The banking sector including fintech and loan services continue to face massive regulatory compliance demands from the government and other regulatory watchdogs in a bid to curb financial crimes. But when the subject of illicit financial activities is broached, what easily comes to the mind of many are such illegal transactions like money laundering, cyber fraud, bribery and corruption, rogue trading, terrorist financing, and consequently, its ripple effects on the economy and the society at large. Hardly if ever would many think of the burden, in terms of heavy fines, such oversight in illegitimate financial transactions has on the institutions themselves. But such is the case. To make matters even worse, technological advancements increased the sophisticated trends and regularity of money crimes, making the industry worth trillions of dollars and increasing the nightmare of regulators and institutions. A couple of instances will highlight the burden financial crimes have on regulators and the regulated. In 2012, HSBC Holding Plc, a British multinational investment bank, in a landmark fine paid $1.9 billion to the U.S. authorities for the violation of Anti Money Laundering lapses that transferred money to Mexico.
How Did Money Laundering Go Unnoticed?
Again, in what has been described as the largest money laundering transactions, an investigation in 2017 uncovered illegal financial activities to the tune of $223.07 billion involving Estonia Danske Bank from sources in Russia and Azerbaijan. Topping them all was the $3 billion fine Wells Fargo, the DOJ, and the Security Exchange Commission were slapped with. The scandal also cost John Stump, Fargo’s CEO, his job. As a consequence, he can’t hold any banking positions in the U.S. as detailed in a report.
Although not similar to the examples given above, the case of Barings Bank, the British-owned second oldest merchant bank that operated worldwide until 1995, is also one of the consequences of lapses in regulating financial transactions.
One may wonder, how could such massive amounts be authorized yet undetected as fraudulent by the appropriate bodies vested with the responsibilities of overseeing the activities? The answers are not far-fetched. Usually, there are inadequate regulations and controls that go improperly scrutinized. When the discovery is finally made, it would have become late as the money would have been withdrawn.
Tech and digital currencies also created loopholes for money laundering, making manual processes of regulating transactions ineffective. And among other factors, keeping up with changing regulations and regulatory arbitrage are some of the institutions’ biggest hurdles.
When properly utilized, technological tools could become the double-edged sword that not only increases money crimes but can be used to step up surveillance of unlawful money activities. Tools like AI and machine learning don’t just make the fight easier but also eases the burden on human efforts and costs in AML regulations. And this is the policing tool regtech is utilizing.
Using AI, ML, and Automation as the Watchdog for RegTech
Regtech’s influence on solving financial crimes is yielding results. Their success is due to their ability to close regulatory loopholes and more efficient data management, use, and accessibility across the sector. Regulatory reporting, compliance, control, and management of identity, risk management, and transaction monitoring are some of the problems plaguing the sector which it bridges to salvage financial crimes.
Although their areas of focus are different, their use of advanced technologies in rendering their services is common. For example, Acarda GmbH, a leading provider of compliance and regulatory reporting for investment management firms, uses automated data distribution, big data analytics, real-time reporting, and the cloud in the fight against money crimes.
A new regulatory reporting law passed by the European Commission and Parliament which will take effect from 2022 will require asset managers to adjust their services so they can adapt, control, and sell their products as quickly as possible. When implemented by regtech companies and the financial sector, this will increase trading investment transparency and also reduce investors being misled with positively exaggerated returns.
Alessa, a Canadian regtech firm, is using advanced analytical rule-based tech approaches, like anomaly detection and machine learning, to uncover and flag suspicious transactions that pose a risk of tolerance to their clients. Its currency transaction reports (CTRs) are automated and sent electronically and so optimize their clients’ resources.
To help financial services provide solutions to risks and compliance management problems, 360factor, a Texas-based company, uses AI-powered methods to predict and mitigate danger in money transactions. Predict360, its software solution, integrates regulatory compliance management, risks and controls, KRIs, audits and assessments, policies and procedures, and training in a single cloud-based SaaS platform using AI, predictive analytics, and unique insights to forecast red lights and streamlining compliance.
The winner of the “Best Regtech Platform” during the 2021 Fintech Breakthrough awards, StarCompliance, also uses automated and configurable technologies in regtech to enhance compliance.
Due to the increased compliance in the sector when compared to the previous years, experts are projecting a high market growth between 2021-2025 for about $10 billion increasing at a CAGR of over 20%. The growth could also be ascribed to a hike in fintech transactions and other financial services that went online following the coronavirus outbreak.
Using AI, ML, automation in regulatory compliance to curb unlawful money crimes is effective and saves costs and time, but we must not forget that the door could swing both ways.