Regtech centre stage as AML teams battle new risks generated by geopolitical tensions

EU and US sanctions lists and new regulations are creating strong demand for regtech among overloaded AML and compliance professionals in banks


An overwhelming majority of AML and compliance professionals in banks believe current geopolitical strains involving the US and EU are creating new risks and challenges for preventing financial crime at their organisations, according to a survey by SWIFT and Dow Jones’ risk and compliance unit.

While three quarters of the 500 AML professional surveyed pinpointed geopolitics as a major new consideration for them going forwards, many of them also believe advances in regtech are key to their being able to respond to risks created by international tensions. A notable example of such tensions is such Russia’s annexation of Crimea, leading as it did to US and EU sanctions against Russian banks, companies and individuals that have to be factored in banks’ daily screening operation.

According to the survey more than half (54%) of respondents are planning to increase their investment in regtech over the next 3-5 years. That thumbs up for regtech reflects a positive experience in using new technology over the last couple of years, with nearly 60% saying it has improved their company’s ability to tackle AML, KYC and sanctions requirements. (see Figure 1)

Joel Lange, managing director of Dow Jones Risk & Compliance, says: “The shifting geopolitical environment has created an additional layer of complexity for tackling financial crime around the world. As the political and economic landscape continues to impact international trade, data protection, and tax cooperation, the need for greater transparency and more effective information sharing across borders is more important than ever.”

Figure 1: Regulatory technology impact and investment      (Source: Swift-Dow Jones)

Figure 1 Regtech Swift

Regulatory challenges remain

With financial crime continuing to evolve, increased regulatory expectations and enforcement of current rules continue to be the key future challenges for AML professionals – 70% of respondents regard them as continuing to represent the greatest compliance challenge. They are also worried about the outlook on the rulebook front, with 50% saying they are concerned about their ability to cope with additional regulations going forwards.

Amongst the plethora of regulations compliance professional have to deal with the most onerous are proving to be the “50% rules” issued by the US Office of Foreign Assets Control (OFAC) and EU. The rules are aimed at establishing the ownership and control of an entity to help determine whether it is subject to sanctions restrictions. Another is the US Treasury’s FinCEN Rule, aimed at strengthening customer due diligence requirements for financial institutions.

The 50% and FinCEN rules together are cited by over 70% of respondents as contributing to increased workloads for compliance departments. More than half of respondents, meanwhile, say FATCA3 (which targets non-compliance by US taxpayers using foreign accounts) and the Fourth EU Money Laundering Directive are regulations that add to existing workloads. (see Figure 2)

The survey also found that the greatest AML-related challenge currently facing organisations is having enough trained staff (57%), followed by the reliance on inadequate or outdated technology (48%) and getting too many false positive alerts (46%).

Figure 2: Impact of regulations on organisation workload
    (Source: Swift-Dow Jones) 

Figure 2 Sanctions And Regulations Swift

Banking on regtech

There’s certainly little doubt about the scale of the global money-laundering problem, with the United Nations estimating that money laundering transactions globally total 2 to 5% of global GDP, or roughly $1-2 trillion annually. Just 1% of global illicit financial flows are currently seized by authorities.

With governments and regulators showing little sign of letting up on their demands on financials to be more vigilant, it’s no wonder under-pressure AML and compliance teams are banking on regtech to help them out. According to research firm WealthInsight, global spending on AML compliance is set to grow to more than $8 bn this year - a compounded annual growth rate of almost 9%.

“Technology can play a key role in providing new and enhanced capabilities that strike a balance between preventing criminal activity, meeting regulatory requirements and containing costs,” says Paul Taylor, Director of Compliance Services, SWIFT. “The most sophisticated financial crime compliance solutions help mitigate risks and boost efficiency in several ways, from managing workloads to automating payments monitoring and reducing false positives, enabling compliance teams to focus on more strategic risk policy and financial crime prevention work.”

Indeed according one AML technology company, FortyTwoData, banks are wasting nearly $3bn a year on false AML alarms alone. FortyTwoData reckons the high volume of false leads is due to outdated AML systems and that the costs associated with them could easily be saved by using new technologies like machine learning and big data.  The firm estimates that, on average, 55% of these false positives can be eradicated with modern regtech solutions, accounting for 42% of banks’ cost on AML compliance.