5 Predictions for Financial Crime Compliance in 2020

Many of the financial crime technology themes that dominated 2019 are expected to re-emerge as the primary focus areas for the balance of 2020, with one key difference. While 2019 might be defined as a year of talking about what should be done, 2020 will be a year of action when many of the key themes from the past few years will start to see actual development, completion and presumably the emergence of successful use cases.

What were some of the activities that led discussions in 2019? Regulators focused more fully on advanced technologies such as how intelligent automation and advanced analytics could assist in monitoring and detecting unusual behaviour. Regulators also began more favourably accepting the integration of advanced technologies which could assist with information sharing, helping to better detect and identify illicit movements of wealth. Additionally, financial services organisations (FSOs) began to look at how to converge fraud and AML monitoring for better oversight of unusual activity.

With greater focus on Ultimate Beneficial Ownership (UBO), we also saw FSOs bringing reformation to KYC processes in order to reduce the risk customers pose to their organizations while better understanding their customers and corporate structures.

Finally, 2019 demonstrated an increased impetus to understand and mitigate the financial crime risk posed by virtual currencies, especially given the changes brought about by FATF’s June 2019 guidance and the EU’s 5^th Money Laundering Directive, which came into force across the EU on the 10^th January 2020.

Based on these actions and activities, here are five key areas that will emerge from the lessons learned in 2019 – and segueing to 2020, will dramatically impact financial crime fighting and anti-money laundering activities in the year ahead. 

Prediction 1 – Private-to-Private Information Sharing

Information and data sharing will dominate 2020, and we should see real information sharing solutions emerge which will allow private sector organisations to share without breaching data protection legislation. The lack of information sharing has been a major hurdle in effectively fighting money laundering, and all financial services organisations and government agencies are cognizant of this challenge. Finally, after many years of talking, we are now seeing tangible advancements in information sharing solutions.

In July 2019, the UK’s Financial Conduct Authority (FCA) ran a Tech Sprint where partnerships were able to develop and validate their solutions. 2020 will be a year in which technology solutions such as these move from pilot stages to live implementations.

The Netherlands are currently at an advanced stage in testing the viability of whether shared transaction monitoring is possible, if deemed viable, which should be determined in the first half of 2020, then this will open the door for more countries and organisations developing or buying their own solutions.

Centrally monitoring transactions across several financial institutions, or having a shared KYC utility, will give organisations much better visibility of what is normal versus abnormal, thus making it much more difficult for criminals to open accounts and move their illicit funds between different financial services organizations.

Prediction 2 – Increasing Adoption of Contextualised Financial Crime

Historically transaction monitoring, an essential element for any financial institution’s compliance program, has been a rules-based system with a set of rules and thresholds, which if triggered an alert is raised for further investigation. These types of systems are essential to regulatory compliance but have their limitations. Rules-based systems ensure obvious typologies are identified and alerts are raised. Monitoring transactions in isolation based on rules risks missing anomalous behaviour which could be suspicious. Agility in optimizing systems and contextualised monitoring are the future, and that future will gain significant traction in 2020.

There has already been much talk about converging fraud and AML monitoring, and Capital Markets and AML monitoring. 2020 will be the year we see much of this talk leading to action, with organisations converging these compliance verticals. Additionally, financial organisations need to broaden their views and analyse more data to understand the context of transactions and their customers’ activity.

Contextual monitoring will be a move away from historic norms in financial crime and compliance. Siloed approaches with multiple systems working in isolation does not work when trying to detect and report suspicious activity. This year financial institutions will focus on integrating multiple internal and external data sources into a centralised, contextual monitoring and investigation tool. Providing a greater understanding of customer risk and what is normal activity for a customer across the entire organisation will allow organisations to better detect abnormal customer behaviour.

