Fighting financial crime has always presented challenges to contend with. However, in 2022, unique global circumstances added fresh complexities and, in some ways, altered the regulatory landscape as we know it.

Firms need to be able to quickly respond to changing regulatory requirements

Inconsistent sanctions regimes, new regulatory measures and stricter punishments for non-compliance have all been contributing factors, which ultimately mean that being able to quickly respond to change is more important than ever for financial services organisations as we consider financial crime compliance in 2023.

An inconsistent global sanctions regime

The conflict in Ukraine continues to bring significant economic and political instability on a global scale, with the resulting sanctions against Russia, as well as other countries such as Iran, North Korea and Venezuela, proving inconsistent when it comes to targeted and granular restrictions against specific individuals, companies and industries.

In fact, in the latter part of 2022, sanctions were updated weekly, and sometimes even daily. The UK amended its Russian Sanctions Regulations 16 times in the last year alone and, in the three months leading up to November 2022, a total of 63 sanctions updates were made across the UK and EU. This trend is a divergence from the past when sanctions were more likely to be blanketed on jurisdictions.

The result is that it is much more difficult for financial services firms to ensure compliance across multiple jurisdictions and in line with multiple governing bodies, particularly if they are not set up to quickly and effectively adapt to a fast-moving regulatory landscape.

Manual know-your-customer (KYC) processes are still common, which brings greater risk of falling foul of non-compliance as internal inefficiencies impact the speed at which regulated firms can react to change. It is for this reason that regulatory technology remains a pivotal part of the fight against financial crime, as firms can benefit from the quick, robust processes it facilitates.

New regulatory measures and stricter punishments

The Pandora and Paradise Papers are just some examples of events that have evidenced the mounting pressure that has faced regulatory bodies. In 2022, they acted by not only introducing new measures, but also by placing a greater emphasis on stronger enforcement overall.

Industry-wide regulatory focus has concentrated on areas such as Ultimate Beneficial Ownership (UBO) in recent times. This, as mentioned, has in some way resulted from the Pandora and Paradise Papers leaks as select regions came under increased scrutiny – with a particular focus on London.

As stricter rules related to beneficial ownership have been introduced by the Financial Action Task Force (FATF), as well as governing bodies in the US and UK, we have also seen the EU Court of Justice strike down public access to beneficial ownership registers of member states. Citing infringement of data privacy rights as enshrined in the EU charter of fundamental rights, this challenges transparency issues and the ‘right to know’ by members of the public. Continued discussions and proposed amendments to existing privacy regulations, as well as compliance regulations, are to be expected in the coming months.

Due to the importance of transparency in the fight against financial crime, UBO access and identification has become a standout theme of regulatory activity, and businesses must update and adapt their KYC processes in response.

Moving forward, it is likely that we will continue to see global investigative and enforcement activity focused on the quality of systems, controls and the true application of a risk-based approach to managing financial crime compliance. Not least because authorities such as FATF explicitly recommend taking a risk-based approach and have become increasingly strong on this point.

In the EU, we can also expect the introduction of the AML Authority, which is a centralised body with oversight of large financial institutions that are pan-European. Its goal is to drive consistency in regulatory enforcement, ultimately improving standards of enforcement.

Focus for 2023

The events of recent months, including headlines around global sanctions regimes, are triggering a strong response from regulatory bodies. In 2023, it can be expected that regulators will continue to act through rules and enforcements as they look to truly clamp down on financial crime. Already, the European Commission has conducted a broad assessment of the key anti-money laundering (AML) and terrorist funding risks and is poised to introduce a package of comprehensive legislation to address these risks at a global level.

The discussion around the link between privacy and transparency will also be ongoing as the ramifications of the EU court rulings become clearer and we continue to see attention placed on the role of beneficial ownership registries in combatting financial crime.

Organisations must consider investment in underlying technology infrastructure as critical if they are to keep pace with the volume of regulatory change against the backdrop of the complex and uncertain world we are living in. A time, cost and energy-efficient KYC process can only be achieved by leveraging the best in regtech, with automation technology being the prevailing solution to ensure effective compliance.

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