Unprecedented—a word that defined the world in 2020.
The unprecedented COVID-19 pandemic and resulting global downstream economic impact upturned everyone’s lives in unimaginable ways, with entire countries still struggling to contain the situation. The unprecedented deadly scale of environmental disasters such as the bushfires in Australia and California claimed lives, forced evacuations, destroyed homes and land, and impacted almost three billion animals in Australia alone.1 In addition, the unprecedented number of “fake news” stories disseminated around the globe challenged faith in news information.
From a regulatory compliance perspective, 2020 was equally dismal. By mid-2020, the global tally of fines meted out by regulators for anti-money laundering (AML) failings was $706 million―surpassing 2019’s full-year total of $444 million2 ― including record-setting fines such as those in Australia3 and Paraguay.4 Research studies show that the penalties meted out in 2020 were for the same shortcomings detected by regulators since 2015.5 In addition, there has already been coverage of another record-setting money laundering fine in the United Kingdom this year.6
But it is the unprecedented Financial Crimes Enforcement Network (FinCEN) leaks, known as the FinCEN Files, that brought to the foreground what may be the biggest elephant in the room for years—defensive filing seems to have gained credence as a get-out-of-jail-free-card. Essentially, out of fear of failing to catch and report suspicious activity and being punished when that failure is identified, some organizations file suspicious activity reports (SAR) just in case, even if that means the regulators have to deal with too many filings where there is no actual illegal activity identified. “When in doubt, file” has been the approach for too long and for too many.
So, what can be seen in the regulatory compliance crystal ball for 2021?
AML Regulations Need Strengthening
Regulators need financial institutions (FIs) to be the first line of defense, responsible for detecting and reporting suspicious attempts to launder “dirty money.” Yes, there are those that regularly file SARs or suspicious transaction reports (STRs), sometimes to the extent where quantity overshadows quality. This kind of reporting complies with expectations and may be done to prevent being found complicit later.
The FinCEN Files also imply that in some cases these FIs may have continued to conduct business with illicit actors while many of these reports filed had minimal effect on policing the global financial system. This has put the spotlight on the efficacy of the process and regulators from regions, including Asia-Pacific (APAC), are expected to consider this as they continue improving their respective regulatory compliance frameworks in 2021.
Quality of Alerts Are a Top Priority
There are simply too many false positives generated today by a financial industry that is over-reliant on archaic rule-based systems. Defensive filing will be increasingly frowned upon by regulators, especially in the wake of the FinCEN Files. The downstream impact of these issues is that regulators have been flooded by data and are generally hard-pressed to follow up on every suspicious lead submitted by FIs.
Starting in 2021, more emphasis will be placed on the quality and accuracy of alerts generated. This is critical for the APAC region, especially with the generally larger customer base of APAC financial institutions.
Advanced artificial intelligence (AI), machine learning algorithms and advanced analytics models will be increasingly encouraged by regulators to help banks in regions with sizeable populations like APAC find needles in haystacks that keep getting bigger and bigger. Regulators in regions such as Singapore and Hong Kong are already leading the way to encourage wider adoption for such AML advanced analytics in compliance systems.
In response, FIs must augment incumbent systems and processes with advanced models to handle changing business landscapes and multi-channel operations as well as to deliver better quality reports and information to regulators.
Advanced AML Will Be Integrated and Operationalized
Adopting advanced technologies for AML does not mean existing operations and systems need to be replaced. The best, most viable path forward is to find a way to integrate advanced technology while enhancing existing systems and processes. In other words, operationalize it.
As advanced AML analytics start to become mainstream in 2021, organizations will merge old and new methods to find the right framework for their businesses. The focus must be on making informed decisions when advanced analytics results point to an opposite direction from existing processes or indicate suspicion where rule-based systems do not, then updating processes accordingly.
Increased Focus on Intelligence vs. Data
In 2021, the deluge of data and alerts generated by the financial industry must be translated into business intelligence. This will be another key theme for regulatory compliance practitioners.
The explosion of data from alerts, reports, business channels and financial products has escalated compliance’s data processing load to dizzying levels. Compliance analysts have been hard-pressed to produce reports quickly when their institutions have questions about the data, such as how many retired/employee/VIP customers have moved from medium risk to high risk in a year? What products do customers care most about? Which geographical regions need more focus? What contributing factors should be monitored or changed? And much more.
In addition, critical updates to risk-based frameworks can be hindered by the amount of data, yet regulators expect organizations to keep up with rapidly changing geopolitical factors, such as when a region needs to be promptly added to or deleted from a sanctions list.
Compliance departments are now adding data scientists to their teams, a trend expected to continue as regulators expect more intelligence to be gleaned quickly from know your customer checks, transactions and the capture of other customer-related data. After all, data is only as useful as the intelligence and insights that can be gleaned from it.
Everything’s Going Digital
If 2020 was the year when several countries announced the advent of digital banks, then 2021 will be when the impact of this is felt from a regulatory compliance perspective.
With the surge of digital/virtual banks globally, and in APAC over the last 12 months, traditional banks are being forced to roll out similar services. Customer satisfaction is the top focus for most FIs. Finding a balance between meeting regulatory compliance standards, without adversely impacting the customer experience processes, will be the norm. This requires overall operations, processes, systems and technologies to be designed for faster processing, regardless of data formats, channels and customer size. The speed of deployment, updates and processing will be critical. Compliance with AML regulation is a given, but—for financial institutions—it can no longer come at the expense of customer satisfaction; instead both should work hand-in-hand.
Putting It All Together
2021 is shaping up to be a watershed year, as the world puts the “unprecedented” 2020 in the rear-view mirror. As APAC gradually comes to terms with this on its road to recovery, a shift in regulators’ expectations and a resulting shift in FIs’ compliance plans will be seen.
Regulators will be expecting more quality data and intelligence from FIs, even as compliance departments find ways to synergize advanced technologies with their existing processes and systems in the new digital world. Compliance teams will face pressure to deliver the output faster and more accurately, with more information connecting the dots between suspicious parties.
The success of 2021 will depend on how well the financial sector heeds the lessons of 2020.
Timothy Choon, managing director, FICO
- “3 billion animals impacted by Australia’s bushfire crisis,” WWF , July 2020, https://wwf.panda.org/wwf_news/?364738/3-billion-animals-impacted-by-Australias-bushfire-crisis#:~:text=Nearly%20three%20billion%20animals%20%E2%80%93%20mammals,%2C%20%2C%20and%2051%20million%20frogs
- “Global Enforcement of Anti-Money Laundering Regulation: Will the Cycle Ever End,” Duff & Phelps , https://www.duffandphelps.co.uk/insights/publications/compliance-and-regulatory-consulting/global-enforcement-review-2020
- “Record penalty for breaches of anti-money laundering laws,” Attorney General for Australia , September 23, 2020, https://www.attorneygeneral.gov.au/media/media-releases/record-penalty-breaches-anti-money-laundering-laws-24-september-2020
- “Brazilian Bank Slapped With Record Money Laundering Fine in Paraguay,” KYC30 , November 10, 2020, https://www.riskscreen.com/kyc360/news/brazilian-bank-slapped-with-record-money-laundering-fine-in-paraguay/
- “Fines for anti-money laundering failures rise as companies repeat mistakes,” Financial Times, https://www.ft.com/content/a547e6ed-5a2e-48c4-bbee-febbf975e4af
- “Money transfer company hit with £24m money laundering fine by HMRC,” Financial Times, https://www.ft.com/content/4da87d87-a44d-424a-902b-91ba75a4e09e
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