ACFCS Special Contributor Report: AML & FinCrime Compliance – Top 5 Trends to Watch in 2023, from corporates adopting AML-lite to crypto crime, oversight and more

By Sujata Dasgupta
Global Head of Financial Crime Compliance Advisory
Tata Consultancy Services Ltd.
Dec 22, 2022

With editing by ACFCS VP of Content, Brian Monroe

Introduction

Looking back, 2022 ushered in great relief from COVID-19, and life – and economies – started returning to normal.

But soon enough, unprecedented turmoil erupted in terms of geopolitical conflicts and economic downturns. It brought to light the disastrous impacts of dirty money moving through the world’s financial centers and a spate of sanctions followed.

It also exposed how illicit money had pervaded other industries like real estate, luxury goods (yachts, private jets) and others.

As in years past, the rising pressure for financial crime professionals – whether they are in anti-money laundering, fraud, sanctions or cybersecurity – didn’t dissipate in 2022 and is unlikely to wane in 2023.

The reasons are manifold: Sanctions designations and related regional and global risks continue to soar. One compliance technology firm tabulated that the Iron Curtain is now the most sanctioned region on the planet.

As well, crypto criminals will still use virtual value to monetize cyber-enabled frauds, a trend that has generated an entirely new cottage industry: blockchain analytics firms and regulators and investigators will continue to uncover massive laundering portals and grand corruption.

Want a preview of next year: Just look at a very draconian December and the multibillion penalty against Danske Bank as being the epicenter of the Nordic and Baltic banking scandals that moved hundreds of billions of dollars tied to risky groups and regions, including Russia, and the graft penalty against ABB at nearly half a billion dollars.  

This year further witnessed new lows in political corruption, with leaders in the highest offices being charged.

And while the crypto winter prevailed almost this whole year, criminals devised innovative means to commit crypto crimes, with several shockers the industry is still reeling from!

As crimes of such utmost gravity continue to plague the global financial landscape, here are some emerging trends for 2023 that I believe will shape the future of fincrime risk controls.

1. FinCrime Compliance to Extend to Industries Beyond Financial Services

Financial services is among the most highly regulated industries, specifically in the areas of crimes like money laundering, sanctions evasion, bribery and corruption and tax evasion to name just a few.

Regulators across jurisdictions are tightening controls in an attempt to make it more difficult for criminals to find weak links in the strong defense mechanisms of the financial sector.

This has resulted in the use of other industries for directing the flow of dirty money, e.g. real estate, luxury goods, art and antiquities dealers, sports, precious metals, gems and jewelry, casinos and gambling and so on.

With increasing awareness of such vulnerabilities, we are already seeing regulators mandating KYC-AML reporting for non-financial industry participants like jewelers and art traders, above certain transaction thresholds.

The U.S., EU, UAE and India are among the pioneers in this space. The telecom industry has also adopted KYC and customer identification programs to better prevent frauds, as most digital payments are now done through mobile phones.

Fincrime risk assessments for a variety of potential crimes – including fraud, money laundering, corruption and others – and a broader adoption of the above-described controls are expected to extend to other non-financial industries, especially those dealing in high value goods and supply chain.

2. SWIFT Migration to ISO20022 Will Drive Enhanced, Targeted Screening

SWIFT’s migration to the ISO20022 payment standard in the areas of cross-border payments and reporting will become operational starting in March 2023.

With this shift, the new payment messages (MX) will have richer and more structured data than the current MT formats. The MX fields have been designed to capture granular details of information required to match against Sanctions Lists that will make screening more effective and efficient.

Most FIs are currently facing challenges with payments screening match accuracy, resulting in a deluge of false alerts while carrying a risk of missing true alerts.

So as SWIFT migrates to the new standard, FIs will look to enhance their screening systems and matching rules by adopting targeted screening of cross border payments leveraging the new, richer data structure of the MX messages.

