State of Financial Crime 2023 Report
Alia Mahmud, Regulatory Affairs Specialist at ComplyAdvantage
Our annual global compliance survey doesn’t just look at the anti-money laundering (AML) implications of hot topics like the uncertain global economy and Russia’s war in Ukraine, important though those are. It also takes an extended view, exploring the longer-term trends that shape how compliance professionals go about their work.
This year, our third survey identified several key trends. One was that firms increasingly align technological transformations with structural reforms within their organizations, focusing on legacy system updates and better cross-team collaboration. Technologies such as artificial intelligence (AI) are also becoming increasingly popular as more firms adopt an integrated mindset regarding fraud and anti-money laundering (‘FRAML’).
We explore all these themes and more in our industry trends report, but here are a few of the top takeaways:
1. Firms are focused on aligning technological and organizational transformation
Amidst challenges related to managing customer data, ever-increasing regulatory expectations, and competitive pressure, firms increasingly recognize that they need to ‘get the fundamentals right’ – i.e., ensuring they have a fit-for-purpose underlying framework to facilitate future success. For the compliance function, this means how their data and teams are structured.
More firms than ever told us that digitally transforming legacy systems – alongside integrating teams and cohesion – are key pain points. 39 percent of firms said digitally transforming legacy systems was their most significant compliance-related pain point, a two percentage point increase on 2021 and 6 percentage points higher than in 2020. This trend is likely self-reinforcing, with compliance officers moving between different financial institutions able to compare newer, more sophisticated tech stacks with older ones. As a result, they become more aware of legacy technologies’ limitations and more determined to implement modernization initiatives where they are needed. Indeed, when asked which area of the compliance function would be ‘at risk’ in an audit, 46 percent cited ‘data management,’ with 42 percent saying the suitability of the tech stack and 41 percent the effectiveness of procedures.
2. Firms are moving from exploration to implementation with AI for financial crime risk detection
Efficient and accurate data analysis is vital for effective AML/CFT programs. As global financial crime trends continue to rise, compliance teams face growing datasets that outpace traditional tools even while budgetary and staffing pressures increase.
But with artificial intelligence, vendors have begun to offer solutions with far superior capabilities that seamlessly address this dilemma. In a recent interview, PwC Luxembourg’s Andreas Braun highlighted how FinTech companies now leverage artificial intelligence in AML and know-your-customer (KYC) processes. In particular, he emphasized the tremendous data processing and analysis possible through AI, which helps solve traditional risk management efficiency and cost dilemmas. Artificial intelligence is quickly becoming a staple in financial compliance, thanks to its power and elegance.
The survey data bears this out. 99 percent of surveyed firms expect AI to impact financial crime risk detection positively. They anticipate specific gains in transaction monitoring. When asked which transaction monitoring use case AI could best help them with, firms overwhelmingly identified three:
- Alert Prioritization – 31 percent of respondents expected AI to help rank transaction alerts by risk. This enables transaction monitoring teams to catch more risky activity and do it faster.
- Flexible Tuning – 26 percent thought they’d use AI to improve their alert system – helping to adjust thresholds and fine-tune alerts responsively.
- Relationship Identification – 24 percent anticipated artificial intelligence would uncover new relationships between monitored entities and individuals.
Only one percent of the respondents didn’t expect AI to benefit their transaction monitoring.
3. PEP screening sophistication is increasing
With politically exposed person (PEP) regulations varying globally, discerning global trends in how compliance teams approach PEP screening can be complex. This year’s survey, however, showed a clear shift toward a greater focus on mid-level government officials. When asked which area their firm most valued in a PEP screening solution, 39 percent said mid-level government officials, a ten percentage point increase on 2021 that made it the highest ranking factor.
The data shows that firms increasingly recognize that there is no “one size fits all” classification when it comes to PEPs. In particular, there is a recognition that middle-ranking and even more junior officials could act on behalf of a PEP, circumventing AML/CFT controls. As a result, it’s entirely appropriate for firms to cover these less prominent public functions as customer risk factors as part of their enterprise-wide risk assessments.
4. KYB solutions evolve to meet market expectations
As AML regulations expand and business relationships grow more complex, firms are seeking to bolster an essential aspect of customer due diligence: know your business or KYB. KYC has often been the natural primary focus when considering global CDD requirements. But equally important are business-to-business relationships, which also fall under the CDD legislative scope. The UK’s Financial Conduct Authority (FCA) and the European Banking Authority (EBA), for example, leave their definitions broad, calling for due diligence on “business relationships.”
In this year’s survey, more than a third of respondents – 34 percent – said they planned to replace or upgrade their KYB solutions. In 2021, Fatpos Global projected a market increase in electronic KYB from around $150 million in 2020 to over $533 million by 2030. Alongside global regulatory trends, this interest is partly thanks to a rise in tailored vendor offerings powered by next-generation tech.
KYB solutions solve pressing industry problems. A 2022 PYMNTS study tied inadequate KYB to substantial fraud-related losses – including resources wasted on false positives. In contrast, firms using “proactive and automated solutions” experienced losses lower by roughly 34 percent. Nearly half of the surveyed organizations struggled significantly with digital business identity verification. PYMNTS identified an over-dependence on legacy solutions and limited resources among key factors holding firms back.
To find out more, download our Industry Trends spotlight report today
Originally published January 18, 2023, updated January 20, 2023
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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