The nature of money laundering and the scale of it present huge challenges for the authorities.
It is a crime that affects all economies, with criminals looking to “launder’’ the money they have gained through illegal activity so that their wealth does not attract the attention of the authorities. Money laundering, therefore, is a crime that often involves a great deal of planning and concealment.
This makes it particularly challenging for those looking to identify and trace laundered funds. It also makes it difficult to assess exactly how much money is being laundered. Yet the United Nations Office on Drugs and Crime estimates that money laundering involves between 2% and 5% of global gross domestic product (the total value of goods and services).[1] At the time of writing, that would be between $2.22 trillion and $5.54 trillion.
It is no surprise, therefore, that companies and investigating authorities are increasingly looking to RegTech to help tackle the problem of money laundering.
What is RegTech?
RegTech is short for Regulatory Technology, which means the use of advanced software and data analytics. RegTech is looked to as a means of helping those in business and finance ensure they are complying with the regulations that are placed on them. It is seen as a way of helping organisations function more effectively and efficiently.
As a result, the qualities of RegTech have led to it being viewed – at least by some – as a way of helping businesses and financial institutions ensure that they meet all their obligations to identify and prevent money laundering.
This view has gained popularity as developments in computing power and analytical ability have boosted the effectiveness of RegTech that can be used for anti-money laundering (AML) purposes.
When it comes to RegTech, artificial intelligence (AI) can be used to recognise patterns and anything that appears irregular – something which is very important when looking for signs of money laundering. But RegTech can also be of use in simplifying identity verification, record-keeping and AML screening.
The Role of RegTech in AML Compliance
RegTech has come to be viewed as a real asset in preventing money laundering because it can be applied to the three main elements of AML activity:
- Customer identification.
- Customer due diligence.
- Transaction monitoring..
Customer Identification
RegTech can be used to streamline the customer identification process, as it automates biometric and document checks. Biometric verification involves facial recognition, voice recognition or fingerprint scanning to confirm an individual’s identity – all of which can be done quickly with RegTech. It is also an efficient way of checking documents used in identification, such as passports and driving licences.
Customer Due Diligence
Customer due diligence (CDD) is the process of checking a potential customer. Organisations with AML obligations have to carry out due diligence before beginning a business relationship with a person. In some circumstances where a person or organisation is deemed to be “high risk”, Enhanced Due Diligence (EDD) may also be required. This usually involves additional steps such as identifying the Ultimate Beneficial Owner (UBO) of a company and examining a person's Source of Wealth (SOW).
RegTech can make this a simpler and less labour-intensive procedure. For example, politically exposed persons (PEPs) – those who hold a prominent public position, such as a politician or judge – need to be screened to see if they are subject to any sanctions. RegTech can cross-reference sanctions lists and information on PEPs databases to make the necessary checks rapidly.
It can also be used to provide a swift and accurate risk assessment of a would-be customer in order to determine the level of due diligence that should be conducted on them.
Transaction Monitoring
RegTech can be used to automate the process of monitoring transactions. It can use machine learning algorithms - which examine transaction patterns and flag up any unusual activity - to help companies identify suspicious transactions or matters that require further investigation.
Why is RegTech Important in AML Compliance?
A business that is found to have allowed itself to be used for money laundering will, whether or not it knew about it, face serious consequences. It could face prosecution which, in turn, could lead to it facing a large financial penalty and/or conviction.
Any failings in AML compliance can also lead to a company facing severe reputational damage – and a resulting loss of business – if it is no longer seen as a “clean pair of hands’’.
RegTech can be seen as a way of reducing the possibility of such unwanted consequences. But it is also of value for a number of practical reasons, as it removes certain problems.
Manual, Intensive Work
Before RegTech became commonplace, AML compliance was often a manual, labour-intensive procedure that involved examining large amounts of paperwork, entry of data and examination of huge volumes of transactions and customer records. RegTech has made the process less time consuming and not as vulnerable to human error.
