The Rising Case for RegTech to Address AML Risks Amid COVID-19

5 mins

Emerged as a subset of FinTech, the Regulatory Technology (RegTech) industry has now gone more mainstream, thanks to regulators and industry practitioners. Recently, there have been many pro-RegTech communique and reports, highlighting that the COVID-19 pandemic has been a catalyst for the adoption of RegTech. In a recent speech at the MENA Regtech Virtual Executive Boardroom, David Lewis, FATF Executive Secretary, said: “The pandemic is a challenge for us all but it also presents opportunities – both for criminals and for us.” He added that the pandemic “has been and should be a catalyst for the adoption of RegTech, and more efficient and effective AML/CFT measures.” Here, we would see the pandemic-related challenges (opportunities) that should prompt the increased adoption of RegTech by financial institutions.

Money laundering remained consistent but became more dynamic

Though the resilience of nations to combat money laundering varies due to their compliance approaches, social distancing measures and the availability of infrastructure, the threat remains consistent during the pandemic times. At the same time, criminals became more dynamic with their money laundering schemes, ‘effectively’ making use of the scare and helplessness of people.

In its report in December, the FATF highlighted a number of COVID-19-related Money Laundering/Terrorist Financing (ML/TF) risks and predicate offences. The global watchdog noted that there have been mounting cases of the counterfeiting of medical supplies and vaccines, investment fraud, adapted cyber-crime scams, impersonation of government officials, fake charity campaigns, and exploitation of economic stimulus measures put in place by governments. Further, there are cases of online child exploitation, crimes related to uninhabited properties and corruption in relation to contracts for medical supplies.

Illegal gains from these offences were laundered using bank accounts of third parties and companies, concealment of values in cash, investment in cattle markets, as well as other practices. Lewis mentioned a case in Tunisia, where a US$2.5 million aid given by a foreign country to cover accommodation, medicines, supplies and COVID-19 tests for stranded people in the country disappeared to a shell company. “Much needed financial support is disappearing into the hands of criminals at a time when citizens, health services and communities need it most,” he laments.

How financial institutions are impacted

In its report, noting down examples from its network of more than 200 countries of criminals profiting from the pandemic, the FATF highlighted the following pandemic-related ML/TF risks:

  • Changing financial behaviours: Changing consumer behaviour, in particular the rise in remote transactions, impacts financial institutions’ ability to detect anomalies. Limited in-person contact is affecting customer identification procedures and criminals are quick to exploit these changes in internal controls. In some countries, where remote transactions and services are less frequently used, financial institutions are finding it difficult to conduct effective customer due diligence and ongoing monitoring. Separately, the shift to remote working has impacted the effectiveness of financial institutions’ systems and controls as compliance staff are unable to carry out their functions with the same efficiency.

 

  • Increased financial volatility and economic contraction: Economic contraction in many countries is resulting in the following vulnerabilities for money laundering:
    • Use of funds from illicit sources to exploit businesses in distress or subject to rapid changes in demand through the provision of capital or a take-over
    • Increased cash withdrawals and a growing amount of cash in circulation help criminal group’s use of fiat currency to launder criminal proceeds
    • Rising unregulated financial services and scams to recruit individuals who may have lost their jobs or suffered a loss in income, as money mules
    • Large shifts of value as a result of the pandemic creating opportunities to commit insider trading
    • Potential misuse of virtual assets in pandemic-related schemes

How RegTech can help financial institutions in COVID times

In April 2020, when many nations went into lockdown, the FATF advocated the use of technology, including FinTech, RegTech and SupTech to the fullest extent possible so that countries can continue with essential financial services. The FATF says: “The effective use of technology, whether used to support onboarding or to ensure effective information sharing between competent authorities and reporting entities, has become even more important as customers’ behaviour changes and social distancing measures mean that face-to-face interaction isn’t always possible.”

According to Lewis, better use of technology will help make financial institutions more effective and efficient in weeding out criminal activity. He noted that technologies such as big data analytics and machine learning can reduce false positives that require manual review, thereby enhancing productivity and standardising compliance efforts. However, these technologies “does not replace human intervention and judgement, it liberates and improves it.”

Meanwhile, industry reports indicate that financial institutions have already taken a huge step forward with the adoption and implementation of technology for regulatory compliance matters. Thomson Reuters’ Fintech, RegTech and the Role of Compliance Report 2021, based on a survey of more than 400 compliance and risk practitioners, said 16% of surveyed firms had implemented RegTech solutions. The report added that Regtech applications continued to provide popular, embedded solutions for firms in areas such as compliance monitoring, financial crime, AML/CTF, sanctions and regulatory reporting.

Looking ahead, the spending on RegTech solutions is likely to go up significantly given the heightened regulatory requirements. According to a white paper from Juniper Research, the RegTech industry is poised to grow from an estimated US$18 billion in 2018 to US$115.9 billion in 2023 with North America and Western Europe contributing almost 70% of the investment.

Tookitaki as a RegTech Player

Globally recognised for its innovation, Tookitaki offers the Anti-Money Laundering Suite (AMLS), an end-to-end AI-powered anti-AML/CFT solution that ensures operational efficiency, low risk and better returns for the banking and financial services (BFS) industry. The solution is validated by leading global advisory firms and banks across Asia Pacific, Europe and North America.

We offer AMLS as a modular or end-to-end platform across the three pillars of AML activity:

  • Transaction monitoring,
  • Name and Transaction screening
  • Customer risk monitoring

In order to power AMLS with comprehensive financial crime detection capabilities, Tookitaki has also developed the Typology Repository Management (TRM). TRM brings together information on the latest techniques criminals and terrorists employ to launder money and then provides the insights to address them. It draws on intelligence we gather from AML experts, regulators, financial institutions and industry partners from across the globe. As soon as a new money laundering typology is identified, our technology shares it across the user base to promote crime prevention. As money laundering patterns continue to evolve, our TRM framework will help financial institutions build futuristic AML compliance programs.

Of course, the pandemic has provided criminals with more opportunities to gain and clean their ill-gotten money. However, financial institutions also have options to reform and turbocharge their AML compliance measures through the application of a risk-based approach and the use of modern technology. Powered by advanced machine learning, Tookitaki’s AML compliance solutions can help financial institutions revamp their compliance programs for enhanced productivity and minimised risk.

For a demo of our award-winning AMLS solution, please contact us.

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