Opportunities and regulatory support for innovative AML/CFT tools

Opportunities of new technologies in the AML/CFT field

Technology-advanced services can process large volumes of information that go beyond human capability and provide data processing results in record time, releasing human resources for more critical work such as the analysis of complex ML/TF cases. 

As put by the Financial Action Task Force (“FATF”) in a July 1, 2021 report on opportunities and challenges of new technologies for AML/CFT, technology can increase the capacity to collect and process data, and share it with stakeholders, including supervisors.

Technology can minimise weaknesses in human control measures, improve customer experience, generate cost savings, and facilitate transaction monitoring. Technology includes amongst others, Application Programming Interfaces (“APIs”) which connect customer identification services with monitoring tools, or risk and threats identification tools with customer risk profiles. An API can generate notifications, alerts or alter risk classifications as relevant.  As set forth by the FATF, APIs can (i) improve the interoperability between traditional banking data, moving away from siloed systems with fragmented frameworks (ii) increase automation and optimise resources and output accuracy, and (iii) supply an aggregated and normalized data feed, helping to build a more complete risk profile for new customers. 

Regulatory support across the globe to support innovation in the AML/CFT field

Regulators across the globe support their RegTech industry which provides technology solutions to help regulated firms meet their regulatory obligations in an attempt to further enhance the growth and competitiveness of their financial services industry and the attractiveness of their jurisdictions.  From a global perspective, the Bank of International Settlements (“BIS”) has set up an innovation hub and it partnered with the G20 in 2020 to hold a global TechSprint to find innovative solutions for operational problems in the area of regulatory compliance.

For national regulators, a recent study by the Financial Stability Board (“FSB”) found that a third of the authorities they surveyed had a strategy to promote or encourage the use of RegTech and that the most common areas supporting the use of RegTech were in financial crime compliance and regulatory reporting. 

In France, the Autorité de Contrôle Prudentiel et de Résolution (“ACPR”) has organized in early July 2021 tech sprints on the explainability of algorithms.  The explainability is instrumental to create trust in artificial intelligence (“AI”) as it allows better understanding of the results of the algorithm to approve and supervise AI-based models.

The UK’s Financial Conduct Authority and the Bank of England have been at the vanguard in their support of technology innovation. From its inception in 2014, FCA Innovate has been providing support to both FinTechs and RegTechs and has come up with some novel initiatives to use technology for solving some of the financial services industry’s most intractable problems. Seven ‘TechSprints’ have been held to date, the first focusing on Consumer Access and the most recent in 2019 centering on AML and involving 40 organisations and 140 participants. Run by the FCA’s RegTech team, these TechSprints have offered a model of collaboration across industry, vendors and regulators which have demonstrated the power of what can be achieved when these three sets of actors work together. 

In Singapore, the Monetary Authority of Singapore (“MAS”) has held annual awards for innovative FinTech and RegTech solutions, announcing the winners during Singapore’s annual FinTech Festival. As well as providing clear guidance to financial firms on outsourcing, MAS has also issued a set of guidelines around technology risk management which describes the best practices for sound technology risk governance. Finally, MAS has established a Productivity Solutions Grant to provide smaller financial firms with funding to adopt regulatory reporting solutions, valued at up to $250,000 per entity.

In Hong Kong, the Hong Kong Monetary Authority (“HKMA”) published in November 2020, a white paper establishing a two year roadmap for the promotion of RegTech adoption.  With five areas of recommendations, the vision is wide- ranging and the actions that the HKMA plans to take to implement the recommendations are:

• hosting a large-scale event to raise the banking sector’s awareness of the potential of Regtech;

• launching a Regtech Adoption Index;

• organising a Global Regtech Challenge to stimulate innovation;

• publishing a “Regtech Adoption Practice Guides” series;

• creating a centralised “Regtech Knowledge Hub” to encourage information sharing; and

• establishing a Regtech skills framework to develop talents.

In Australia, funded by the Federal Government, the Australian Securities and Investments Commission (“ASIC”) has pursued several initiatives to promote the adoption of RegTech within Australia. Using this funding, between 2018 and 2020 ASIC selected a number of difficult problems to address through problem solving events, trials and webinars covering topics from financial promotions to a chat-bot to help navigate the financial services licensing framework. Australia’s Prudential Regulation Authority (“APRA”) has followed a similar path to the Bank of England, looking towards RegTech to streamline its own data collection and regulatory reporting processes, whilst at the same time, encouraging the adoption of RegTech within its regulated community to make their data and reporting capabilities more efficient. APRA also engages with the RegTech industry through ongoing engagement with Australia’s RegTech industry association.