7 Compliance & Financial Crime Trends for 2023

"Follow the trend lines, not the headlines" - Bill Clinton

The increasing geopolitical tensions between the United States, Russia, and China will likely drive the Compliance agenda during 2023. Regulation is expected to become considerably tighter over the next few years.

Anti-Money Laundering (AML) and Sanctions are complex regulations that typically require extensive resources for banks and financial institutions to implement and maintain. Below we've outlined what we at Lucinity think will be the biggest trends in 2023. For a PDF version available immediately, please fill out the form below.

1. Increased Regulation Coordination & Self-Regulation

Financial criminals commonly work together to improve the success of their fraudulent activities. The dark web contains multiple examples of financial criminals acting in unison to share intelligence. Within the Dark Web, data is sold and used to commit fraud and identity theft; financial information is shared or sold to commit fraud.

During 2023, the level of cooperation required across different sectors and industries to take on these threats will call for more stringent enforcement. This should primarily come from the financial regulators and their powers to enact laws. The Anti-Money Laundering Authority (AMLA) has cooperation and collaboration at its heart in the EU.

The AMLA will ensure that law enforcement agencies, such as Financial Intelligence Units (FIUs), work closely with Financial Institutions (FIs) and central banks to combat cross-border financial crime. AMLA will also include A single integrated system of AML/CFT supervision across the EU and coordination supervisors for non-financial entities.

In the US, the changes introduced by the National Defense Authorization Act (NDAA) will continue to have a wide-reaching impact on anti-money laundering (AML) regulations, including the Bank Secrecy Act (BSA). Banks and FIs will continue implementing programs to fit the new mandate. A fundamental area within US regulation relates to how information is shared among the agencies that govern and administer AML requirements. An extension of the recent reforms is to modernize the BSA and other related laws to respond more appropriately to new and emerging global threats.

The banking industry is set to see significant changes in how it regulates itself in the wake of new AML regulations. In 2023, a new set of rules emanating from the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 will be enacted in the UK. The act requires banks to implement stricter controls on their customers' financial activities.

Self-regulation can be a powerful tool for banks looking to improve their reputation and avoid government intervention. FIs have already begun to take steps in that direction. Several bank groups, including the Association for Financial Markets in Europe and the Council of Mortgage Lenders, have formed working groups to develop best practices for anti-money laundering compliance.

The banking industry is confident that it can meet the challenge of the new regulation. As Anthony Browne, chief executive of the British Bankers' Association, recently noted, "We are committed to playing our part in tackling money laundering."

2. Crypto and digital asset management

The global digital asset management market is expected to grow from USD 6.1 bn in 2020 to USD 12.4 bn by 2025, at a CAGR (Compound Annual Growth Rate) of 15.2%. While it seems clear that cryptocurrencies are here to stay, the "wild west," unregulated era is over.

The cryptocurrency and digital asset management industry is faced with increasing regulation aimed at preventing money laundering and countering the financing of terrorism (AML/CFT).

Tightening of regulations for crypto companies will continue for 2023 and beyond with the EU, for instance, enforcing MiCA (Markets in Crypto Assets), which defines specific categories of crypto and establishes a unified approach for all crypto projects and initiatives within the region. Other jurisdictions that traditionally stayed away from regulation, like Hong Kong, Panama, and Seychelles, are expected to follow.

Also, during 2023, the Financial Action Task Force (FATF) will continue implementing new AML standards for digital assets. Crypto and DAM businesses must comply with Know Your Customer (KYC) and AML requirements. They will also need to implement vital KYC/AML compliance programs, including customer due diligence, transaction monitoring, and reporting suspicious activity.

Specialized technology solutions enable FIs and law enforcement agencies to detect and investigate crypto-related transactions more effectively. The concept of KYT (Know Your Transaction) is also growing as an integral part of the Financial Crime Risk management framework. This has allowed recent cases like the Tornado Cash crypto mixing service to raise further questions on ultimate beneficiaries and strengthen KYC policies.

These new regulations and standards will make it more difficult for criminals to use digital assets to launder money. They will also make it easier for law enforcement to track and prosecute money launderers. Compliance with the new regulations may be costly and time-consuming, but it is essential for businesses operating smoothly in the digital asset space.

