Special contributor report: RegTech in AML & FinCrime – Top 5 Trends to Watch in 2022

By Sujata Dasgupta
Global Head, Financial Crimes and Compliance Advisory, Tata Consultancy Services
December 17, 2021 

Introduction

Looking back at 2021, it has undoubtedly been another tough year, following 2020 which ushered in an ominous pandemic that shows no signs of abating!

Yet, the financial industry has showed strength and resilience in providing – without much disruption – continuity in financial services across the globe. This has been enabled by transition to digital solutions, including in the KYC-AML space to manage financial crime risk and compliance.

While we remain uncertain of how the pandemic situation will play out in 2022, here are the top five trends in RegTech that will certainly drive sophistication of fincrime prevention and detection mechanisms in financial institutions (FIs) in the coming years! 

1.    Regulator Enabled Collaborative RegTech Development

The Drivers: The global financial industry has for a long time realized the need to collaborate in strengthening defenses to fight organized crimes.

From global bodies like FATF to regional/national Regulators like European Commission (EU), FinCEN (USA), MAS (Singapore), HKMA (Hong Kong) and several others, all have been emphasizing public and private institutions to jointly build systems and processes for a unified framework against money laundering and other illicit financial flows.

Emerging Trend: UK’s Regulatory body, Financial Conduct Authority (FCA) has been organizing Tech Sprint events focused on AML and fincrime since 2018, to enable new technology development in this space.

MAS announced in Oct’21 the introduction of a digital platform, COSMIC or “Collaborative Sharing of ML/TF Information & Cases” by FIs for securely sharing intelligence on fincrime.

This platform, to be launched in 2023, is being co-developed by MAS and 6 banks in Singapore.

HKMA launched an AML RegTech Lab (aka AMLab) in Nov’21, for encouraging FIs to leverage RegTech for protection against fincrimes, as part of its ‘Fintech 2025’ strategy.

The lab, where initially 5 HK banks are participating, will focus on building collaborative data analytics and network graph based RegTech solutions for discovering hidden criminal rings.

Several other Regulators have also begun providing digital sandboxes, where FIs and FinTech players can experiment with AI and advanced technology-based innovations for KYC-AML and other anti-fincrime focus areas.

As we witness growing Regulator support in this space, enabling collaborative platforms by Regulators across the world for developing niche fincrime RegTech solutions is sure to accelerate in the years ahead!

2.    Real-time Screening Decisions for Instant Cross-border Payments

The Drivers: Traditionally, cross-border payments have been enabled by SWIFT, and settlement of funds from sender to beneficiary takes a few days in this process.

Sanctions screening is conducted before execution of such transaction by each of the FIs involved – sending, intermediary and beneficiary banks. In case such screening generates an alert, it needs to be investigated and closed as either false hit (to allow the transaction) or true match (to stop the transaction, freeze or return the funds based on the case).

While the current settlement timelines allow for human-led investigations and case decisioning, the emerging trend of instant cross-border payments pose a significant challenge in closing screening alerts in real time!

Emerging Trend: The call for instant cross-border payments has been gaining momentum in the financial industry.

In July’21, SWIFT launched SWIFT Go built on their gpi (global payment innovation), for speedier cross border payments for small businesses and consumers. In the Nordics, P27 – a joint initiative by 6 banks in Denmark, Sweden and Finland – is also aiming at instant cross-border payments across these countries at lower costs.

Several similar initiatives like Project Nexus by Bank for International Settlements, and APAC’s Asian Payment Network are all working towards making instant cross-border transactions a reality.

With instant payment, the requirement for Sanctions screening also shifts to real-time, and this cannot be supported by the legacy screening and investigation platforms.

Accordingly, AI and machine learning based screening solutions will emerge that can – within a few milliseconds – screen transactions before execution, risk score and decision on alerts, and manage the treatment for closure (allow if false, stop/freeze/return if true match).

3.    Interoperability of Digital Identities Across Jurisdictions

The Drivers: Identification of individuals and entities/businesses have been steadily moving from physical, paper based to digital across the world.

