AML Compliance Issues and Trends in 2019
Anti-money laundering (AML) has always been an issue for the finance sector. But as the political stances change, strategic partnerships emerge and break, it is becoming an increasingly complicated matter.
In the past, AML departments in banks were comprised of one or two staff members or they were smaller divisions within financial security departments. Today, an ordinary AML department may include hundreds of staff members. This can be seen as a sole indicator of the increasing importance and complexity of AML efforts.
The balance is still shifting in the financial world, which makes it even more important to keep up with the trends. So let’s take a look at the trends of 2019 concerning the finance industry and the efforts of anti-money laundering.
Cryptocurrency and the Centralised Finance Structure
Cryptocurrencies were heavily discussed by certain industries when they were first introduced. To be more specific, Bitcoin initially flared the discussions. And those certain industries including mostly software and technology-related experts and companies. There were a considerable number of people from the finance industry who were involved in the discussions but for a time, Bitcoin remained a mystical invention with unrevealed and suppressed potential.
Then Bitcoin’s price peaked enormously in 2017, flaring the discussions again. These discussions revolved around its potential to be adopted as a valid or regular currency and its potentially malicious usage.
Today, the arguments seem to settle down but cryptocurrencies are still around and growing in variety and amount since enthusiastic “crypto miners” work tirelessly to get more cryptocurrency. They still pose a threat to AML efforts and experts are trying to devise ways to take them under control.
Being “regulated” is against the very nature of cryptocurrencies. Their whole purpose is not to become an instrument of investment but to be untraceable. This is one of the reasons it is very hard to come up with a way to regulate or trace them. However, since cryptocurrencies have attracted the focus of the centralised system and financial authorities on more than one occasion, it’s safe to assume that they will ultimately be regulated or outlawed completely since indifference is not a viable option anymore. Either way, it’s logical to assume that there will be regulations that will involve cryptocurrencies sometime in the future.
New AML Regulations Affecting the Financial World
Technological advancements, shifting political balances and the search for increasingly transparent financial structures have also been affecting the financial industry. Sometimes financial companies easily adapt to these changes with some tweaks and minor process changes. Sometimes they create ripple effects involving the whole industry. 5th EU Anti-Money Laundering Directive has been one of the ripple effects that has fired up concerns regarding the future of investment banks and similar financial entities.
Before the 5th directive, 4MLD introduced the ability to use electronic ID checks for customer due diligence, and 5MLD builds on this. 4MLD provisions that exclusively referenced “original documents or copies” have been amended in 5MLD, paving the way for further adoption of digital identity technologies. A traditionally cumbersome element of the onboarding process will see a marked improvement in the customer journey.
Besides, 6MLD was published on 12 November 2018 so there will be no time to be complacent. So there are many more changes on the horizon for AML in 2019.
As mentioned above, more regulations can be expected to be enforced by authorities as the new innovations and advancing technologies are used to conduct malicious financial activities.
More Rules, More Processes, Harder to Comply
As time has progressed, more authorities, states and companies have come to the conclusion that sharing information and intelligence plays a key role against AML. As a result, consolidated structures have emerged and created more regulations to comply with.
With more comprehensive structures between banks and other financial entities, the amount of shared data has been growing. This makes it even harder to process data, validate transactions, and keep up with regulations in order to avoid compliance issues.
Adding to the pressures are the amount and complexity of the processes and transactions introduced by the globalization of the finance industry, as well as an increase in the manpower needed to manage this huge amount and validation of data.
New Players in the Industry: Fintechs
Fintechs are not the new players in the industry but their assuming the role of banks is a relatively new issue. We’ll see whether the decentralised structure of fintechs prevails over the centralized structure of the banks. Maybe they’ll develop synergies and evolve into something completely different and more functional.
As banks and fintechs journey through their own destiny to adapt to the new situation, the authorities approach to the situation is simple: If fintechs act like banks, they should comply with the same laws and regulations that banks are subjected to.
This may look like it will complicate the processes for fintechs but they have major advantages over banks. They adopt technologies quickly and can follow the example of banks when it comes to regulatory compliance.
Relying on Technology
As with other industries, finance is becoming more and more dependent on technology. The finance industry has already seen applications to fight against anti-money laundering. But it is true what they say in the technology business: You shouldn’t rely on the beta version of anything.
So far, the finance industry has been mostly relying on rule-based AML measures. While this is a good idea as it results in strict compliance with laws and regulations, it may have become too inflexible. A recent study conducted by PwC revealed that false positive alerts generated by rule-based AML measure can go up to 90-95%. This ratio of false positives is practically unsustainable and crippling for both fintechs and banks.
But apparently, technology always comes up with a solution even to the problems that are created by itself. More advanced methods like machine learning have already been introduced into the system as a counter measure against money laundering. These systems take advantage of methods such as intelligent data aggregation, statistical models, learning algorithms and pattern recognition to determine malicious financial activity, while dramatically decreasing the number of false positives. As machine learning becomes a mature technology in the finance business, attempts to apply more advanced AI (artificial intelligence) technology are still on the way.
Although an expert human eye will always be needed to better look into suspicious financial activities, companies like Fineksus are not shy about introducing proven technologies into the finance world. An increasing reliance on technology allows the possibility of being able to effectively solve or assist in finding the solution for the above-mentioned situations.