As published in Tabb Forum.
2024 was another landmark year for FinCrime and related prevention efforts, writes Steve Marshall, Director, Advisory Services at FinScan, an Innovative Systems solution. Against a turbulent geopolitical backdrop, regulated firms face the challenge of ensuring their AML compliance systems keep pace with new and extended sanctions packages, Mr. Marshall explains in this article.
With increasing geo-political tensions, regulatory developments, and technological advances, 2024 was another busy year in the financial crime (FinCrime) space. The last 12 months were also punctuated by record fines for anti-money laundering (AML) breaches, highlighting the challenges regulated entities face in keeping pace with the speed of change. This 2024 retrospective shines the spotlight on the key themes from the past year, including the expansion of sanctions packages and the growing complexity of the financial ecosystem and regulatory and technological developments.
Expanding geopolitical turmoil
2024 saw continued expansion in geopolitical turmoil around the world. The enduring war between Russia and Ukraine and the rapidly escalating conflict in the Middle East captured the headlines, but there were other hotspots, such as Venezuela, following the disputed presidential election in August.
Geopolitical turmoil often translates to new and additional sanctions regimes. In the case of Russia, the U.S. Departments of State and Treasury announced a new package of measures to disrupt Russia’s wartime economy, while new sanctions were introduced against Iran following drone attacks on Israel. In Venezuela, we saw the reinstatement of oil sanctions, which had been lifted in October 2023 on the promise of an orderly election that did not ultimately come to fruition.
Keeping pace with the fast-moving sanctions landscape is essential for regulated institutions and requires technological infrastructure. Failure to do so can result in large fines and reputational damage, as evidenced by high-profile fines of banks over the course of the year for not having sufficiently robust AML compliance and sanctions screening systems.
More complex payments ecosystem
A growing array of new payment types and payment rails continues to crowd the payment marketplace, which means institutions have a more complex payment workflow to monitor when undertaking transaction screening.
The gradual shift towards instant payments worldwide is a case point, with Switzerland one of the latest markets to move to instant payments. Instant payments mean financial institutions (FIs) must work to a much shorter and stricter timeframe when screening payments. In contrast to screening a standard automated clearing house (ACH) payment, which settles over two days and gives FIs sufficient time to check that all parties are compliant, real-time payments must be screened and settled within minutes or even seconds. Any delays in transaction screening would damage the real-time payment proposition, so FIs must ensure they have the technology in place to act at speed.
Growing adoption of blockchain was also signaled through Stripe’s landmark acquisition of stablecoin platform Bridge for $1.1bn in October. The acquisition will facilitate faster, safer, and cheaper domestic and cross-border payments. Stablecoins are pegged to fiat currencies, reducing volatility and minimizing the need for traditional banking intermediaries. The move could also see greater adoption for stablecoins and blockchain technology, at large, as Stripe is a major merchant acquirer.
New regulatory developments
In January, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) opened its beneficial ownership registry under the U.S. Corporate Treasury Act, while in March, the UK expanded the coverage of beneficial ownership registers. For its part, the EU updated its best practices for effectively implementing restrictive measures which now more closely aligns with the Office of Foreign Assets Control (OFAC) 50 Percent rule in defining ownership.
More change is ahead. Beneficial ownership reporting is a key focus of the EU’s updated Sixth Money Anti-Laundering Directive (6AMLD), announced as part of the EU’s AML package of reforms in May 2024, while Australia launched a consultation on enhanced beneficial ownership requirements in November.
Regulated institutions also must get to grips with additional cryptocurrency requirements. The EU’s MiCA regulation introduced in 2023 aims to align crypto activities with existing AML requirements and demands transaction monitoring and beneficial ownership transparency even within the crypto ecosystem. 2024 saw transitional work undertaken to comply with MiCA’s measures.
Compliance teams will also need to adjust to new regulations published this year. Alongside the EU’s AML Package, Australia passed its Anti-Money Laundering and Counter-Terrorist Financing Amendment Bill in September, which, among other things, will expand AML oversight to the legal and accountancy sectors.
Advancing technological capabilities
The broad and rapid advances in AI, particularly generative AI, have led to the creation of AI frameworks from the G7 and various governments, indicating a more structured approach to how AI can be deployed for compliance purposes, including AML and KYC processes. The EU’s Artificial Intelligence Act, published in July 2024, is a key example.
As cryptocurrencies and other digital assets draw investors’ attention in a cyclical manner, machine learning-based graph investigation technologies are being utilized to monitor millions of assets across multiple blockchains, including non-fungible tokens (NFT) and decentralized finance (DeFi) protocols, to enhance transparency by tracing digital wallets and transaction pathways. These advanced tools are increasingly combined with traditional AML/KYC solutions to enhance compliance efforts, particularly when funds from digital assets and wallets are converted into fiat currencies. New tools that use advanced biometrics and digital identity solutions are emerging, transforming the customer onboarding process to increase protections against fraud and synthetic identity.
Data quality has been consistently highlighted as an essential component of a robust AML compliance program as technology capabilities advance. The EU’s AML Package included a number of data collection and management requirements. Additionally, The Comptroller of the Currency in the US and the Switzerland-based Wolfsberg Group cited data quality in releases throughout the year.
The path forward: building resilient AML strategies
2024 was another landmark year for FinCrime and related prevention efforts. Against a turbulent geopolitical backdrop, regulated firms face the challenge of ensuring their AML compliance systems keep pace with new and extended sanctions packages. Furthermore, ensuring transaction screening capabilities are flexible and adaptative to accommodate an increasingly complex payment infrastructure, encapsulating instant settlement and integrating with crypto exchanges as money moves across blockchains, other digital assets and/or gets converted to fiat.
From a regulatory perspective, ultimate beneficial owner reporting requirements have come to the fore in 2024; they will continue to be front of mind thanks to new regulations published in various jurisdictions over the last 12 months. Finally, AI will increasingly find more use cases to support AML investigation efforts. Still, organizations also need to be cognizant of regulatory frameworks supporting their implementation and ensure data quality is central to the design of a robust AML program.