However, the mechanism remains fragmented as digital IDs issued by one country are not accepted in another for KYC specific identification, for availing financial or other services.

The pandemic has accelerated the need for remote customer identification or eKYC, and digital ID interoperability across countries can ensure faster, cheaper and more convenient eKYC. Customers possessing multiple digital IDs for different countries is also a vulnerability being exploited by criminals, leading to fraud and ID theft.

Emerging Trend: The EU’s eIDAS Regulation announced recently provides a framework to mutually recognize electronic IDs issued by its 27 member countries, thus enabling interoperability and trust in cross-border electronic transactions across EU.

This is truly a watershed event, that promises to demonstrate the infrastructure and benefits of interoperable eIDs – both for individuals and businesses.

In Nov’21, UK and Singapore also signed an MOU to boost trade cooperation by creating interoperability of digital IDs of these countries, as a bulk of trade between these countries is delivered digitally.

The pilot projects to build the solutions will begin soon.

As the world starts witnessing the benefits of such solutions making remote KYC identification and electronic transaction verification faster, easier and secure, digital ID interoperability is sure to emerge as an essential tool for seamless cross-border financial services. 

4.    Alternate Data Solutions to Augment Traditional Data for KYC-AML 

The Drivers: FIs have traditionally relied on data they hold internally for KYC-AML purposes, which include data on customers, accounts, transactions, associated parties, alerts, cases and so on.

However, the most often internal data has issues like being fragmented across the enterprise, inconsistent, incomplete, inaccurate or non-current among others.

Data quality issues are ranked among the top reasons for huge volumes of false alerts, time consuming investigation, customer reviews and due diligence, and inaccurate risk profiles in the KYC-AML functions.

With the recent surge in volume, variety and velocity of data generated due to increased digital activity of customers – both inside and outside FIs, leveraging external data to augment FIs’ internal data about customers and their behaviour is becoming a talking point for every fincrime compliance executive!

Emerging Trend: Alternate data procured from external sources offer the opportunity to collate, assess and corroborate the digital footprint of existing and potential customers in real time, creating a 360° view.

Such sources are now growing – from just 3rd party reference data providers earlier, now there are KYC utilities, Corporate Registries, web and news media, open source intelligence (OSINT), investigative journalism reports e.g. ICIJ, social media, shared fraud databases, dark web and so much more!

Specialized data providers are focusing on niche customer segments e.g. small & medium enterprises, vessels & maritime, corporates and UBO  – essential in customer profiling, monitoring & fincrime risk management.

The adoption of such alternate data, by integration of external sources with the FIs’ own fincrime intelligence and analytics platforms is poised to gain a strong momentum in the years ahead!

5.    RegTech Solutions for Detecting Environmental Crimes

The Drivers: Environmental crimes like illegal wildlife trafficking, poaching, illegal logging and mining, hazardous waste dumping and so on have been rampant for a very long time.

The impacts are disastrous – it threatens biodiversity and ecological balance, causes environmental pollution and harms the planet overall! Not to mention the illicit funds are then laundered through the financial network across countries, sucking out billions from the economy.

Till now, FIs have not had effective tools to identify and track such crimes or the corresponding flow of funds.

FATF has been strongly advocating defenses against environmental crimes, and the EU 6MLD lists it among the 22 predicate crimes for money laundering.

Emerging Trend: With increasing awareness and Regulatory mandates issued in the last year, new RegTech solutions are now starting to emerge to tackle this crime, but is still in its nascent stages.

To start with, standard typologies to identify such crimes and red flags to indicate illicit wildlife trade, illegal logging and so on will have to be defined.

The detection models can take into account historical incidences of such crimes, as may be available from published law enforcement outcomes, court cases and media reports.

Leveraging open source intelligence, like adverse media, wildlife incident reports, centralized repositories created by NGOs working in this area can be integrated to aid in investigations and discovery of criminal networks who run such organized crimes.

RegTech in environmental crimes will see a huge spurt in the next year, as it must – not just to prevent illicit fund flows but to protect the planet!