Long reads

Financial crime compliance takes centre stage as digital adoption accelerates

John Rayment

John Rayment

CEO, Identitii

2020 saw digital adoption accelerate across the global financial services industry, the impact of which will be felt into 2021 and beyond.

In 2021, we will see digital transformation continue to accelerate as financial institutions look to adapt to changing customer demands and new ways of working. The challenge here is the legacy technology still in-use by many of the world’s financial institutions. Do you upgrade these outdated systems, or replace them with something built to be digital first? Both have challenges, but rip and replace carries by far the biggest risk, particularly if it’s being done quickly.

It’s the challenges associated with upgrading legacy technology that have driven an increase in popularity of overlay systems, which help to quickly bring existing technology into the digital age. Along with the increasing adoption of cloud, overlay systems provide a faster, safer and more palatable option for adding new products and services (or improving existing processes).

An overlay approach allows the underlying legacy systems to remain in place, reducing the risks that come with complete systems overhauls, while new digital native products and services are deployed on top. This delivers not only the speed to market demanded by customers in 2021, but also enables multiple disparate systems to be ‘brought together’, providing much needed visibility and transparency into existing data.

The other trend we see is an increased tendency to partner with fintechs and regtechs who have solutions that can quickly plug into financial institutions existing services, often via API and using open banking rules. Partnering enables financial institutions to bring new products and services to market faster and to improve their regulatory compliance programs with solutions already live and tested in market.

Financial crime compliance will remain a key focus across the industry this year, as criminals find new ways to exploit gaps between rapidly changing technology infrastructure, new payment flows and regulatory fragmentation. Add to this that some regulators, including AUSTRAC in Australia, have publicly stated they will take more enforcement action, and it’s an easy prediction to say that we will see more regulatory fines for non-compliance in 2021. At the time of writing this is already being realised, with Capital One fined $390 million by FinCEN last week for violating the Bank Secrecy Act and “failing to implement and maintain an effective Anti-Money Laundering (AML) program”.

To stay on the right side of regulators, financial institutions will need to ensure reporting, payment and customer systems talk to each other and that they have a clear, single view of what is and isn’t reportable across all business units and jurisdictions. This is difficult today and often still involves highly manual processes, increasing the risk of errors and misreporting. Also increasing the risk of non-compliance is the complicated and ever-changing AML/CFT regulatory landscape, where each jurisdiction requires something slightly different, making it difficult for any organisation conducting cross-border transactions to ensure compliance. Unless there is a way to make cross-border compliance easier and less expensive, we will also continue to see a decline in active correspondent banking channels around the world, making it difficult for some markets to access the global financial system.

It is because of some of the challenges above, that our final prediction is that a global, digital ID program will also increase in priority in 2021. The industry has been talking about real-time payments for many years, and the need for real-time KYC and real-time compliance is growing. However, if payments are still held up for KYC and AML checks, can they actually ever be real-time?

A global, digital ID program could pave the way for simplified, cross-border know-your customer checks, making it easier for counterparties and regulators to know the source and destination of funds, and ultimately reduce the number of payments flagged for investigation. It would also help improve financial inclusion, making it easier for individuals in emerging markets to access financial services and improving trust in certain correspondent banking channels. But there are many challenges we need to overcome, including high profile data breaches, before we can move forward.

Comments: (0)