2021 has been another year filled with volatility for the compliance landscape. From the rise in financial frauds and cyber crimes fueled by COVID-19, to the spotlight on environmental crimes at COP26, as well as one of the biggest data leaks in the Pandora Papers saga, financial crimes are rapidly evolving, and so are regulations. Alongside intensified risks, there are also exciting opportunities in the crypto and virtual asset space, which have attracted the attention of regulators. 

In retrospect, how did these key happenings set new standards for Anti-Money Laundering (AML)/ Counter-Terrorism Finance (CTF) practices? What are important actions that firms should take? These are some questions that we hope to answer in this review, while we highlight key insights into what the future holds for the compliance landscape in 2022 and beyond.

Environmental, Social, and Governance (ESG): Spotlight on Environmental Crimes 

Aside from traditional financial crimes, rising awareness towards ESG has expanded the scope of understanding and expectations towards relevant crimes. With whistleblowing incidents and increased public access to corporate information, companies are now expected to comply not just with legislation, but also with ethical expectations revolving around health, safety, environmental, and human rights practices. 

In particular, the COP26 Summit this year and various updates from key regulators have cast the spotlight on the issue of environmental crimes. The FATF report released in July 2021 has alluded to the convergence of environmental crime and money laundering activities, and environmental crimes are now listed as a predicate offence under the 6th EU Anti-Money Laundering Directive (6AMLD). 

Firms are now expected to assess their risk exposure to non-traditional financial crimes and join in the effort to combat intersecting problems in the realms of ESG. More information on the issue can be expected at the FATF’s next plenary in February 2022. 

Pandora Papers leak: Upcoming Revisions to Beneficial Ownership Standards

The Pandora Paper leaks — dubbed as one of the biggest leaks of offshore data in history — has pinpointed the need to strengthen regulation and compliance in beneficial ownership. The 11.9 million leaked documents exposed powerful figures and organisations from over 100 countries and predominantly involved the use of offshore shell companies to hide their wealth.

In response to the incident, the FATF has released statements expressing frustration over the lack of effective actions from most countries, despite the introduction of beneficial ownership standards almost 2 decades ago. The regulatory body is now considering amendments to its Recommendation 24 to enhance the transparency around beneficial ownerships, and final revisions may be expected to be made in 2022. 

For many firms and compliance teams, the Pandora Papers has revealed an unprecedented risk exposure to financial crimes with the extensive scope of organisations and individuals involved. Many have been revisiting and reassessing the risk levels of their clients based on the leaked files. In the future, firms should also look into enhancing their KYC processes to mitigate risks and anticipate new regulations for offshore property owners. 

Crypto and Virtual Assets: Expansion of Relevant Regulations 

As market prices of Bitcoin and various virtual currencies soared to unprecedented levels this year, there has been an influx of public interest in the crypto and virtual assets space. At the same time, regulatory bodies around the globe have taken steps towards understanding the virtual asset market and associated risks. 

One of the key updates includes the Guidance from the FATF on a Risk-Based Approach to Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), just released in October this year. Revisions from the 2019 Version include clarification of the definitions of VA and VASP, as well as updates on compliance processes involving stablecoins, peer-to-peer transactions, and other procedures involving VASPs.

Alongside the exponential growth of the virtual assets industry, AML/CTF regulators will be constantly revising and expanding relevant AML/CTF requirements. Invariably, firms will need to exercise more prudence and ensure compliance with the evolving regulatory changes and expectations around VA and VASPs. 

COVID-19: Rise in Financial Crimes and Accelerated Growth in RegTech

According to the “COVID-19-related Money Laundering and Terrorist Financing Risks and Policy Responses” report by FATF, the pandemic has led to a proliferation in crimes. The surge in money laundering activities, cybercrime, and misdirection or exploitation of government funds or international financial assistance has pointed towards new vulnerabilities that emerged in the financial ecosystem.

This has highlighted the fundamental need for regulatory compliance. More exigency is now placed upon financial institutions to adopt risk mitigation measures, and many institutions are adopting regulatory technologies to pare costs while meeting regulatory requirements.

According to a global regtech survey, more than 42% of the RegTech firms that participated in the survey reported observing a sharp increase in sales across the industry over the past six months. Currently, several financial institutions have also already started utilising regulatory technologies, such as digital verification processes through facial recognition. Improving remote customer onboarding by allowing them to upload photos of personal documents is also becoming commonplace. 

Moving Forward: Adopting a Risk-Based Approach to Compliance

Beyond 2021, there is no doubt that the compliance landscape will continue to evolve. To keep up with emerging crimes and industry trends, regulatory bodies around the world are quickening their pace in revising existing guidelines. This means that financial institutions and firms will inevitably have to navigate more challenges in this increasingly complex regulatory environment, and our key recommendation is to adopt a risk-based approach for the effective implementation of relevant guidelines. 

Adopting a risk-based approach essentially means taking a more proactive stance in mitigating risks of money laundering and terrorist financing. This often involves the use of risk assessment systems through the use of Machine Learning (ML), Artificial Intelligence (AI), and Deep Learning (DL) as they help to better tackle the dynamic nature of financial crimes with improved efficiency and precision. These intelligent transaction monitoring methods can help institutions conduct ongoing reviews to effectively monitor risk profiles real-time, and stay up-to-date with newly released regulations. Automated risk scoring systems can also enhance the transparency and accuracy of risk assessments to identify and prioritise emerging risks.

Read more on the risk-based approach adopted at RegTank here, and contact us at info@regtank.com for a demo!