In what ways is financial crime compliance changing?

By Puja Sharma

Increased technological adoption and the focus on efficient and adaptive processes is itself a focus point in regulatory compliance, meaning that process automation and perpetual KYC (pKYC) are converging with reality.

Encompass Corporation, the provider of the leading Know Your Customer (KYC) automation platform, has published a landmark whitepaper analysing trends in financial crime compliance across 2022 and providing an understanding of what they mean for banks in 2023.

The whitepaper, ‘Trends in Financial Crime Compliance’, cites robust and risk-based approach to KYC as the key to navigating the complex world of rising instances of financial crime, global sanctions, and stricter fines for non-compliance.

‘Trends in Financial Crime Compliance’, authored by Dr. Henry Balani, Global Head of Industry and Regulatory Affairs at Encompass, revealed that, in 2022, regulatory pressure concentrated on areas such as Ultimate Beneficial Ownership (UBO). This was in response to the Pandora and Paradise papers, with a key focus on London as a mecca for money laundering. 2022 also saw an increase in notable fines against firms for non-compliance, especially crypto exchanges, brokers, asset managers, and securities firms, in the UK and Asia.

It analysed the impact of Russia’s invasion of Ukraine, and the volatile and complex systems of sanctions this has created. Global economies have been inconsistent in their responses, particularly about restrictions placed on specific individuals, companies, and industries.

The whitepaper concluded that these significant external issues are being exacerbated by internal factors, such as outdated technologies exposing firms to greater risk of non-compliance, and prominent data siloes meaning firms are failing to effectively identify suspicious customers. Internal inefficiencies are also impacting the speed at which regulated firms are reacting to change.

As a result, the KYC approach must move from being traditionally manual to one which takes advantage of the power of automation. This comes, Dr. Balani writes, as instances of global financial crime – and the sophistication of perpetrators – increase, alongside the burden of regulatory compliance.

Looking at what can be expected throughout 2023, the whitepaper states that sanctions regimes and money laundering scandals are triggering a strong response from regulatory bodies, and they will continue to clamp down on financial crime, with KYC as a core mitigating component.

Dr. Henry Balani, Global Head of Industry and Regulatory Affairs at Encompass, said, “It is likely that we will continue to see investigative and enforcement activity in all jurisdictions focus on the quality of systems and controls, as well as the true application of a risk-based approach to managing financial crime compliance.

“The ability for firms to demonstrate they have a robust KYC framework, with efficient and effective controls – and a well-defined and comprehensive approach to customer risk assessment – is critical to standing up to regulatory scrutiny.”