Digital asset management is also subject to AML laws. Asset managers will also need to take reasonable steps to verify the identity of their clients and report any suspicious activity, which will also apply to their operations related to client fund investments.

3. The adoption of Artificial Intelligence

Organizations and individuals are increasingly using artificial intelligence (AI) to help them comply with anti-money laundering and compliance requirements. By identifying suspicious transactions and funds, AI can help organizations avoid money laundering and identify any potential violations. Additionally, by training compliance officers on how to use AI, organizations can ensure that they always comply with AML regulations.

Ultimately, the progressive adoption or democratization of AI will enable businesses and organizations to overcome the challenges posed by the AI skills gap created by a shortage of trained data scientists and software engineers.

Use AI to Monitor Money Laundering

One of the best ways to help prevent money laundering is by using AI to monitor financial transactions. By monitoring financial activities, you can determine whether or not money is being sent or received for illegal purposes and whether customer behavior is aligned with expectations and stated purposes.

Use AI to Train Compliance Officers

Another way to help Compliance Officers keep up with the latest anti-money laundering regulations is by training them on AI technology. This will allow them to identify potential anomalies and make sure they are promptly acted upon. As more organizations adopt AI technology, compliance will become increasingly more straightforward and cost-effective, reducing "alert fatigue" levels across operation teams.

2023 will continue the efforts to develop more ethical and explainable AI models. AI developers must ensure that they can explain how decisions are made and what information was used to arrive at them.

4. Ultimate Beneficial Ownership (UBO)

Two critical events related to UBO regulation have dominated the agenda in 2022 and will carry additional work over the next year.

The passing of the UK's Economic Crime (Transparency and Enforcement) Act came into force in March 2022 and represented a significant shift in this particular area.

The act includes a much-awaited reform to Companies House. It's a unique institution as it provides a clear view of companies and legal entities created within the UK. However, it does not offer any data validation, effectively allowing the creation of a vast network of fake entities to support financial crime activities. The reform includes identity verification for new and existing company directors / PSCs (Person with Significant Control). This simple step should enable better law enforcement and financial institutions' investigations if correctly implemented.

This reform also highlights how the ongoing work performed by financial crime professionals, such as Graham Barrow from Dark Money Files, raises public awareness on a topic traditionally restricted to government and corporate circles.

This new law also entails the creation of a new public Register of Overseas Entities, which will enable disclosing of UBOs who own UK property through non-UK entities. This could mean a boost in terms of the ever-present issue of entity resolution.

The second event related to UBOs that will influence the 2023 roadmap is the recent ruling by the European Courts of Justice (ECJ), invalidating a provision contained in the EU 5th MLD (Money Laundering Directive) that guaranteed public access to information on companies' real owners. The non-profit Transparency International has commented on this as a "fight against cross-border corruption set back by years."

After the seeming progress brought by UK Economic Crime Act and its subsequent reforms described above, it is difficult not to assess the ruling as a discrepancy in criteria that criminals will likely prompt to exploit on both sides of the EU borders.

Additionally, the lack of public access raises the risk for those affected by data theft who can now not verify if their identities are being used to construct false establishments to enable financial crime. Registers will still be accessible by governments and their agencies, but with limited resources, it remains unclear how law enforcement alone can provide adequate monitoring.

5. Crime as a Service

Criminals have taken every advantage of new technologies to grow and prosper in their chosen illegal activity. While they are not regulated or governed, they are well-funded and coordinated.

An emergent business model has been detected among organized criminal networks. As with any other organization or entity, criminals take advantage of new ways of working to maximize efficiencies. These models leverage technology to achieve their goals and increase the opportunities for financial crimes while minimizing traceability and streamlining costs.

Crime as a Service facilitates financial crimes through digital means. They will, for example, provide a money mule network, able to perform large volumes of transactions as part of money laundering efforts in exchange for a fee from the customer (organized crime gang). These networks do not need to be highly trained and operate separately from the main organized crime group. If they are detected and subsequently neutralized, another one takes its place, and operations resume.

This introduces an additional challenge to financial crime investigators: crime as a service provides fungible elements, also detached from the main organized groups. They can respawn elsewhere, potentially bringing investigative efforts back to square one.

