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

The Skinny:
- In this special contributor report, a tech-savvy thought leader takes a look ahead at what will be key financial crime program fulcrum points, regulatory focal points and how best to use technology and partnerships to achieve effectiveness – with a special focus on fintechs.
- Sujata Dasgupta is making these predictions informed by the last decade and her more than 20 years of experience in financial services, cognizant that banks in recent years have been pushed to better analyze and wield data to more efficiently manage a broad array of rising anti-money laundering (AML), fraud and sanctions risks.
- Some snapshots: Regulators will have to work with, not against, banks, fintechs and technology vendors — and be more aligned with broader law enforcement priorities. New tech could make sanctions screening for payments faster along with facial recognition, artificial intelligence and other analytics technologies transforming customer identification, going fully digital.
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!
About the author

Sujata
Dasgupta is the Global Head (Financial Crimes Compliance Advisory) at Tata
Consultancy Services Ltd., and based in Stockholm, Sweden.
She has had a rich global exposure through her work with premier banks in several major financial hubs, viz. New York, London, Singapore, Hong Kong, Frankfurt and Nordics.
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.