Inaccurate and Out-of-date Data
Managing huge amounts of customer data and large quantities of transaction records is a major challenge – and one that RegTech can deal with. Before its arrival, there was a greater risk of important information not being updated and data not being cross-referenced and analysed to spot suspicious activities.
Regulatory Changes Not Being Noticed
Companies have faced the challenge of having to be aware of the AML regulations that apply to them and of any changes to those regulations and any new obligations they have to meet.
Some companies have found it difficult to ensure they know of all their responsibilities and have struggled to have AML compliance systems in place that ensure they meet them. But RegTech can now be used to provide companies with automated tools that ensure they are meeting all their obligations.
These practical uses of RegTech bring a range of benefits to companies that employ it to ensure their AML compliance is as good as it should be.
The Benefits of RegTech in AML Compliance
The ways in which RegTech can be applied (which are mentioned above) are of day-to-day practical value to companies. But they also bring more general benefits.
Increased Efficiency
The use of AI can make AML operations more efficient as it can be learning continuously from new data without the need for more resources to be put into programming. RegTech is capable of carrying out in-depth analysis to identify signs of money laundering risk and then integrate that knowledge into the algorithm. The result is an improved AML process with no need for the time-consuming manual AML checks that would otherwise need to be carried out. It may even be cheaper than having a staff team doing the work that AI could do.
Improved Data Accuracy
Taking a RegTech approach to AML removes the potential for human error. Not only is it less labour-intensive than having the tasks carried out manually, it also removes the risk of data being missed or misinterpreted.
Real-Time Monitoring
RegTech can provide real-time monitoring and risk assessment, which enables companies to address potential problems quicker than would otherwise be the case. It can identify irregularities in transactions and customer behaviour swiftly and accurately and compare it with historical data – giving its users the chance to act on anything suspicious immediately.
Up-to-date Compliance
As the regulations relating to AML can be subject to change, those who are subject to them face the task of making sure they know about all the changes and are complying with them. In a busy company where staff resources are stretched this can mean that regulation changes may be missed as the manual checks necessary to stay abreast of them are not being carried out.
But RegTech can ensure that those checks are made, removing the risk of a company being penalised for failing to comply with regulations.
Detecting More Sophisticated Forms of Fraud
Criminals are becoming increasingly sophisticated and calculating in the ways they look to launder funds. But RegTech provides the technology that can identify the techniques being used by the money launderers. It can recognise signs and connections between individuals that may not be seen by those making manual checks.
Deterrence
As we have said here, RegTech brings various benefits to the way a company can tackle the risk of money laundering. But it can also have the effect of deterring the criminals. If those looking to launder money are made aware that the bank or financial institution they are looking to use is now employing RegTech to look for signs of wrongdoing, they may think twice before trying to pass their funds through it.
The Challenges of RegTech in AML Compliance
There is no doubt that RegTech can be of great use to companies looking to identify and prevent money laundering. But while it has its obvious advantages, there are aspects of it that may make it less than ideal for some companies.
- Cost: RegTech can do the work of many people and may be cheaper for a large company than employing a team of staff to do the same tasks. But it may be too expensive for smaller firms who may not have the finances to make the necessary investment in it.
- Training: Bringing RegTech into the workplace will mean that some staff will require training in how to use it. Training may only be needed by a small number of staff but it will be continuous, and so involves ongoing expenditure.
- Integration: Any RegTech that is bought by a business may have to be integrated with existing legacy company systems, which can be a difficult and time-consuming process.
- Transparency: The use of AI in AML may be seen as a step forward by many companies but a lack of transparency in its use may lead to concerns being raised by regulatory bodies. There is a need to ensure that the use of AI is meeting all requirements regarding data collection and storage and privacy and security standards.
Conclusion
The benefits of RegTech are clear when it comes to tackling money laundering. But it is neither a one-size-fits-all solution or a magic wand for companies looking to ensure their AML processes are as good as they can be. Those looking to use it need to do their research to ensure they are able to obtain the benefits it can offer in a way that suits the way they operate.
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