency.″ If we want to be efficient, we must ″add lightness.″

That is exactly what supra-national, national and industry bodies do not do. They keep adding weight and they keep adding complexity.

There are three principle aspects to making a fast, safe, car.

The first is the power to weight ratio. In a racing car, every kilo can cost several tenths of a second per lap, depending on the circuit. In a recent F1 session, the first twelve cars had fastest laps within a total spread of 0.8 seconds. Thousandths matter, tenths are an age.

At the end of the race, at least 2KG of fuel must remain in the car. It needs that for compliance purposes. Seriously: if you think compliance in a bank is complicated, you should try compliance in a racing team, even at junior club level. When my son raced go karts, the rule book was hundreds of pages long, most of which didn’t apply to his class but you had to read it to find out which rules did and did not apply. We’ll get back to those rules a little bit later because they have an important lesson for us.

The power to weight ratio drives almost every decision of racing car design: from wafer-thin drivers’ boots to saving a few grammes in the design of gloves. In a recent F1 season, several drivers lost so much weight they were ill.

Nuts and bolts are made from ultra-lightweight materials so as to save, on a MotoGP bike for example, as much as 3KG relative to the normal steel components on a road-going bike.

Simply, more power and less weight equals fast. But it only equals fast in a straight line. Chapman more or less said that, too. Rats: I thought I was being original when I wrote it but on further research discovered something similar attributed to the Great Innovator.

From a financial crime perspective, this applies to the policies and procedures, the laws and regulations. The more complex they are, the harder it is to make them work efficiently.

And the more weight they add to an already burdened risk and compliance system.

The second thing that matters is traction or ″grip.″ No matter what is happening in the car, the most important thing – above everything else – is grip and grip comes from one thing: it’s called the ″contact patch″ and it’s, literally, where the rubber meets the road and that’s all about tyres.

Tyres work because of friction. If there is no friction, the car doesn’t move. Or, more terrifyingly, if it already moving, it doesn’t stop or change direction. The efficiency of the tyres depends on many things and most of them really cannot be simplified because the way the tyres sit on the road and the level of grip depends on so many variable factors.

In the world of financial crime risk and compliance, this is where we would find Know Your Customer and all its related sub-topics. Just as a complex suspension, chassis and wheels arrangement that works one day probably won’t work the next, in KYC we are constantly struggling with things that change even though at first sight, they appear to be the same.

Whoever said ″the only constant is change″ could have been speaking about racing car setup or KYC.

That brings us to the third thing: aerodynamics. You have no doubt often heard people say that the aerodynamics of a Formula One car are such that it could be driven on the ceiling.

Aerodynamics is complicated. There is absolutely nothing that can be done to simplify its principles but there is a lot that is done to make its use more complicated.

For example, in a Formula One car, the ″aero″ is used to increase downforce which means, ironically, to make the car behave as if it is heavier the faster it goes. It pushes the tyres hard onto the tarmac and that increases grip.

Yet, it’s not all about grip: aero is also about safety. A racing car literally makes a hole in the air and it’s how that air is channelled around the car that puts it over the wings that push the car down, which is why it’s called ″downforce.″

Not all the air goes over the car: some goes under the car and, for all kinds of reasons, it churns about and it slows down. As more air rushes in, it hits the slow-moving, swirling air that acts like a dam and the newly arrived air creates a force that physically raises the front of the car off the ground. It’s has been seen on far more occasions than it should have been, the car can flip over as the nose rises so far that, just as if you put your hand out of a car window at speed, the front of the car is pushed back like a sail. If the air were a fluid, and some people argue that it is, we could almost consider this to be a hydraulic effect.

This is not the same as ″lift″ which is the enemy of racing cars. Lift is the opposite of downforce and is caused by the air pressure above the wing being less than the air pressure beneath it, which is the opposite of aeroplane design. Car designers design the aero to exclude lift.

Aero is used to break up the air as the car hits it so that only a tiny proportion goes under the car and that proportion is channelled in ways that prevent it being caught in a bottleneck and creating an obstruction.

