Our leading financial crime and compliance experts, Mike Harris (MH), Nina Kerkez (NK) and Katarina Pranjic (KP), summarise the latest AML and KYC trends emerging over the past year and give their informed opinion on the movements and trends likely to dominate 2022 and beyond.
In 2021 and since the start of the pandemic, we’ve seen an exponential rise in people going online to access all manner of services, from banking and financial services, to e-commerce, gaming, entertainment and more. Even some traditionally face-to-face professional services, like legal and accountancy services, investment management and pensions have been forced to adapt. With the help of the burgeoning UK Fintech sector, many of these services are now accessible to customers 24/7 via a smartphone. Mainstream adoption of cryptocurrencies is steadily becoming a reality too, creating significant risks for financial crime compliance teams. All of this change of course means greater risk to businesses, as they get to grips with new technology and new patterns of customer behaviour, which explains the significant upturn in demand for Regtech solutions that support effective know your customer (KYC) and AML due diligence processes. But as customer behaviour evolves, so must the ways in which companies assess and monitor that risk. A one-and-done approach to risk mitigation is unlikely to be enough to protect a company in today’s 24/7 ‘always on’ culture. Increasingly, monitoring and risk management must follow suit.
(MH): “The rise in online fraud has created a surge in money laundering as proceeds of fraud seek to re-enter the financial system. The world is changing and AML processes will need to evolve to keep up – just like the transactions themselves, the processes increasingly need to operate in real time to be effective in combatting the rise in digital financial crime. Firms can no longer rely on manual KYC processes to get by and will need to adopt sophisticated solutions that can spot suspicious behaviours in online account activity using multi-layered Identity management tools and move to flag or block suspicious activity quickly. Not only that, but the constantly changing global political landscape means increasingly firms will need to ensure they are continuously monitor customers after onboarding for changes in their status that could raise their risk level. If we’re talking about rising levels of crypto crime, the obvious counter-measure must be the development and deployment of blockchain KYC solutions.”
Although the UK and EU are now following separate strategies in developing AML regulations, the EU is seeking to implement common regulation and AML rules across the bloc to better combat cross border money laundering. Meanwhile, the UK and US are both reviewing their existing AML regulations. One thing all three regions have in common is they all follow FATF guidance on the risk-based approach and effectiveness which will doubtless reflect in local regulation. So, while we may see some local differences, the overall direction will be similar: more AML regulation is likely.
(KP): “The EU’s “AML Package” is expected to strengthen systems, including a new AML authority, providing consistency in approach and levelling out issues of uneven resource allocation and directly applicable rules on CDD and beneficial ownership aimed at eliminating the issue of rules being transposed into national frameworks at varying pace.
“Alongside this, there’s the introduction of 6th EU AMLD, with a focus on risk assessments, senior manager obligations, beneficial ownership registers and sanctions, among others. And FATF updated recommendations and other publications will tackle various topics, such as a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs) and the Digital Transformation of AML/CFT. All in all, 2022 seems set to be a year of tightening up, filling gaps and solidifying the AML regime in Europe and beyond.
“If more regulation really is on the way, regulators may have to take a long hard look at how they engage with industry too, as a mid-2021 study showed a massive 92% of compliance professionals asked for greater guidance from the regulator in implementing a risk-based approach. As such we’d hope to see greater attention in this area from the FCA, as to date, much of the rhetoric has been focused on tightening controls and cracking down in 2022.”
The UK regime remains committed to providing guidance to specific sectors via the Joint Money Laundering Steering Group (JMLSG) and there won’t be much change to this in 2022. However, the regulatory approach to supervision is becoming risk-based in line with broader AML guidance and is itself under close scrutiny to improve the overall effectiveness of the three Statutory Regulators (the FCA, HMRC and the Gambling Commission) and the 22 other supervisors overseen by OPBAS.
(KP): “The multiplicity of supervisors of AML regulation in the UK is a hot topic at the moment, with many questioning whether there’s far too many. It forms a key part of the current consultation, which HM Treasury will report back on in the Autumn of 2022.”
In 2021, the Cutting the Cost of AML Compliance Report found that the compliance bill for the UK financial services sector will reach over £30bn in two years if left unchecked. Moreover, firms are throwing a massive 70% of their budgets on people, and only 30% on technology. In short, we believe KYC is at a pivot point and 2022 may well be the year that firms realise that the current model and its associated costs are unsustainable. The pandemic and remote working practises have already accelerated the adoption of technology in key areas such as identity and verification, now the focus must shift to improving data quality and the use of data analytics using machine learning to automate processes like screening, alert remediation and transaction monitoring – driven in part by the emerging requirement for perpetual KYC. We also expect this to lead to greater adoption of new tools such as Open Source Intelligence (OSINT).
