The era of digitalization as a global process continues and scales, gradually infiltrating more and more into various aspects of the existence of human civilization and spheres of activity, including the banking sector, many players of which, despite the possibilities of advanced technologies, continue to face old problems in areas anti-money laundering (AML) and Know Your Customer (KYC).
For financial institutions in most regions of the world, AML is gradually ceasing to be something that corresponds to such a formulation as fulfilling regulatory obligations. The relevant line of activity of banks is being transformed into a strategic priority for the foreseeable future. According to media reports, referring to the opinions of experts and the results of special industry research, next year the efforts of financial institutions in the context of AML will show growth.
In this case, it is appropriate to mention the news that the money transfer giant Wise has complied with the recommendations of the European regulator to bolster its AML programs.
Currently, there is a distinct and, in a certain sense, unambiguous tendency, within which financial services are becoming faster and more accessible. The factor of intensive modernization of the mentioned sector is the active development of technologies. At the same time, the risks of financial crimes are growing against this background. The corresponding upward dynamic shows a fast pace. In the context of this threat, regulators are calling on banks to be more vigilant.
Financial crimes are an urgent problem in cyberspace. For example, the use of advanced technologies, in particular artificial intelligence, has made the activities of scammers aimed at stealing money in a virtual environment more sophisticated. One of the tools for countering relevant threats in cyberspace is the personal awareness of users. For example, a query in an Internet search system, such as how to know if my camera is hacked, will allow anyone to get information about signs of unauthorized access to a personal device. Often, as part of the practice of unauthorized access, cybercriminals steal money through mobile banking apps or to compromise their victims, but also mainly to achieve a financial result.
In the past, AML was perceived by banks primarily as a kind of cost necessity. In the context of this perception paradigm, many financial institutions have characterized the relevant category of effort as a necessary burden to meet regulatory requirements. Currently, the attitude of banks towards AML is being transformed. Such efforts become a special circumstance in the context of competitive differentiation for financial institutions. To a certain extent, consumers contributed to this tendency. Customers at the level of personal interaction with traditional lenders, neobanks, and other online financial service providers, are facing an increasing level of digitalization. These consumers, being aware of various threats in the cyber environment, begin to pay attention to such an aspect as trust in the bank. In fact, trust is gradually being transformed into an asset in terms of its impact on the activities of a financial institution and its position in the industry in the context of competitiveness.
TD Bank is currently working on the selection of observers for compliance with the law. In this case, the financial institution intends to monitor its progress in the risk and control area and report to regulators, as ordered by the United States government in October. In September, the US Office of the Comptroller of the Currency (OCC) signed a formal agreement with Wells Fargo to rectify deficiencies in the practice of managing risks related to AML and financial crimes.
TD Bank is expected to pay a penalty of about $3 billion for past compliance failures and to agree to limit its growth in the United States.
The media also released information according to which the US government agencies are currently investigating Citigroup’s policy in the AML area.
In the context of the present conditions and tendencies, a proactive approach to AML/KYC will be constructive for financial institutions. As part of the appropriate strategy, banks will be able to avoid penalties, which are a sensitive factor of negative impact on the indicators of the economic aspect of their activities, and at the same time cause a decrease in consumer confidence. In this case, there is a remarkable situation in which compliance with requirements is a necessity for financial institutions, due not only to the actions of regulators but also to what can be described as a kind of conjuncture formed by the behavior of customers.
Next-generation technologies, in particular artificial intelligence tools, can help banks more effectively detect and prevent suspicious activity as part of their efforts to combat money laundering. The leverage of AI can also increase the speed of realization of the mentioned practice. Fraudsters also use artificial intelligence in their activities, but this does not mean that similar tools cannot be a means of combating financial crimes.
It’s worth noting that recently there has been a kind of shift in the approaches of regulators. In this case, it means that regulators have begun to pay more attention to financial technologies and fintech models and impose sanctions in the appropriate space. There is also another tendency currently being observed, which is that banks and payment ecosystems are reseeing partnerships in the financial technology area. Sponsor lenders turn down more deals and prioritize those business agreements that are more in line with their goals.
It is also worth noting that it is currently obvious that AML systems should not function in silos. Integration of these functional platforms with fraud detection systems, KYC, and other compliance tools can contribute to the formation of a unified solution for protection against financial crimes.
AML is no longer just a condition for keeping a banking license. The effectiveness of the relevant systems is an indicator of the reputation of financial institutions and determines the degree of a lender’s ability to innovate. Banks that do not invest in complex AML frameworks or make insufficient financial injections in such functional solutions may face the risk of falling behind not only in the context of compliance but also as a part of the ability to provide effective customer service.
The administration of the current President of the United States Joe Biden pays considerable attention to the fight against financial crimes. It is expected that the corresponding priority will remain after the return of Donald Trump, who won the presidential election of the United States last month, to the White House in January. It is worth noting that other countries also pay attention to the fight against financial crimes. For example, in November in the United Kingdom, the regulator fined Metro Bank $21 million for failing to monitor AML risks.
The high degree of intensity of regulation coincides with the pace of technological innovation. Modern financial crimes are committed at a rate and scale that significantly exceed the response capabilities of manual processes. At the same time, artificial intelligence and machine learning can provide abilities sufficient to counteract the mentioned crimes. The use of appropriate tools allows financial institutions to analyze huge amounts of data to identify anomalies in real-time.
The results of special industry research indicate that in the United States, 70% of financial institutions leverage artificial intelligence and machine learning to counter criminals. AI and ML can generate more reliable, accurate, and comprehensive detection and prevention mechanisms.
Large transaction models are currently in operation. In this case, it means generative artificial intelligence models adapted to financial crime. LTMs see transactions in their entirety without aggregation, maintaining a broad view and understanding language data within financial operations, such as reference texts indicating intent.
It is worth noting that the results of special industry studies indicate changes in consumer priorities in the context of interaction with banks and financial services companies. In this case, the main feature is the growing importance of the security issue. In the United States, 69% of survey participants in the framework of the mentioned studies said that when choosing a financial institution, their priority is protection from fraud and other crimes aimed at stealing money. Also, 32% of respondents characterize the specified factor as the most important in decision-making.
Proactive compliance teams have good prospects. In this case, the relevant teams must be seamlessly integrated into the product development process, ensuring that innovation is not carried out at the cost of integrity.
One of the main challenges faced by compliance teams is the uneven pace of evolving legislation compared to the dynamic of technology development. Many regulatory frameworks are focused on traditional business models. Appropriate approaches struggle to cope with the complexities associated with new-generation technologies. For example, regulators are still catching up to the development of digital assets and the implications of artificial intelligence systems.
In the context of the mentioned regulatory realities, compliance teams must creatively interpret existing norms and at the same time prepare for new rules that could potentially fundamentally reshape their industries.
As technology has a kind of transformative impact on industries, the role of the compliance team will increase. To achieve success, the relevant teams of specialists will need to embrace technological tools, deeply understand the regulatory landscape, and develop cooperative relationships within their organizations.
In the context of modern circumstances, businesses should stop perceiving compliance as a barrier to innovation. Nowadays, compliance is actually a foundation for implementing innovative solutions.
