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The anti-money laundering (AML) sector had barely caught its breath after the ups and downs of a COVID-19 afflicted 2021 when, in February of 2022, Russia invaded Ukraine.
The war, ongoing at the time of writing, has been widely condemned since it began, with nations implementing rafts of sanctions against the malignant Russian authorities, in solidarity with the people of Ukraine with considerable implications for the AML sector.
As sanctions against Kremlin-linked oligarchs, financial criminals, and related entities all over the world snowballed, so the AML frameworks of the global fintech community were tested to their limits in the frenzied rush to comply with mounting reporting obligations, to avoid the colossal legal and financial penalties of failing to do so.
Elsewhere, the ongoing fall out from the release of the Pandora Papers, which had its first anniversary in October 2022, continued to fuel legislative changes among even the world’s most powerful economies, piling on further challenges for AML practitioners at every level of the sector worldwide.
All of this occurred against the backdrop of the ongoing economic carnage of the COVID-19 pandemic and subsequent global shutdowns in response to it which had fomented a host of new criminal typologies that AML practitioners had to counter then, are combating now and will continue to fight against in the near future.
Three main themes emerged from 2022’s whirlwind FinCrime environment, and not all of them were negative:
- A collective sense of the importance of insisting on transparency surrounding the source of funds of customers as being a moral imperative entrenched itself deeper into the business psyche of financial service providers (FSPs) and similar entities globally.
- Embracing artificial intelligence (AI) and machine learning as critical elements of AML best practice achieved improved uptake in the fintech sector and accrued greater acceptance among regulators as it became both better explained and understood.
- The widening net of industries and business categories requiring AML supervision and therefore guidance offered both challenges and opportunities for the sector’s practitioners.
So, what can we learn from events in the AML sector this past year, and how will this play out in 2023?
Ultimate beneficial ownership: growing demand for transparency
The theme of shifting towards ensuring that the sources of funds dealt with by AML sector role-players have legitimate and morally acceptable origins became palpable during 2022. The war in Ukraine brought this sharply into focus due to the increased global awareness of the devastating end result of financial crime as the horrors in Ukraine unfolded live on the screens of digital devices across the entire civilised world.
This theme is clear in the trend of significant world economies’ regulatory frameworks governing ultimate beneficial ownership (UBOs, which can also refer to individual ultimate beneficial owners) tightening and enhancing their relevant legislative environments. Their re-invigorated financial law infrastructures have illuminated the dark nooks and crannies where tax evaders, money launderers, and other serious economic criminals previously lurked undetected.
Notable examples of this trend in 2022 included:
- The UK parliament passed the oft-updated Economic Crime and Corporate Transparency Bill (Economic Crime Bill), which includes reforms at the limited company registration entity, Companies House. These changes will oblige current and future entities who wish to conduct business in the UK to accurately identify and verify their UBOs, effectively ending the capacity of crooks to anonymously exploit the diversified UK economy to commit all manner of financial crimes.
- In the US, the federal AML watchdog, the Financial Crimes Enforcement Network (FinCEN), issued its Beneficial Ownership Information Reporting Requirements final rule in September 2022, which enhances the customer due diligence obligations of entities subject to the Bank Secrecy Act.
- Remarkably, even the historically furtive Swiss banking sector felt the initial rumblings of its government taking the direction of greater transparency, if somewhat caveated:
“The [UBO] register will be accessible to the relevant authorities but not publicly available. The aim is to achieve a solution which is as effective and efficient as possible.”
Implementing AML frameworks: agility trumps legacy
The trend of shifting away from traditional, cumbersome, and labour-intensive rules-based AML frameworks to fighting financial crime towards the adoption of a risk-based approach (RBA) while keeping pace with the soaring annual cost of compliance was a highlight of the year.
The trend towards more nimble, scalable AML infrastructure, or automation, has demonstrated greater acknowledgement of the human instinct to distrust the unfamiliar, both among clients and regulators. What I call ‘practical AI’ must be credible, and therefore believable, to the customers, not merely the vendors, and palatable to the regulatory bodies which govern the compliance environment.
