Anti-money laundering (AML) is a phrase that may not be top-of-mind for every executive, but keeping an organization up-to-speed with compliance and AML trends continues to be a central part of sound business management.
It’s also a huge challenge.
AML regulations are intricate and constantly changing. Keeping in line with evolving regulations drains resources and falling out of step with them risks incurring stringent penalties.
Banks in North America have borne the brunt of a global crackdown on inadequate AML practices since the 2008 crisis with its financial institutions (FIs) paying out almost $37 billion in fines. USAA bank alone paid $140 million in 2022 as global AML penalties surged 50%.
USAA vowed to “get its house in order” following the punishment, but for businesses who have never stepped out of line, turbulent headwinds in the AML sector may make keeping their house in order tough enough.
As financial crime gets smarter thanks to disruptive new machine learning and artificial intelligence (AI) technologies, law enforcement is also upping its game with fast-paced regulatory changes.
A 2022 AML trends survey from compliance experts Alessa shows that financial and fintech institutions are fully aware of this dual demand: 86% of organizations said that they considered money laundering to be a “high-risk area”, with over half believing heightened regulations to be their biggest AML challenge.
Yet, like with any business endeavor, sound AML compliance comes from an in-depth knowledge of the landscape surrounding it.
Only by keeping on top of AML trends that affect the financial services industry can businesses mitigate risks in the face of evolving financial crime challenges.
In this context, let’s delve into the prominent AML trends 2023 has brought us so far, providing insights for organizations to ensure robust AML compliance throughout the next financial year.
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The 8 AML industry trends executives should be aware of in 2023
1. Regulatory changes dominate AML agendas
Organizations see regulatory expectations as a predicament for a reason: AML legislation is evolving almost as quickly as the technology it seeks to regulate.
The past year has seen major changes to regulatory frameworks in the United States and Europe in terms of beneficial owners. In September 2022, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) announced the "Final Rule" requiring individuals and foreign organizations to report accurate beneficiary information. This combats illegal financial activities ranging from fraud to terrorist financing and takes effect on January 1, 2024.
Elsewhere in North America, the Canadian government has moved to align its legislation with international recommendations, including regulating all mortgage lenders and increasing penalties for illicit cross-border transactions.
Switzerland, one of Europe’s leading financial centers, also amended its Anti-Money Laundering Law for beneficial ownership (BO) requirements effective from January 1, 2023, as well as increased demand for regular updating of customer data and the submission of Suspicious Activity reports (SARs).
The pace of regulatory change is unlikely to slow.
In the US, the 2022 National Illicit Finance Strategy to combat the financing of terrorism (CFT), as well as fraudulent activity, is already in full flow, backed up by an Executive Order that will force FIs to toe the line. Other nations may follow the US’s lead.
2. Automated transaction monitoring and screening is more crucial than ever
Tougher regulations will push businesses to upgrade how they keep tabs on customer activity – transaction monitoring is at the forefront of this evolution.
Most financial firms already monitor transactions to flag unusual patterns or suspicious transactions, then screen the relevant customer information against various criminal watchlists or databases.
Automated detection software, however, allows companies to input custom rules that flag unusual activity in real time. Compliance team members get a smaller, more specific list of actions to investigate, which they can then choose to alert law enforcement agencies to.
Automated monitoring improves the accuracy of fraud detection and saves compliance teams time and money by only focusing on dangerous alerts. It’s also contributing to a boom in the transaction monitoring industry, which is set to hit $42.52 billion in 2029, according to market research from Data Bridge, a market intelligence and consulting firm.
3. Companies are fortifying their AML defenses via sharing
“Sharing is caring” goes the maxim, but financial entities are finding that it also brings a whole host of benefits in the tough AML landscape of 2023.
By pooling together resources, firms can foster a collaborative culture that makes it harder for criminals to perpetrate schemes. They can also speed up fraud detection and investigations by adopting external practices used by others within the data-sharing ecosystem.
The UK has one of the leading initiatives in this area. Its Joint Money Laundering Intelligence Task Force (JMLIT) comprises over 40 private sector institutions that work together with the government to exchange and analyze money laundering and economic threats. The task force also plans to use algorithms to generate “synthetic data” to streamline the process.
In the US, the Anti-Money Laundering Act 2020 attempted to follow suit by announcing new requirements for US financial institutions and authorities to develop “appropriate frameworks for information sharing”.
4. Crypto adoption is an “emerging AML risk”
Cryptocurrencies have received a lot of bad press recently and with good reason.
The collapse of crypto exchange FTX liquidated up to $2 billion-worth of assets, while cryptocurrency scams increased by 37% in 2022, according to investigative outlet Privacy Affairs.
Unsurprisingly, jurisdictions around the world are strengthening their regulatory frameworks to mitigate money laundering risks surrounding digital currencies. The US and the EU have both pledged to enhance their regulations in 2023 with plans to expand the “Travel Rule” and monitor the activity of virtual asset service providers (VASPs).
