4 Ways Regtech will Transform AML/KYC Controls in 2024

Subject to a call against rising financial crimes and oversight anti-money laundering (AML) compliance controls,  AMLab 4 (Fourth Anti-Money Laundering Regtech Lab) was hosted by the HKMA (Hong Kong Monetary Authority) in collaboration with Cyberport and supported by Deloitte. It was an effective response to the heightened threat of money laundering and digital fraud. The AMLab series is designed to improve the utilization of data and technology in AML Compliance.

Compliance experts have divided financial crimes into four main categories where money laundering and financing for terrorism are identified as the most significant and troublesome crimes. Money laundering (ML), with its association with facilitating funding for terrorism and the flow of funds gained through illicit activities, requires a fortified collaboration of regulators, financial institutions, and technology to curb it.

What is regtech? A collaborative intervention of technology to reinforce regulatory measures (Regulatory Technology) in combating financial crimes in its different forms equips us with a brief answer to the question. The escalating bar of predicate crimes and growing regulatory pressure is the reason behind the market of RegTech in AML (anti-money laundering) solutions reaching $12.82 billion in 2023.

In this blog, we will have a closer look at how RegTech solutions are transforming the future of AML compliance for financial institutions (FIs). We will also explore the regulatory reforms to reinforce Regtech employment into compliance solutions. But before that, let’s build a quick understanding of the contribution of RegTech to AML/KYC solutions and its growing market.

Contribution of RegTech in AML/KYC Solutions Market

The value of RegTech solutions has been predicted to touch $60.77 billion by the year 2030. The predicted compound annual growth rate (CAGR) of 24.9% shows the struggle of financial institutions to create resilience against bad guys from infiltrating the financial ecosystem and to avoid enforcement upshots.

However, a balanced alignment of both legal (regulatory) and detective (supervision) measures is needed to resist financial fraudsters from laundering their illegal gains and shambling the integrity of financial systems. To meet the said curbing measures, robust AML/KYC (anti-money laundering and know your customer) compliance controls are required to be implemented by both financial and non-financial businesses.

The importance of AML/KYC controls and compliance can be comprehended from the fact that every year the European Union (EU) spends $83 billion on strengthening AML compliance programs along with updating AML laws.

While institutions are in daunting competition to deploy with AML regulations and ease the burden of compliance costs, technologies like RegTech solutions seem like a silver lining in the dark tunnel of compliance demands.

Artificial intelligence (AI) is believed to be a pivotal pillar of Regtech solutions. For this very reason, AI-based AML compliance solutions might reach a market value of $8.42 billion in 2033. Let’s take a look at the forecasted CAGR and market value of AI-based AML solutions for different jurisdictions.

3 Governmental Measures To Boost RegTech Solutions into AML/KYC Controls

Undoubtedly, law enforcement and regulatory bodies are taking strict measures through new AML laws being enforced and different compliance penalties being levied on institutions for overlooking compliance intricacies.

It would be unfair if we do not appreciate the supervisory efforts to encourage and support businesses, particularly SMEs (Small to Medium Enterprises), in deploying technology into their compliance measures. Three governments took initiatives to empower the compliance framework as displayed below.

Where technology has presented businesses with impactful solutions to employ vigilant compliance measures, it has posed several challenges in integrating interpretable regulations and extensive data into these compliance solutions.

“A data-driven industry needs a data-led regulator,” said the  FCA (Financial Conduct Authority at UK) Chief Data, Information and Intelligence Officer. The innovative initiatives led by the regulatory authorities to reshape AML/KYC compliance programs are crucial in these desperate times of continuously evolving financial crimes.

However, it will be too bold to predict the future of compliance with partial to full involvement of technology in AML/KYC solutions. Several technological developments in compliance infrastructure are being made by the advisors, which will answer most of the questions a regtech buyer and regtech creator might be pondering. Let’s try to find those answers.

How RegTech is Refurbishing AML Regulatory Landscape?

With room to grow more, in the United Kingdom (UK), Regtech Solutions secured funding of $8.3 billion in 2020 which was significantly higher than the market valuation in 2019, recorded at $7.2 billion. Before deep diving into the regulatory stances and findings on Regtech, let’s take a quick look at the segments of compliance that benefit the businesses,

• AML & CFT (Anti-money Laundering & Countering the Financing of Terrorism) where RegTech empowers AML checks with swift customer onboarding through screening against sanctions entities, PEPs (Politically Exposed Persons), and several other global barred lists.
• Transaction monitoring and automated behavioral detection to facilitate Fraud Prevention.
• Maintaining robust and timely reporting of suspicious financial activities to meet Prudential Reporting needs.
• Securing business operational activities to employ ICT Security.

RegTech Initiative by the Financial Conduct Authority (FCA)

With an aim to bring ease for financial institutions to comply with regulatory requirements and encourage innovation in compliance solutions, FCA introduced potential game-changing initiatives.

Regulatory Sandbox and TechSprints by the FCA are intended to foster the sustainable growth of RegTech and FinTech in the UK. With a real-time feasibility study of Regtech innovations, launching of pilot scale solutions, and commercial implementation of an innovative RegTech solution, the regulatory sandbox will aid in creating an intersection of regulations and regulated entities.

However, it is crucial to address the challenges of businesses in regulating the technology and its interpretation in compliance. Deciding the level of RegTech effectiveness is difficult for firms irrespective of their operational size and in-house compliance programs.

The alignment of institutional understanding and reg tech integration aid the financial industry in combating predicate crimes. The European Union (EU) is making prominent progress in enforcing laws and providing support to deploy them.

The EU’s Initiatives To Boost Regtech Adaptation

For real-time fraud detection and prevention and to protect the integrity of the financial ecosystem, the transformation of regulations and technology is inevitable. RegTech fills the spot quite perfectly.

To encourage businesses to adopt RegTech solutions in this global fight against money laundering and associated frauds, the European Banking Authority (EBA) regulated by the EU published a concrete analysis of RegTech solutions to highlight the undeniable need for innovations in AML compliance controls.

The report identifies the significant compliance outcomes of RegTech solutions to streamline the unified aim of both institutions and regulatory bodies. These outcomes can be measured in terms of enhanced compliance efficiency and AML risk/case management along with several other compliance benefits included.

However, a proactive and vigilant approach is required to understand and implement Regtech solutions to meet the dynamic requirements of AML regulations. Showing the other side of the coin, where Regtech has made compliance expectations meetable, it has increased governing demands and internal controls.

There might be several questions that one might ask: where are institutions heading with compliance integrated with Regtech? If technology can do everything, what directions a business need to follow to stay compliant and protected from financial fraudsters?

As unpredictable as it sounds, Regtech analysis by the EBA gives near-to-satisfying answers and directions for financial sectors to be followed.

Conclusion: Compliance Needs Timely Decisions

The rise in regulatory demands and complex navigation around the web of compliance is in dire need of technology intervention. Undoubtedly, the regtech market is under the limelight while empowering the compliance industry with more effective solutions. The regulatory reforms, businesses need to meet compliance needs, and investor interests are the driving factors behind the rapid growth of the regtech industry.

After developing a comprehensive understanding of what is regtech, businesses are required to know their compliance needs and inclusive regtech solutions meeting these demands. On the parallel side, regtech solution providers need to expand their innovative scope and collaborate with financial institutions to design required compliance solutions.

Encouraging businesses to foster a compliant culture and attain easy yet efficient solutions, AML Watcher believes in boosting collaborations, innovation, and outcomes. Connect with us to strategize your compliance with innovation and commitment.