The financial crime compliance landscape is evolving rapidly as regulators and financial institutions alike grapple with the demands of compliance in a year of political change, conflict, and technology innovation. The cost of compliance is now a cost of doing business, and traditional internal systems are no longer sufficient to keep pace with market developments.
Neobanks and fintechs are increasingly leveraging modern technology to stay ahead, while traditional financial service providers are feeling the pressure to keep up with these tech-savvy competitors. Global regulators are under mounting pressure to provide clearer guidance on the use of emerging technologies, with 2024 marking a year of heightened focus on the risks posed by digital currencies, and 2025 set to shift towards the challenges of artificial intelligence. What are the key developments changing the face of financial compliance?
What regulatory developments are shaping financial crime compliance?
- European Union (EU) AI Act
Several significant regulatory changes over the past year have played a crucial role in advancing financial crime compliance. One of the most impactful is the EU AI Act, which lays the groundwork for increased transparency, explainability, and ethical use of AI across Europe. Set to come into force in 2025, this legislation will provide clearer guidelines for AI use, particularly in financial crime compliance, enabling banks to implement AI solutions that prioritise compliance.
- EU Digital Operational Resilience Act (DORA)
Another critical piece of legislation is the EU’s Digital Operational Resilience Act (DORA). This regulation, also coming into effect in January 2025, aims to strengthen the IT security of financial entities and insurance companies. DORA is designed to minimise IT risks, particularly in the event of cyber-attacks, through enhanced information sharing and greater digital operational resilience. This collective intelligence approach is expected to foster a culture of transparency within the financial services sector.
- Sanctions
Additionally, the sanctions imposed on Russia have led to new regulatory directives in both the EU and the US. The EU’s new directive, which came into effect earlier this year, criminalises violations of sanctions with severe penalties, including prison sentences of up to five years. As these rules are adopted across all 27 EU member states, businesses operating within these jurisdictions must ensure compliance. In the US, the Office of Foreign Assets Control (OFAC) continues to evaluate the effectiveness of sanctions, underlining the importance of robust entity screening tools to stay compliant.
Innovations shaping financial crime compliance for the better
- Transaction monitoring should be a focus for financial institutions as they look forward. Many regulated firms have cracked the code on Know Your Customer (KYC) processes, but transaction monitoring can be more difficult, with complex typologies. To crack the code on the huge variety of variations and patterns, a distinct typology library and AI strategy will be paramount.
- Regulatory sandboxes are becoming instrumental in driving towards industry-standard, regulated data sets that encapsulate known financial crime typologies. Countries such as Spain, the UK, and Singapore are leading the way, using these sandboxes to positively influence industry innovation.
- Generative AI is another area generating significant interest. While it has garnered much hype, it also demands high levels of explainability and reliable underlying data. The emerging regulations around AI are expected to steer the industry towards more trustworthy AI applications in Regtech. Additionally, advancements in transaction monitoring and the ability to manage behavioural activity are setting new standards in Know Your Customer (KYC) protocols.
- Collaboration between the private and public sectors is also expected to gain traction. Banks in Australia are already exploring the use of large language models and generative AI to fight against financial crime, but it is the market’s data laws that are curtailing implementation, but some are calling for enhanced public and private sector coordination and data sharing to improve the detection of emerging financial crime typologies. Increased collaboration has long been a discussion, but we are yet to see resounding regulatory change to make it possible and encouraged.
Prepare for the future of financial crime compliance
Regulatory flexibility will be a factor in preparing for change. The industry must navigate a landscape shaped by rapid technological advancements, stringent regulatory requirements, and the need for collaboration across sectors. By embracing innovation, financial institutions can not only meet the demands of compliance but also drive the industry forward into a new era of transparency and resilience.
Read more about the steps needed to implement AI to meet the needs of transparency and resilience in AML programmes, in our eBook '5 key AI AML buying considerations for banks'.
Photo by and machines on Unsplash
