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Change ahead: Key KYC and financial crime developments in 2023 (Farnoush Mirmoeini)

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2022 brought renewed attention to the anti-money-laundering (AML) space and the know your customer (KYC) processes underpinning it. High profile cases, such as the criminal trial of Credit Suisse for failing to prevent money-laundering by a Bulgarian drug trafficking ring and the unprecedented sanctions against Russia put the subject front and centre in the news. It also emphasised the need for financial institutions to be on top of their KYC processes. As we move into 2023, what are the key trends and developments that the industry can expect to see in the financial crime and KYC space? Here KYC Hub puts forwards its predictions for the coming year. 

Heightened geo-political risk increases the scope for money laundering.

Geo-political risk increased significantly in 2022 and shows no sign of abating in 2023. The ongoing Russia Ukraine war is a key case point and resulted in Russia becoming the most sanctioned country in the world. There are also ongoing tensions with Iran, which holds the second spot for the greatest number of sanctions. Increased sanctions globally lead to more scope for money-laundering.
 

In 2023, we can expect to see more complex money-laundering schemes emerging; trade-based money laundering (TBML) where money is moved using trade transactions is a particular issue. The US sanctions issued in November 2022 against a number of companies accused of facilitating the sale of Iranian petrochemicals to buyers in East Asia is a good example of this trend. The challenge for financial institutions is that these types of money-laundering schemes are hard to detect and will easily stay under the radar without a strong compliance infrastructure and robust controls.

Regulatory scrutiny of cryptocurrencies continues.

As cryptocurrencies move more towards the mainstream, so too is the level of regulation surrounding them. The approach taken for crypto-regulation varies significantly by country, but there is an undeniable shift towards increased scrutiny of crypto-firms and the need to comply with KYC and AML regulations. For instance, as of 2022 the UK requires all crypto firms to be authorised and it has also introduced crypto-currency specific regulations relating to KYC and AML.

In 2023, there will be sustained focus on the regulation of cryptocurrency firms. The collapse of crypto exchange FTX in November 2022 and the reports of lax controls will only bring further impetus for the need to regulate the sector. The European Union (EU) is on the cusp of approving the Markets in Crypto-Assets (MiCA) regulation, which will have wide-ranging implications for crypto-activity in the EU bloc covering money-laundering, consumer protection and the accountability of firms. If passed, as expected, by the European Parliament it is likely to come into force from 2024, which will mean a busy year ahead for firms that will fall under its purview in preparation for implementation. 

Payment companies and fintechs up their KYC game.

The universe of payment companies and fintechs has expanded significantly over recent years. New challengers have emerged to challenge incumbent players and improve customer experience with a slick digital first approach. However, there are concerns that these challengers do not have the necessary compliance infrastructure or controls in place. In April 2022, the UK’s Financial Conduct Authority (FCA) published a review which found that challenger banks needed to improve how they assess financial crime risk, with many putting a focus on onboarding customers quickly rather than focusing on customer due diligence.

With challenger brands becoming an increasingly important part of the financial services landscape, we expect that regulators will inevitably focus more on their compliance processes. Many money-laundering scandals are complex, with sophisticated transaction patterns that escape basic monitoring. Accordingly, the requirements to combat these are increasingly thorough and detailed, as demonstrated by the US Treasury’s 2022 National Illicit Finance Strategy. Newer providers will need to ensure they have the compliance infrastructure to keep pace with the changing regulatory environment.

The metaverse and the implications for money laundering.  

The metaverse, often referred to as the Internet in 3D, has only risen to prominence in the last two years. Individuals in the metaverse can represent themselves as their avatar and increasingly the view is that, for some, the metaverse will present a whole new world in which to present themselves. If an individual chooses to present themselves to a financial services company through their avatar rather than in real life, this would present onboarding challenges. There is also the scope for moving money in the metaverse, often through the use of digital assets. Again, this presents a number of potential loopholes for money-laundering. The metaverse may still be nascent and the absolute value of financial crime limited, but as it continues on its upwards trajectory, so too will the level of concern increase. There will therefore be an increasing push for the industry to determine its position and approach to fighting financial crime in the metaverse.

To conclude, 2023 looks set to be another challenging year in the fight against financial crime. Financial institutions will be pushed to ensure they have in place a strong compliance infrastructure. Traditionally, this has meant increasing headcount in compliance departments, but in this era of the Great Resignation combined with staff cuts that is not always possible, nor is it the most effective approach. With money-laundering increasing in complexity, there is a greater need to invest in technology to support KYC and AML processes. In particular, the use of simple screening and rules-based approaches are no longer sufficient. However, there is significant scope to harness machine learning (ML) and artificial intelligence (AI) technologies more effectively. The use of intelligent automation techniques such as optical capture recognition (OCR) to decipher documents is one such example. Investing in these capabilities also enables institutions to retrain their staff and deploy them to more investigative roles. Financial crime may be increasingly sophisticated, but so too are the tools in place to fight it. The onus is therefore on financial institutions to use them.

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