Additionally, these services are scalable and increasingly sophisticated. Their technology can be sold or rented to multiple customers in the same way any legitimate business would leverage technology. This translates to financial institutions and law enforcement needing tools to effectively draw the networks and associated entities. Solution providers should take note of these emerging patterns and develop relevant roadmaps for their products.

6. Compliance as a partner

Within FIs and FinTechs, there are many benefits to having anti-money laundering and compliance as a partner integrated throughout their business. For one, it helps to create a leveled playing field. All business functions will be held to the same standards, which will help promote fairness and equality.

To make compliance a shared responsibility, it is essential to create a cross-functional team led by HR, finance, legal, security, and members from other critical business functions. Build teams around problems through training which empowers them to own risks and decide how to mitigate them. This will result in a more cohesive and effective organization that can meet its goals. As we have seen above, criminals act in a coordinated fashion. There's no reason why entities should not work similarly.

It's important to destigmatize compliance-related tasks and encourage collaboration and awareness to make everyone feel like they have a part to play in meeting the company's goals. Companies will be more successful when everyone is on the same page and working together towards a common goal.

Compliance costs must also be considered, especially during uncertain times ahead, see part 7 below. Cutting down compliance budgets is rarely a good recipe for success. Still, if cost streamlining follows a detailed analysis of areas where automation can help improve efficiencies and collaboration, it becomes a sensible approach.

Compliance has the undeniable cost of USD 214bn globally in 2020, up from USD 181bn the previous year. Combining the human workforce with artificial intelligence into what experts in the field have labeled "Augmented Intelligence" (AuI), helps maximize budgets when inflation and salaries go hand in hand, exacerbating the problem of uncontrollable higher costs.

When compliance costs are expected to rise at least 12-18% this year, AuI can make a difference. AuI is particularly good at fast data processing while retaining human decision-making. Low-level operations, which typically rank high on the inefficiency scale, can be automated instead of offshored and retain human decision-making. Compliance does not only become faster, but smarter.

AI-powered solutions, coupled with well-trained staff, help reverse inefficiencies and lower costs from staff turnover (68%) while achieving higher operational excellence. Meanwhile, customer friction can remain low because automated insights reduce the need for clarification and regulatory requirements stay within boundaries due to the effective explainability of detection engines.

7. Correlation between economic downturn and increased fraud risks

As the UK slides into an inevitable recession, the rest of Europe will likely follow. Figures showing a UK GDP drop of 0.2% last quarter or an overall economic contraction by 0.4% in comparison to 2019 only reinforce that assessment.

The end of 2022 brings a grim picture, with inflation skyrocketing across the globe (c.11,1% in the UK), driven by the Russia-Ukraine war and the tail-end effects of the COVID pandemic.

Indeed, companies will feel the pinch. We have already seen technology giants like Meta and Amazon make announcements related to staff reduction. Banks and financial services won't be an exception. However, this is where FIs must be careful.

UK CIFAS (Fraud Prevention Service) has noted a higher risk of criminals targeting loan products and credit services motivated by the economic downturn.

Economic pressure has several risks:

1) individuals are likelier to fall victim to illegal lending services or fraudulent schemes.

2) they may be more attracted to commit financial crimes themselves to survive, such as fraud or money mules

3) forced migration typically brings more human trafficking activity

In the case of fraud, the challenge is double. Since the customers have no track record of fraud or criminal behavior, risks probably won't be identified at onboarding.

As we enter a global recession, it is critically important that banks not cut costs in their compliance department but double down on their spending plans (see part 6 above). As we learned from the pandemic, we are now in an environment of lower cash usage and increased online and phone transactions, increasing fraudulent behavior. In a world where USD 215bn is spent annually on compliance and AML, history shows us that management often sees compliance as one of many cost centers. But, also one where the axe often comes down when cuts need to happen swiftly.

Therefore, compliance must not be seen as a cost center but as a business driver. Since 2008, the number of fines levied on the banking industry has, for the most part, been directly connected to the fact that many cut back on their compliance spending to free up costs through a period of significant market and operational stress – the Global Financial Crisis.

Banks can only operate smoothly and derive shareholder value if they run more efficiently without compromising on quality and keeping their compliance standards high. There is a significant opportunity to ensure that history doesn't repeat itself; let's take it.