(NK): “The idea of KYC and AML processes where there’s no input whatsoever from human beings is unlikely to ever become a reality – however, the current balance is way too weighted in favour of humans and what we’ll increasingly see through wider regtech adoption is a levelling up to be much better configured for both humans and machines to play to their own strengths. The challenge for the industry in 2022 and beyond will now be to manage their digital transformation of KYC and ensure those whose jobs are automated, are retrained and redeployed into areas where human intelligence and rational thinking will remain an invaluable and irreplaceable part of a risk-based KYC/AML process.”
In 2021 the Economic Crime Levy was announced in the UK Government’s Finance Bill to develop a long-term Sustainable Resourcing Model (SRM) to tackle economic crime and raise much needed funds for fighting financial crime in the under-resourced public sector. The levy will aim to raise £100 million per year from the AML regulated sector to pay for government initiatives to help tackle money laundering, as outlined in the Economic Crime Plan. Charges will become applicable for regulated entities in the new financial year, from April 2022, but will only be payable from the following year and will be calculated based on company size, determined by their UK revenue. As such, 2022 will be a year of preparation for those private sector firms who are impacted, ready for when the bills start arriving, in 2023.
Financial crime is without borders. Yet AML law enforcement is defined by jurisdiction. Seemingly every policy maker, from the Financial Action Task Force to the Wolfsberg Group and the Basel Committee has stressed the need for better inter-governmental cooperation through cross border intelligence sharing. The Egmont Group continues to provide the primary mechanism for global intelligence sharing via Suspicious Activity Reports, which are produced by a member country’s national Financial Intelligence Units. The Group recently published a paper jointly with FATF with two big themes on improving information sharing and cross border collaboration through the digital transformation of KYC.
(NK): “Once again ICIJ revelations in the Pandora Papers exposed the extent to which offshore and shell companies are used to hide money and other assets and maintain secrecy in the identity of beneficial owners. In 2022 we expect further pressure on governments to accelerate creation of public registers of beneficial owners and for ‘offshore’ jurisdictions to open up their corporate registries. FATF has already upped the anti and recently published more robust guidance in beneficial owner registers and the widespread misuse of nominee directors and bearer shares used to facilitate financial crime and tax evasion. In 2022, cross border collaboration, transparency and information sharing will be dominant themes as the pressure increases on governments to tackle rising levels of financial crime.”
Green crime is an emerging global threat that genuinely affects all of us. It generates a lot of money, poses risk to environmental and financial ecosystems and exploits natural resources and wildlife. Moreover, it grows significantly each year. In fact, it’s already one of the most lucrative criminal enterprises out there, with FATF’s Money Laundering from Environmental Crime Report (July 2021) estimating environmental crime to be generating up to USD 281 billion in criminal gains each year.
Many international organisations and intergovernmental bodies are now actively addressing the importance of this problem, but it’s not one that’s likely to go away anytime soon. Naturally, it goes hand in hand with, and engenders money laundering, as criminals find ways to launder the illegitimate proceeds of green crime through shell companies, complex ownership structures and front companies, posing as legitimate business such as furniture or clothes manufacturers, dealers in precious metals and stones, waste management, and pharmaceutical companies.
(KP): “Now recognised as a burning problem, regulated firms are already being asked to increase focus on environmental crime detection and to develop policies and guidance accordingly. The EU Directive 2018/1673 (formerly called the 6th AMLD) has expanded its list of predicate offenses to include environmental crime, but the transposition of these measures into local laws is inconsistent across member states. It’s fair to say, the battle against green crime is still in its relative infancy and in 2022 firms can surely expect more guidance, initiatives, and, no doubt, headlines on this highly relevant topic.”
(MH): “It’s fair to say that the unpredictable nature of financial crime creates an ever-changing risk landscape and whilst it’s always preferable to make predictions based on known facts and research, everyone in financial crime compliance has had to learn to expect the unexpected. And there’s no reason to expect 2022 will be any different. All regulated entities can do is protect themselves by employing powerful data and analytics tools to help them understand patterns and behaviours that might otherwise be invisible to the naked eye, ensure their data quality is the best it can be, to maximise process efficiencies and adopt a robust risk-based approach to their AML controls to make sure that far from ticking boxes, they’re effectively determining and assessing the risks to which they’re increasingly exposed.”