So, the car needs aerodynamics because it improves its safety and, by way of contradiction, it adds effective weight – but only at critical times.

In financial crime risk and compliance, we get a surfeit of information and all too often it’s both in the wrong place and it’s unstructured, just like the air that would gather under the car without a properly designed front wing.

Our version of aerodynamics is policies and procedures, law and regulation and, of course, training so that information is collected where it should be and sent by the most efficient route to the place where it is needed.

Earlier, I mentioned the UK’s Motor Sports Association Rules. They are very different from the rules in Formula One which are set by the Fédération Internationale de l’Automobile or FIA. We’ll look at that next.

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The ethos of the two sets of rules produced by different governing bodies accurately defines part of the problem that financial crime risk and compliance practitioners face.

The FIA says, although not in exactly these words, ″here are the rules: you must comply with them. If we don’t ban something, you can do it but you carry the risk that we might ban it later and, in some cases, we might ban it retrospectively.″ Colin Chapman was often a victim of this: his inventions and innovations were often referred to the FIA by competing teams – and the FIA often banned his innovations until one of the other teams came up with something similar.

The UK’s Motor Sports Association rules take the opposite view: it amounts to ″If the rules don’t say you can do it, you can’t do it.″

These two approaches define the contradictions felt in every regulated business.

The contradictions arise both internally and externally.

Internally, Risk and Compliance teams want certainty but other departments, such as sales, want flexibility. Compliance says ″no″ but sales goes to the board, says ″we might earn a lot of money if we do this even though it’s risky.″

All too often, the board, mindful of their own remuneration and the obligation to shareholders to maximise value, say ″go ahead and do it.″

And yet, both sides want the same thing: they want efficiency, they want clarity, they want business to flow smoothly and they want the best result possible for the least expenditure of time and energy.

In short, they want to drive a Lotus Type 72, which, due to Chapman’s design strategy and foresight, dominated the fast-changing world of Formula One for five years without significant modification. They want to get the systems right, to simplify everything to the point where it works efficiently and reliably.

They don’t want a complex, highly computerised, car that they have to read a 100 page manual before they turn the key and then they can’t make do what they want it to do when they want it to do it.

And they really, really, really want the rules and regulations to be stable, not to be changing, in terms of principle or priorities, on short cycles.

Externally, those who specify laws, rules, regulations and policies seem to have little or no understanding of that. They adopt a set of rules that falls between the FIA and the MSA. The general approach is ″do this. But you have freedom to do that. Until we say otherwise. And if we say otherwise, we’ll apply penalties as if that had always been the case.″ Businesses operate in a straight-jacket but with their legs free. It’s a ridiculous combination.

What have we learned?

The pinnacle of motorsport is simply an example of a chase for perfection – and that is what risk and compliance officers are desperately trying to achieve.

No one ever does.

No one ever can.

But they need to be given a fair go and supranational bodies, legislators, regulators and all policy setters aren’t letting them do that.

The ordinary business that has to comply with financial crime laws has been set up to fail. It cannot be expected to have all the technologies that are foisted on it; it cannot be expected to keep up with all the changes in laws and regulations and in priorities especially when it operates in an international environment or in a field where the laws of other countries operate on its business due to extra-territoriality.

Nor, frankly, can banks. Not even the big ones.

Chapman’s ethos is the ethos that all those who push ever more complex, ever more expensive and ever more technical obligations onto businesses should learn. We need simpler laws, regulations and, of course, far, far simpler so-called Guidance Notes. How else can we design systems that are efficient and, therefore, give us the equivalent of the speed that is, after all, the point of being in business.

If those policymakers don’t want to listen to a visionary who changed the world with an oily rag and a ball-point pen, they might prefer to listen to French writer Antoine de Saint-Exupéry (1900-1944) who lived a short life of privilege and fun punctuated by the horrors of war, himself being shot down whilst on a reconnaissance mission.

He said “Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away.”

Thank you for listening. I’ll talk to you next time.

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