Dr Janet Bastiman, Chief Data Scientist, Napier, put it succinctly in her interview with AI Magazine in February 2022 when she said that “the strengths of AI lie in its ability to automate and effectively speed up large, complex - but well-defined - processes. Explainability in AI is important because, in order to trust AI, end-users need to be comfortable to not just understand a result but to believe and trust it.”
A great example of the trend towards deeper acceptance of AI’s role in RegTech during 2022 was Amsterdam-based mobile banking company Bunq’s court victory against the Dutch Central Bank (DNB) in October 2022:
The Trade and Industry Appeals Tribunal found that DNB’s decision to prohibit Bunq from incorporating the use of AI in its AML framework because of alleged non-compliance issues was inadequately rationalised. The regulator stated in response that it would ‘take the ruling onboard in our dialogue with the financial sector on risk-based compliance with statutory requirements and the use of technology to combat money laundering.”
Industries under AML regulation: the ever-widening net
The expanding scope of industries, which regulatory entities expect to toe the line of AML compliance, was another distinct highlight of the year. As the trend of evermore ingenious and sophisticated criminals exploring new frontiers of money laundering and other serious economic crime has taken hold, regulators have responded by drawing the affected sectors deeper into the supervisory fold.
In the UK, the Economic Crime (Transparency and Enforcement) Act 2022 (ECTE Act 2022) which was implemented in August 2022, is a good example of this trend emerging in the real estate market. It targets foreign kleptocrats seeking to launder illicit funds through the UK property market. With its passing, accelerated by events in Ukraine, the ECTE Act 2022 now requires by law that offshore companies seeking to purchase business premises, plots, or residences on the British mainland must provide and verify the true identities of their UBOs, thus shutting the gate to this well-travelled money laundering highway for criminals.
In the US, the Department of the Treasury’s 2022 Study of the Facilitation of Money Laundering and Terror Financing Through the Trade in Works of Art highlighted the ongoing money laundering risks of this exclusive industry. The US Treasury recommended “applying AML/CFT requirements such as customer identification and suspicious activity reporting obligations to certain art market participants would provide authorities with additional information and pathways to address the money laundering vulnerabilities outlined by the study” as a potential remedy.
2022 also saw the world’s financial regulators fixing cryptocurrency trading firmly in their sights. In October 2022, the Organization for Security and Co-operation in Europe (OSCE) partnered with the United Nations Office on Drugs and Crime (UNODC) to launch a US- and Germany-funded initiative intended to fight money laundering perpetrated via crypto trading and other virtual assets.
The online gambling industry also entered the fold of AML supervision in 2022, which saw Fan Duel, the premier North American gaming group, partnering with Napier to guide it on its compliance journey as they expand into Canada.
AML trends in 2023: is it just more of the same?
2023 will see no let-up for the AML sector from regulatory entities at any level. This position is supported by the example of the October 2022 launch of the collaboration and intelligence-sharing initiative by the UK and US sanctions authorities, the OFAC-OFSI Enhanced Partnership. The partnership aims to enhance co-operation between the two countries on sanctions regimes, with positive implications for the global AML community during 2023 and beyond.
The cost of compliance will continue to rise in 2023 if 2022 was an indicator of what the future holds. An accelerating trend of Fin Techs looking to automation and implementation of AI-driven, match-to-existing, RBA-friendly software and services, should follow suit as they try to mitigate the costs incurred by staying on the right side of regulators, offset the need to take on further staff, and continue the fight against financial crime.
2022 saw the scope of industries subject to AML supervision expand further in both number and scale. This should continue in 2023, while those industries currently included in the AML regulatory framework are likely to experience more extensive and in-depth compliance requirements.
As daunting as this sounds, the potential available to the AML sector balances out the challenge. Globally present market research company Facts & Factors made some jaw-dropping predictions on the potential growth of the AML market in the coming years, which were reported on here:
- The worldwide AML market was worth about $2,582.5m in 2021.
- The worldwide AML market is likely to grow by $6,014.7m in the period from 2022 to 2028.
- This is a compound annual growth rate of about 15.7%.
The AML sector has had to adapt, evolve, and innovate at a breakneck pace during the course of 2022. To continue to flourish in the future, Napier intends to be at the helm as we usher in 2023,to take heart at its resilience, and seize the opportunities presented by such enormous potential AML market growth.
Let Napier lead the way to the future of financial crime compliance
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