2021 was a challenging year for the financial industry in terms of the increasing threats of financial crimes and the expanding scope of the regulatory requirements. As a result, the focus of the regulatory bodies was on the Anti-Money Laundering (AML) compliance and how to make it more stringent in order to assure better monitoring, identification, prevention and elimination of money laundering and terrorist financing crimes. This trend in the compliance area seems to be continuing in 2022 with more rigid regulation updates to include as many new fields that might be vulnerable to financial crimes such as the crypto world as possible. Therefore, the financial institutions need to make sure that they are in line with the fast-evolving regulatory domain and take precautions in advance. The measures for achieving a successful AML compliance might require more effort than ever before in 2022; however, it is an undeniable fact that the financial industry has proven itself in maintaining a successful operation in many fields of financial crimes over the past year thanks to the adoption of digital solutions especially in Know Your Customer (KYC) and Anti-Money Laundering (AML) fields.
The four main AML trends that are expected to be the hot topics in 2022 are as follows:
1. Need for regulating the crypto currencies
As one of the reflections of the ongoing global pandemic in the financial ecosystem, the consumers tend to look for newer financial instruments more than ever before and the crypto currencies are one of them. The problem is that the crypto area is by nature decentralized and anonymous and lacking a solid and universal regulation therefore, highly prone to financial crime. 2021 Crypto Crime Report prepared by Chainalysis shows that the illegitimate digital coins distributed among cryptocurrency addresses in 2020 was $1.3 billion. Another data illustrates that the total amount of money lost in crypto scams in 2021 was 30% more than the total account in 2020. Thus, it is not a surprise that the regulators and the businesses around the world are now focused on cryptocurrency and how to regulate it. The biggest and most effective regulatory bodies such as FinCEN, Securities and Exchange Commission (SEC) and Financial Action Task Force (FATF) are closely involved in strengthening virtual assets regulation. The expectation is that in 2022, a KYC process to ensure AML compliance in cryptocurrency exchanges will be required for each user around the globe.
2. Emerging technologies (AI and ML) for enhanced data optimization
The importance of adapting the emerging technologies such as artificial intelligence (AI) and machine learning (ML) by the financial institutions for the purpose of achieving better data optimization and AML compliance was acknowledged in 2021 within the atmosphere of the global pandemic. It is anticipated that this trend will continue to remain essential for the institutions to fulfill their regulatory requirements in 2022 as well. As the survey suggests, so as to successfully fight money laundering, the quality of regulatory inquiries and tracking need to be enhanced and the number of false positives should be reduced which might create extra operational costs. To ensure the effectively functioning AML procedures and refrain from extra costs, financial institutions must carry on investing in AI and ML tools in 2022. Automation will likely be one of the hot topics of 2022 as it will help FIs offer better financial solutions to their customers and apply effective compliance practices in the ever-changing financial environment.
3. APIs for better TMS (Transaction Monitoring and Screening)
Together with the digitalization, two of the important features expected from a financial service are pace and safety. To fortify their AML procedures, it is crucial for financial institutions to incorporate faster methods to detect suspicious activities in their monitoring systems. The adoption of technologies such as AI, ML and big data will be able to provide the solutions for the demands of the regulators. The FIs can manage the risks by embracing technology-driven tools which will assist in reducing false positives, monitoring suspicious activities and preventing or eliminating them. The increase in cross-border payments is another driver of using API technology in transaction monitoring services. With the support of an API-powered TMS system, institutions will possible to detect money laundering crimes in advance, as in the client screening process against global databases, PEP lists and watchlists.
4. FATF encouraging data sharing among leading FIs to combat AML/CFT
In order to strengthen the efforts spent for the fight against financial crimes of money laundering and terrorism funding, the Financial Action Task Force (FATF) demanded governments, financial institutions and businesses to cooperate among each other by sharing information. Since the financial industry suffers from the common issues regarding the quality, quantity, transparency and treatment of information, sharing of it among FIs is expected to alleviate the workload and save time. Although the adoption of this trend moved forward a bit slower in 2021, the initiatives will likely to be more in number in 2022 because in addition to FATF, national regulatory bodies such as European Commission (EU), FinCEN (USA), MAS (Singapore) and HKMA (Hong Kong) have started to encourage the cooperation of public and private institutions to work on collective systems to build an integrated framework against money laundering or other financial crimes.
As the technology continues to offer endless possibilities, it is likely that the financial criminals will discover new methods to manipulate the financial industry to commit money laundering or terrorist financing crimes. However, at the same time, it is possible to use the technologies in detecting those criminal activities as well. Therefore, to minimize the risk of financial crimes, it is essential for all the stakeholders of the financial environment to embrace the importance of adopting a strong AML compliance framework and following the trends in the industry to remain aware of the potential risks.
Tuncay Çoruh, Product Development Director