3. Instant Payments Will Need Instant Monitoring

Domestic payments in several countries are now instant and 24/7, with the beneficiary account credited within a few seconds or minutes of the originator’s account being debited.

IMPS in India, Faster Payments in UK and Osko in Australia are some such examples.

But now, even cross-border payments are going instant – SEPA in EU had laid the foundation in 2017 (for instant Euro payments within EU countries), and several other countries have been developing payment rails to enable instant cross-border payments.

Speed of payments is a crucial factor exploited by criminals and that is the reason real-time screening and fraud detection systems have already been implemented by most FIs.

The industry is now looking at shifting money laundering checks from post-facto periodic monitoring to create reports for law enforcement to a real-time mode to identify criminal links where payments are completed in a few seconds or minutes.

Customer experience needs to be balanced too, so achieving the highest level of accuracy and reducing false alert levels in real-time transaction monitoring will be among the priorities of artificial intelligence-based smart AML solutions in 2023.

4. Adoption of Data & AI Solutions for Fincrime Compliance Will Grow

Many large financial institutions still struggle with inefficient legacy systems, fragmented data and overly manual processes in managing financial crime risk and compliance functions across the spectrum of countercrime duties: prevention, detection, investigation, reporting and remediation.

With the growing complexity of crimes, higher volume and velocity of payments and increasing regulatory obligations, the challenges are getting compounded.

Regulators are now supporting the use of advanced technology, which has led to a rapid growth of RegTech solutions to improve effectiveness and efficiency. Their implementation by FIs has been in relatively small pockets so far though.

The coming years will witness enterprise level implementation of data-driven, AI powered solutions, including:

• Biometric-based smart identification, verification and authentication
• natural language processing (NLP)-powered contextual screening and adverse media checks
• network graphs for criminal linkage and corporate structure/beneficial ownership discovery
• Machine Learning in anomalous behaviour detection for fraud, money laundering, bribery & corruption, human trafficking, environmental crimes and others

5. Focus on Crypto Crime Prevention & Regulatory Scrutiny Will Surge

This year was significant for crypto as it was plagued by multiple storms on one hand and witnessed several Regulatory framework developments on the other.

The crypto industry is still recovering from the impacts of serious crimes that took placed in 2022, like cross-chain bridge hacks (e.g. Ronin bridge and Nomad bridge exploits), money laundering (e.g. Tornado Cash, RenBridge) and fraud/misconduct (e.g. FTX, Celsius) among others.

While the value transacted through crypto is still much smaller compared to fiat, the rising adoption of crypto coupled with its growing crime rate has caught the attention of regulators.

During 2022, FATF also expanded its Travel Rule recommendation to include VASP reporting requirements, while US’ FinCEN has been applying crypto travel rule to VASPs since 2019.

The EU also approved the MiCA (Markets in Crypto Assets) Regulation in 2022 to protect against crypto-based money laundering and other crimes.

The takeaway for crypto exchanges and the brick-and-mortar banks holding their accounts: More jurisdictions are expected to follow the FATF guidance and mandate stronger obligations around crypto transactions in the next year.

Sujata Dasgupta is a multiple international award-winning industry leader, and Global Head (Financial Crimes Compliance Advisory) at Tata Consultancy Services Ltd., based in Stockholm, Sweden.

She has more than 20 years of experience, having worked extensively in the areas of KYC, Sanctions, AML and Fraud across banking operations, IT services and consulting.

She has had broad global exposure to criminal tactics and compliance countermeasures through her work with premier banks in several major financial hubs in seven countries across the US, UK, EU, and Asia.

She is an accomplished thought leader, author, columnist, and speaker, and is regularly interviewed by reputed international journals for her analysis and opinions on contemporary topics in this area.

She has been named ‘Risk Professional of the Year 2021’ by Waters Technology, and winner of ‘Head of FinCrime Compliance of the Year 2021’ by Themis. She can be contacted on LinkedIn.