Technology has the potential to combat money laundering and terrorist financing (AML/CFT) therefore making compliance faster, cheaper and more efficient, according to a new blog post by Sigma Ratings.
Mentioning a report published by global AML watchdog Financial Action Task Force (FATF), Sigma Ratings director of financial crime intelligence Hamad Alhelal wrote that as digital innovations continue to emerge at an ever-accelerating pace, technology can be the answer to making AML compliance smoother for companies.
Alhelal believes that in today’s environment, institutions are able to leverage advanced technology to analyze big data, both structured and unstructured, more effectively, including clients of Sigma Ratings. As a result, emerging technologies can “improve the speed, quality and efficiency of measures to combat money laundering and terrorist financing,” while also helping “financial institutions and supervisors, assess these risks in ways that are more accurate, timely and comprehensive,” he wrote.
Highlighting the necessary conditions, policies and practices that need to be in place to improve the efficiency and effectiveness of AML/CFT, FATF’s report said that AI-based tools can analyse data accurately, in real-time and help better identify emerging risks. It can also assist in the validation of the results of manual assessments and their subsequent conclusions.
However, the sector is dragging its feet in terms of digitalisation, making it an upward trek for regulated companies to combat financial crime. While embracing technological innovation is a no-brainer, some of the key challenges hindering compliance efforts include the use of legacy systems. The FATF attributed “complexities and costs involved in replacing or updating legacy systems” as the key concerns which make it challenging to exploit the potential of innovative approaches to AML/CFT for both industry and government.
For the industry, the “cost-benefit analysis to adopt new technologies continues to be an obstacle to greater uptake of innovative solutions for AML/CFT, based in part on a real or perceived lack of regulatory incentives to pursue innovation,” the report said.
Moreover, while the use of RegTech is “highly encouraged, manual reviews and human input remains significant nonetheless,” it said.
FATC is hardly alone to urge the industry to adopt RegTech solutions, Alhelal said. Regulators all around the world, including the European Union and Hong Kong, have made encouraging RegTech adoption a key focus of their supervisory efforts. He detailed that for those in the US, the recently passed Anti-Money Laundering Act of 2020 (AMLA) “includes several provisions that address regulatory technology (RegTech) innovation directly or require regulators to consider actions that will involve RegTech.”
Despite the high costs, according to the FATF, when “implemented using a responsible and risk-based approach,” emerging and advanced technologies have a slew of benefits such as helping foster financial inclusion, bringing more people into the regulated financial system thereby reinforcing the effectiveness of AML/CFT measures.
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