The effects of the global pandemic have shown themselves on two different sides of the mirror: the acceleration of the initiatives in the digital financial service industry and the evolution of fraud methods together with the new digital channels. As fraudsters are becoming more tech-savvy and agile, the fight against financial crimes such as money laundering will likely get more challenging in 2023. To be able to answer the compliance needs of the financial industry, the regulatory landscape is expected to get substantially rigorous in the upcoming years. In addition to the evolving trends in the digital world, the geopolitical strain between the US, Russia, and China will have an impact on shaping the compliance roadmap in 2023.

Higher Cooperation in the Regulatory Area and Self-Regulation

The fraudsters benefit from the advantages of the dark web by co-working and interchanging their experiences and information to enact their fraudulent activities successfully. It is easier to sell and use personal and financial data on the dark web to commit identity theft and other financial crimes.

The cooperation of different industries will be required to combat these new threats in 2023. Especially, the role of the financial regulators is extremely critical as they hold the power to enact laws. In the EU, AMLA (Anti-Money Laundering Authority) understands the importance of collaboration of different law enforcement agencies working together to fight against money laundering and ensures that the Financial Intelligence Units (FIUs) are in close contact with FIs (Financial Institutions) and central banks.

Similar to the EU, the legal improvements in the US in 2023 aim to have an overarching influence on the AML (anti-money laundering) processes and regulations including the Bank Secrecy Act (BSA). The regulatory changes mainly focus on the collaboration and data-sharing methods of the agencies that hold the administrative power on defining AML requirements.

In addition to cooperation among different financial stakeholders, self-regulation is another crucial term that will need to be acknowledged by the banks in 2023 for ensuring their reputation and refraining from governmental intervention. Some FIs and bank groups have already taken steps towards this end and formed alliances working on the best practices to remain compliant against AML requirements.

Regulation in the Management of  Cryptocurrencies and Digital Assets

The existence of cryptocurrencies is likely to continue in the upcoming years; however, they will only be able to exist in a more regulated environment. The digital asset management industry is expected to confront a stringent regulatory renovation for AML (anti-money laundering) and CFT (countering the financing of terrorism) purposes in 2023.

The Financial Action Task Force (FATF) will enforce the crypto and digital asset management companies to apply CDD (Customer Due Diligence), transaction monitoring, KYC (Know Your Customer), and other AML requirements. Together with the targeted technological solutions, the new regulatory arrangements are anticipated to make it harder for criminals to misuse digital assets for money-laundering purposes.

Artificial Intelligence Becoming Prevalent

AI (artificial intelligence) supports organizations in detecting any suspicious activity and preventing money laundering, therefore the use of AI is expected to increase extensively in 2023 within the framework of AML compliance. AI can help companies remain compliant with AML regulations in both ways: first is by simply monitoring the transactions and detecting suspicious behavior; second is by educating compliance officers on how to use AI so that the FIs can make sure that they remain compliant all the time.

Crime as a Service (CaaS)

Crime as a Service (CaaS) is a new business model used by organized criminal networks. CaaS refers to an advanced tool or service which is developed and sold by an experienced cyber criminal to often less experienced cyber criminals. With this method, less experienced or capable criminals can get hold of the technologies that are able to create bigger criminal damage and are harder to trace and detect. As the nature of the CaaS is disconnected from the origin and accommodates fungible components, it is extra challenging for financial crime investigators to track and fight them.

The Relationship between Economic Recession and Fraud

The long-term effects of the COVID-19 pandemic and the war between Russia and Ukraine have started to reflect on the global economy with inflation booming at the end of 2022. The banks and other financial institutions will inevitably feel the impact of this recession; however, they need to be extra careful as the economic pressure will likely carry the risk of higher criminal attempts in 2023.

With the economic situation worsening, individuals will be more prone to become the victims of fraudulent activities or to get attracted to commit fraud themselves. In this case, the challenge of the financial institutions is doubling because the customers with no previous risky behavior or record will not be detected at the stage of onboarding.

Therefore, at the doorway of a global recession, the responsibility of the banks and other FIs is extensively critical. Instead of diminishing their compliance costs, they must increase their investments in their compliance departments to detect the risks and act upon them on time during these challenging times. Since the Great Recession in 2008, the majority of the penalties imposed on the banking industry were related to banks trimming down their compliance costs to save extra money. However, this also caused them to compromise on their service quality and lower their standards for compliance.

To sum up, the trends and predictions regarding fraud and AML in 2023 evolve around digitalization, cyber security, and global economic recession. To successfully fight the upcoming challenges of 2023, the financial industry is to keep compliance at the core of their strategies, understand compliance as a supporting partner to their businesses, and continue to push their financial and operational efforts around it.

Ahmet Vefik Dinçer, CEO