As published in Tabb Forum.
Financial crime is becoming more sophisticated, and institutions need to stay ahead of the curve and adopt innovative solutions to future-proof AML and KYC processes, writes Steve Marshall, Director, Advisory Services, FinScan, an Innovative Systems solution. In 2025, organizations will need to focus on data quality and integrity to drive efficiency, accuracy, and effective risk management through robust risk identification and mitigation, Mr. Marshall explains.
With geopolitical tensions escalating, anti-financial crime (FinCrime) measures will be front of mind for regulators and businesses in 2025. We expect to see an increased focus on compliance in the wake of new laws and regulations, growing scrutiny of digital assets and potential changes to the previously coordinated efforts to target evasion of Russian sanctions caused by the recent US elections. Technological advances will drive change as organizations invest in artificial intelligence (AI), machine learning (ML), and blockchain solutions to enhance customer due diligence (CDD) and transaction monitoring. Best practices will also evolve as organizations focus on data quality and place greater emphasis on environmental, social, and governance (ESG) considerations when carrying out due diligence.
New compliance demands
Regulation will again be a key focus in 2025 as regulated institutions get to grips with new requirements introduced by regulators seeking to keep pace with a turbulent global landscape and technological advances. The EU’s 2024 AML Package, for example, ushers in several changes. While many of these do not have to be implemented by 2027, certain elements, such as the enhanced requirements for beneficial ownership registers introduced by the updated 6MLD, have a shorter timeframe. The same reforms will also see a new supervisor, the EU-wide Anti-Money Laundering Authority (AMLA), start work in mid-2025.
[Read Steve Marshall’s related article, “Geopolitics, Regulation and Technology: Analyzing Key AML Developments from 2024.”]
Increased scrutiny of digital assets
The rapid adoption of digital assets, such as cryptocurrencies, will continue to pose unique challenges in detecting and preventing money laundering and terrorist financing. Regulators worldwide are making clear to the crypto industry that FinCrime laws and regulations apply to them; as such, we can expect increased scrutiny of digital asset providers and exchanges, as well as enforcement actions for failure to comply.
In the EU, compliance with the Markets in Crypto Assets (MiCA) Regulation, which has an implementation deadline of 30 December 2024, will be a particular focus for the industry, while the new travel rule or Transfer of Funds Regulation (TFR) will have significant implications for crypto asset service providers (CASPs) in the region. Elsewhere, the Middle East markets will be keenly observed thanks to their progressive and ongoing efforts in crypto regulation. The Abu Dhabi Global Market digital asset framework, for example, is considered to be a world-leading exemplar of a framework that prioritizes investor protection while also fostering innovation.
As for the US, the world awaits to learn more about the incoming Trump administration’s intended approach to crypto assets, though a pro-crypto stance is expected. Reports show that the crypto industry fueled almost half of the corporate money flowing into US election campaigns, with funds used to back key Republican allies, demonstrating the desire of the crypto industry for a Trump administration.
Potential changes to global efforts against Russia
The new US political regime could also ring in changes in the international stance taken towards Russia. Recent years have been marked by an increasingly internationally coordinated approach, as evidenced by G7’s first-ever joint guidance issued in October 2024 on preventing evasion of export controls and sanctions imposed on Russia. However, there is a great deal of uncertainty from the US’ allies and adversaries as to what position will be taken when Trump assumes office in January 2025.
Investment in AI, ML, and blockchain
Digital adoption and investment in AI, ML, and blockchain solutions will accelerate in 2025. Customer due diligence (CDD) is a particular focus area for investment, with organizations being pushed to take a more dynamic approach to CDD to have a more up-to-date view of customer risk rating. Institutions are looking to incorporate transaction monitoring results into the CDD process in real-time, as well as using AI to review large data sets and draw conclusions about anomalies that may present a risk. This proactive approach aims to identify and mitigate risks as they arise rather than relying solely on periodic reviews.
Institutions will also turn more and more to AI to automate routine compliance tasks and reduce false positives when screening. This approach means humans are less pressed to clear alerts, as there are fewer unproductive results. In turn, this frees up resources for more strategic activities while allowing tasks and workflows to be more integrated, smarter, and faster.
ESG considerations come to the fore
Compliance programs will be pushed to incorporate ESG considerations into their customer assessments. Clients’ environmental and social impact and governance should be checked as part of the CDD process, reflecting a broader trend towards responsible banking and investment practices. In particular, greater transparency should be sought on governance structures and any changes to these.
However, environmental and social factors must not be forgotten. The fine of a Dutch yacht maker in December 2024 for failing to check the origin of wood used in the construction of Jeff Bezos’ new superyacht is one recent example of the types of information that regulated organizations will need to ensure they collect as part of their CDD efforts.
An increased focus on data quality is a must
Given technological advances, organizations must focus more on improving data quality in 2025. Multiple bodies have flagged the importance of data quality in recent times. For instance, the EU’s AML Package includes several data collection and management requirements, while The Comptroller of the Currency in the US and the Switzerland-headquartered Wolfsberg Group cited data quality in their 2024 dispatches.
The focus on data quality will not disappear in 2025, though organizations can effectively address data challenges using a comprehensive, compliance-specific data quality solution integrated directly into the screening process. This approach helps uncover hidden risks that traditional screening processes might miss.
Preparing for 2025
The financial crime landscape is becoming more sophisticated, and it is crucial for institutions to stay ahead of the curve and adopt innovative solutions. In 2025, organizations will need to focus on harnessing the power of data quality and integrity to drive efficiency, accuracy, and effective risk management through robust risk identification and mitigation. They will need to invest in technology and expert guidance to address the evolving needs of customers. It will also be essential to future-proof AML and KYC processes to adapt to inevitable change and navigate the complexities of the regulatory environment effectively and sustainably.