Prediction 3 – Real-time AML Monitoring

Will 2020 be the year that AML monitoring moves from batch to real time? Early indicators show that technology is moving FSOs in this direction. although 2020 may be too soon for complete adoption. Clearly FSOs are discussing the move towards real-time AML monitoring, and many are currently planning their systems and support to manage this approach in the next several years.

Aligned to this, the introduction of Contingent Reimbursement Model (CRM) in the UK will also result in a number of organizations moving to real-time inbound fraud payment monitoring. Any inbound payment which is suspicious is clearly within money laundering regulations and will need to be reported.

FSOs in other countries are also looking at moving toward real-time AML monitoring, including South Africa and Spain. While many institutions may not move all AML transaction monitoring from batch to real-time, as this would be impractical, many will take a greater risk-based approach and move some higher risk customer transactions to real-time AML monitoring.  Additionally, there are operational efficiency benefits to bringing siloed AML and fraud monitoring together.

Prediction 4 – Quality not Quantity Impacts 2020

2020 will see a greater focus on fighting financial crime by placing greater importance on outcomes and providing higher quality information to the authorities as opposed to just ensuring technical compliance, a significant change for some operations.  

There is more awareness of the impact financial crime has on economies, individuals and the environment. Big awareness campaigns have been run by a number of organisations in the last year, human trafficking and wildlife crime are two such campaigns. Barclays focused on applying technology to fight human trafficking, while Standard Chartered took on the illegal wildlife trade in some of its efforts. Campaigns such as these place greater focus on the effects of financial crime and greater emphasis on FSOs to conduct an effective investigation and gather sufficient information which will help the authorities recover assets and identify and stop the criminals.

Of course, complying with regulations should not be neglected, but increasingly in 2020 FSOs will focus on exceeding minimum legal and regulatory standards by adopting programs that address significant global issues. Making a real and tangible difference in fighting financial crime will continue to be a strategic direction of FSOs this year. This direction is strongly supported by the Wolfsburg Group, an association of thirteen global banks which works to address money laundering and terrorist financing efforts on a global basis.

Wolfsburg released its own detailed “Effectiveness Statement” late in 2019 said that FIs seem to be devoting a significant amount of resources to practices designed to maximise technical compliance, without necessarily optimizing the detection or deterrence of illicit activity. The organization’s recommendations included that FSOS should “establish a reasonable and risk-based set of controls to mitigate the risks of an FI being used to facilitate illicit activity.”

Prediction 5 – Greater Alignment of Standards

A challenge in fighting financial crime is the consistency of the standards adopted across different jurisdictions. Even in the EU, where 4^th and 5^th Money Laundering Directives have been transposed into local laws, there are differences in how the laws have been utilised. Furthermore, there are different money laundering legislation across different jurisdictions, including sentences for those found guilty of money laundering.

To better fight financial crime there must be a level playing field across the globe. This is not going to happen overnight, but Europe are taking their first steps to greater consistency. The 6^th Money Laundering Directive will need to be transposed by December 2020. Some key elements of the 6^th MLD are to unify predicate offences across EU member states, impose tougher sentences for money laundering offences, and to add additional offences of criminal liability for legal persons and the offence of aiding and abetting, inciting and attempting money laundering.

In 2020, the EU’s new anti-money laundering body will emerge. In December 2019, it was announced that Europe was going to set up an EU AML supervisor. Exactly what the end state of this supervisor looks like is still unclear, but it is expected that this body will enforce standards across the EU and aid in the consolidated intelligence gathered across FIU’s in the EU.

Clearly, 2020 could be a big year for meaningful inter-institution collaboration with data and information sharing taking a more central role in our fight against financial crime. Combining this focus with a more consistent and planned approach to managing our data, coupled with the impact of new legislation, will make it much harder for criminals to hide in the shadows. It will take us all working together as a collective, sharing information and aligning standards to truly fight financial crime, stop criminals and stem the illicit flow of funds. This year could be the start of a new era in how we tackle financial crime. Only time will tell if the industry adopts a stronger, results-oriented culture as it plays out its vision for the coming year.