min read

Yesterday's non-compliance fines and tomorrow's AML legislative updates

Published on
March 28, 2024
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Every year poor AML compliance results in harsh penalties, hefty fines, and a damaged reputation for businesses all over the world; 2021 wasn't an exception in that regard. Last year's staggering number of fines and penalties for AML and KYC related violations indicates that new regulations will emerge worldwide during 2022.

Still, too many companies fail to comply with AML regulations

AML is a blanket term for the range of regulatory processes that companies within regulated industries must have in place. For example, Know Your Customer (KYC) and Know Your Business (KYB) processes that verify a customer's identity - or a company's ultimate beneficial owner (UBO) - along with comprehensive and transparent information on clients as a risk-based strategy. The processes and procedures that meet KYC and KYB requirements should occur during onboarding to ensure that clients are truthful about who they are and the business they are involved in. For a company to determine whether a customer’s risk profile matches their collected information, some of the KYC and KYB checks should be performed regularly throughout the business relationship.

Being regulatory compliant is more complex for regulated companies with operations in several markets globally. Meeting AML requirements across country borders entail challenges of regulatory divergence, national differences in digital prerequisites, diverse online identification methods and beyond. However, the regulations are clearly stated, and there is an abundance of practical technological solutions available. Even so, regulators across the globe continuously detect numerous significant failures in multiple regulated entities' AML frameworks. Several sites and news outlets have published information on the staggering amount of AML fines publicly announced by regulatory agencies during 2021. It's a depressing reading. Numerous regulated organisations have failed to create governance, develop policies that staff grasp, adopt a risk-based strategy, or collect comprehensive information on clients, beneficiaries, and transactions. Lining up all the failures in regulated entities' AML framework would result in a substantial, repetitive, and tedious executive summary. Let's look ahead instead.

Updates in AML regulations and KYC/B compliance will undoubtedly appear in 2022

The world has entered its 2022nd year, and new regulations or updates in compliance are expected, urging regulated entities to be even better prepared. One cannot help but wonder how the changes in AML regulations will affect those companies that failed to meet regulatory demands last year and how it will influence regulated industries in 2022.This year, the competitive differentiator for regulated entities, especially financial institutions, will be automation. Automation improves and ensures the accuracy and effectiveness of the KYC and KYB checks and the entire process sequentially.

Many steps and checks can be run simultaneously, creating a seamless real-time customer experience. Companies investing in compliance automation with advanced technologies such as Robotic Process Automation (RPA), Artificial Intelligence (AI), and Machine Learning (ML) improve operational efficiency, reduce fraud, lower operating costs, and enhance the client experience. Ultimate Beneficial Owner (UBO) legislation that caters to clarity and transparency will impact the KYB process for companies in some countries.

In 2022, many financial institutions should use software for background screening, which shortens the timeline for the Enhanced Due Diligence (EDD) process, makes for more informed decision-making and robust identification of high-risk entities and UBOs. But some nations don't accept UBO regulations, granting criminal fellow citizens have easy access to shell companies. A dramatic increase in money laundering and other financial crimes is the forecast regarding such countries. Regulatory requirements for the crypto sector will increase this year. The focus of regulatory authorities around the globe will be centred on money laundering threats linked to payments methods like crypto wallets, e-payments, and e-money exchanges.

The cryptocurrency market is growing exponentially and has become more mainstream, but it is still highly volatile by nature, making it popular among criminals. The sum of the money lost in cryptocurrency scams in 2021 was almost 30% higher than the previous year. Thus, the crypto sector's lack of transparency and clear regulations cannot endure; AML requirements and measures that protect investors and combat money laundering and terrorist financing will be implemented by regulators worldwide. For example, Estonia has recently expanded the definition of VASPs (Virtual Asset Service Provider) to include sectors of the digital currency industry that were once left unchecked.

Estonia amended its anti-money laundering laws to extend oversight over the crypto sector, targeting decentralised finance (DeFi) platforms while tripling its license fees to over $11,000.Last year's non-compliance fines display widespread deficient transaction monitoring, lack of customer due diligence and overall poor AML compliance within just about all regulated industries. Effective AML and KYC/B systems with automated processes for onboarding and monitoring customers must be central when managing customer risk. Those systems and KYC/B processes should also be adapted to country-specific requirements and regulations for international operations. Most regulated entities are wise to have AML frameworks, KYC/B processes, and checks that cope and adapt to an ever-changing regulatory context.

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