By Chris Bourne, compliance expert in AML, CTF, KYC, KYB and head of marketing at Northrow, UK’s financial crime risk regulatory and compliance firm
As the economy continues to recover following the impact of the COVID-19 pandemic, regulatory changes are underway in the anti-money laundering and market abuse space.
In addition, the events in Ukraine, and the wide range of financial sanctions imposed on Russia in response, are having a significant impact on financial markets and must now be taken into account by firms when considering the current and future financial crime landscape. The threat of financial crime continues to be acknowledged by senior management and boards as a critical risk to their business. To assist firms in managing this risk, we provide an update on how financial crime is evolving and what KYC and AML professionals need to know in order to prepare themselves for the future.
As the financial industry continues to digitise and expand its global reach, economic crime has become increasingly sophisticated, presenting new challenges for Anti-Money Laundering (AML) professionals.
In this article, Chris Bourne from UK’s financial crime risk regulatory and compliance firm Northrow explores how financial crime is evolving and discusses the key trends that AML professionals need to be aware of in order to ready their firms for the future of financial crime and compliance.
The evolution of financial crime
Financial crime has undergone a significant transformation in recent years. Technological advancements have provided criminals with new avenues to exploit, and, as a result, an improved approach to combating illicit activity is required.
There are some notable trends shaping the evolving landscape of financial crime that will play a significant part in the role of AML professionals today and in years to come:
Regulatory complexity: The ever-evolving regulatory landscape, coupled with the increasing global nature of financial markets, presents a significant challenge for compliance professionals. Adhering to varying regulations across jurisdictions while maintaining efficiency requires the continuous evolution of the compliance processes to meet global AML requirements.
Cryptocurrency risks: The rise of cryptocurrencies has introduced new challenges in tracing and monitoring illicit transactions. The very nature of virtual currencies provides a degree of anonymity, attracting criminals seeking to launder money or engage in illegal activities. The rapid development of virtual currencies like Bitcoin and Ethereum has generated uncertainty among regulators and professionals regarding the appropriate ways to standardise guidance and, indeed, manage AML compliance within this sector.
Cybercrime and data breaches: The digitisation of financial services has led to an increase in cybercrime, including data breaches and identity theft. What’s more, in a research report conducted by NorthRow, one-third of compliance professionals cited cybersecurity as a top priority for 2023. Criminals can use stolen personal information to commit fraud, money laundering, and other illicit activities. As such, firms need to ensure that the data and documents they are gathering as part of KYC onboarding processes is legitimate, accurate and uncompromised. Any sort of vulnerability can lead to data breaches that can paralyse entire businesses through fines, legal proceedings and reputational damage.
Preparing for the future
In light of these evolving trends, AML professionals must continually adapt their compliance strategies and enhance their capabilities to mitigate novel risks as they arise. There are a number of ways that AML professionals can prepare themselves for the future of economic crime and compliance:
Embrace technological advancements: AML professionals must stay abreast of technological advancements and use them to their advantage. Robust data analytics and AI-powered tools can enhance risk assessment, screening, and ongoing client monitoring. Investing in cutting-edge technology and partnering with RegTech providers can improve the effectiveness of KYC and AML efforts across the board, helping firms to streamline processes while maintaining robust onboarding procedures.
Strengthen data protection: Given the proliferation of data breaches and cyber threats, protecting sensitive customer information is paramount. Implementing robust data protection measures, including encryption, multi-factor authentication, and regular security audits, is essential. Additionally, AML professionals must stay informed about emerging data protection regulations and adopt best practices to safeguard the privacy of customer data collected as part of their customer onboarding processes.
Enhance collaboration and information sharing: Financial crime is a global issue that requires a vast collaborative effort in the battle against illicit money entering financial systems. It’s important for all regulated firms and those working within them to actively engage in information sharing initiatives with industry peers, law enforcement agencies, and regulatory bodies; fostering a proactive and coordinated response to emerging threats.
Stay abreast of regulatory changes: The regulatory frameworks governing financial crime prevention continue to evolve in response to the changing financial system and habits of those that seek to exploit it. Compliance teams must stay up to date with regulatory developments in their jurisdictions and ensure compliance with the latest requirements.
Understand cryptocurrency risks: The adoption of cryptocurrencies introduces unique challenges for AML professionals. Familiarity with the underlying technology, blockchain, is crucial to monitor and track cryptocurrency activity effectively. Compliance professionals need to be well-versed in the intricacies of the crypto market, including the potential for money laundering, terrorist financing, and other illicit transactions.
Foster a culture of compliance: Effective financial crime prevention requires a culture of compliance embedded throughout the organisation. AML professionals should foster an environment that emphasises ethical behaviour, regulatory adherence, and continuous education and improvement. Regular training programmes, internal audits, and robust compliance frameworks can strengthen this culture for both seasoned and new recruits.
Financial crime is evolving at speed, demanding proactive and adaptive measures from compliance teams to effectively combat financial crime in the future. However, in this era of increasing complexity and sophistication, it is vital to recognise the crucial role of RegTech in the fight against financial crime. By leveraging this technology, compliance professionals can harness the power of automation, intelligent algorithms, and real-time monitoring, thereby improving their ability to detect, prevent, and mitigate financial crime risks – ensuring nothing is overlooked or slips through the cracks.
When coupled with a sharp focus on fostering a companywide culture of compliance, firms can be sure they are doing their part in contributing to a more secure and resilient financial ecosystem.