Yet, the crackdown on virtual currencies may turn out to be a boon for FIs. Better cybersecurity standards and fewer fraud-related losses will instill badly needed market confidence in the crypto arena. Businesses that can handle it smartly will find that they position themselves for success in a market with huge potential.
As Shane Bauer, First Vice President at Bankers’ Bank told Alessa’s 2022 AML Trends Report, “Cryptocurrency is in its infancy, and its impact on financial services right now is minimal, but that will change. It's just too good of a rail and too suited to certain uses, not all of which involve crime."
5. AI and Machine Learning are reshaping AML security
Amid all the skepticism surrounding AI, there’s no denying that the technology has a huge range of uses, including in the AML sector.
Surging payment volumes and more complex financial crimes are pushing organizations to upgrade outdated systems and labor-intensive processes in favor of Regulatory Technology (RegTech) compliance programs powered by advanced technologies.
AI-driven AML solutions that include biometric smart identification, NLP-powered screening, and intricate network graphs that uncover criminal systems will be at the forefront of this transformation.
Machine learning, meanwhile, will detect anomalous behavior linked to financial crime and reduce false positives by improving the accuracy of risk-based assessments.
The multiple benefits AI-powered solutions will bring on top of enhanced security, including cost, time, and labor savings, means that its full adoption may come quicker than many financial leaders expect.
6. RegTech companies and regulators are forming a symbiotic alliance
Since 2008, the rise of RegTech has gone hand-in-hand with the growth of digital finance as regulators have raced to contain the risks associated with new fintech technologies. KPMG foresees an almost three-fold increase in the value of the global RegTech market between 2022 and 2027 as a result.
This heightened demand for regulatory assistance calls for a tighter relationship between regulators and RegTech providers. The benefits of this will include more adaptable regulations as RegTech firms enable financial regimes to adjust rules according to emerging risk and market trends.
It will also lead to a more clear communication channel between fintech businesses and regulators, reducing penalties and ultimately leading to a safer financial system.
RegTech is set to be a central feature of global AML efforts over the next decade and has earned the right for close collaboration with regulators. Expect to see more RegTech solutions emerging to address evolving financial risks sooner rather than later.
7. KYC and CDD are becoming more customer-friendly
According to the aforementioned Alessa survey, Know Your Customer (KYC) spending is second only to Transaction Monitoring when it comes to AML investment.
A key tenet of this is working to prevent customers from abandoning the onboarding process before completion thanks to tricky and time-consuming procedures – an issue that affects 96% of FIs, according to security research firm OneID.
Since the pandemic, financial firms have used advanced technology to slash the time it takes to carry out Customer Due Diligence (CDD) checks. More specifically, this includes smart customer profiling which requires only basic information from low-risk customers, biometric verification, and AI-powered screening. All contribute to a lower onboarding time and a boost in customer satisfaction.
Striking a balance between regulatory compliance and customer experience continues to be a key management concern, but smart tools are helping FIs win the battle.
8. Compliance-as-a-partner solutions are helping companies avoid sanctions
Collaboration in compliance is proving to be a handy tactic for FIs as they seek to make use of external expertise integrated into their AML framework while keeping costs down.
The source of this expertise comes from outside entities in a relationship termed ‘Compliance as a partner’ and these include AML tech providers, RegTech companies, and banking platforms.
All have one aim in common: to enhance the efficiency of the FI’s AML system.
This risk-based approach holds numerous benefits for financial entities: they get to source streamlined processes and tech tools developed by their partners who specialize in meeting AML requirements. This means quicker detection and prevention of crime and a drastic reduction in error-making.
Compliance as a partner can take the form of a dedicated service or be part of a holistic package along with banking and payment services. Either way, it gives the partners a chance to create cross-functional teams and combine their know-how to ensure compliance is as robust as possible.
The future of AML compliance and what it means for financial institutions.
A cursory glance at the above trends tells us that advanced technology and collaboration are common themes in AML compliance in 2023, and this is set to continue over the next decade.
The executive team at management consulting firm McKinsey shared their vision of what this will look like in a recent interview summarizing the latest AML trends and how FIs can adapt to them.
Senior advisor Mariliu Jimenez urged leaders to focus on breakthrough technologies. “Compliance officers have to focus on innovation. What’s out there? What can and can’t help us do our jobs better? Organizations need to embrace technology and be on the lookout for what’s next.”
Associate Partner Scott Werner, meanwhile, stressed the importance of cooperation.
“We are seeing productive collaboration among regulators, law enforcement, and financial institutions, with new risks in the geopolitical and digital-assets space accelerating constructive dialogue between these parties.”
Expert insights like these, guided by the latest trends, underpin the transformative path that AML compliance is taking.
As we experience turbulent times in the world of digital security, a forward-looking, collaborative approach isn’t just about meeting regulatory requirements, but helping financial organizations survive evolving risks.
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