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New AML Regulations Breed New Opportunities

The first 100 days of the new US Administration are upon us, and while focus of the news cycle has been targeted on the response to COVID-19, there has been signficiant progress in the fight against money laundering.

The start of 2021 saw the enactment of the Anti Money Laundering Act – the first major piece of AML legislation passed since 2004. Experts call the US renewed dedication to cleaning up dirty money one of the most consequential AML efforts in recent history.

Joe Biden’s first 100 days as President are upon us, and while he has been rightly celebrated for his response to the COVID-19 crisis, he has also made significant progress in the fight against money laundering.

This is an easy claim given that 2021’s Anti Money Laundering Act is the first major piece of AML legislation passed since 2004. Still, experts call Biden’s dedication to cleaning up dirty money one of the most consequential AML efforts in recent history.

Key changes include enhancements to the system for filing suspicious activity reports (SARs), whistleblower protections and rewards, new reporting requirements for banks and financial institutions, and of course, the increased penalties for organisations that fall afoul of the legislation.

Because money laundering is a global, cross-border phenomenon, the US alone cannot stamp it out; what happens there sets a precedent for the rest of the world, who themselves are increasingly scrutinising AML systems.

That’s why we at Lucinity applaud the US efforts and are hopeful that the changes ushered in will enable the collaboration in knowledge and data sharing globally -- from the private sector to regulators, and banks to governments. We are especially keen to see this global effort tackle the SARs issue and put in place the foundations needed to rewire the AML eco-system.

An opportunity for real systemic change

Historically, information flow between all parties involved in a SAR – banks, regulators, and individuals – has been a slow and ineffective process, leading to banks reporting the same customers (or connected customers) for suspicious activity multiple times. Because there is minimal cost associated with filing a SAR, banks are incentivised to cover their bases. This has led to regulators being inundated by SARs – up to 2 million reports were filed just last year. 

Once you add privacy laws and protections to the mix, we see risk-averse regulators who fear interventions that do more harm than good and banks, who are generally not permitted to share customer information between each other, either maintaining or severing relationships based on SAR assumptions that may not even be true.

Rather than continuing to cloak failures under the guise of privacy rights, 2021 represents an opportunity for banks and financial institutions to take charge with more holistic and transparent compliance systems that still maintain robust privacy rights. Building systems that support real-time information sharing will help accomplish both aims.

SARs in real-time

The technology and infrastructure required to enable near-real time information share must go both ways: from bank to regulator and vice versa, so that suspicious activity can be tracked correctly, and banks can trust the efficacy and usefulness of SARs.

Data also needs to be analysed along the entire supply chain and across all vendors, from payments processors to direct integrations. Working in concert, compliance and IT teams must completely pseudonymise data into a human unreadable format, without compromising the information’s integrity or comparability. 

This encrypted data can be analysed by statistical, machine learning, or any other data science methodologies, meaning that the flow of information between banks and regulators becomes infinitely more transparent, dramatically reducing the chances of an illicit action taking place.

Playing well in the sandbox

What has until now been slow-moving regulation and response must dramatically quicken its pace. Between the digital knock-on effect of the COVID-19 pandemic and the rise of cryptocurrency, among countless other new technological advances, fast evolving financial criminals have discovered new breeding grounds.

In this world, technology creators and developers are best poised to help regulators understand the specifics of how AML technology actually works in order to establish robust and inclusive guidelines around its detection.

In an approach known as Sandbox 2.0, banks, fintechs and regulators are actively working together to make positive change for everyone. By testing innovative AML solutions, regulators become better educated about the methodology behind these technologies, so their policies can allow emerging solutions that can stop money laundering in its tracks. In turn, AML fintechs gain more autonomy and freedom to continue innovation that pushes banking forward with efficiency and customer satisfaction gains that also benefit society as a whole.

Certainly new regulations will help stem money laundering, but financial criminals are adaptable and formidable. A sandbox approach represents the future of policy making – whether adopted in the US or in any region or country.

Refreshingly, it no longer relies on regulators to shoulder all the work, or for banks to feel exposed on the frontlines, but integrates all relevant voices in the regulatory decision-making process and the compliance that follows. And, with more eyes on the ball, vested parties can stay one step ahead of financial crime with holistic systemic changes that can respond quickly to whatever the future throws at them.


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Justin Bercich

Justin Bercich

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12 Mar 2021


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This post is from a series of posts in the group:

Artificial Intelligence and Financial Services

Artificial Intelligence and Financial Services

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