How Fintech and Regtech Players Can Drive AML Adoption

Khurram Akhtar – Co-Founder ProgrammersStrength.

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The average risk of money laundering and terrorist financing increased from 5.25 in 2022 to 5.31 in 2023. These rising numbers threaten global economies; money laundering crimes are becoming the norm and front companies are organised to empower fraudsters, creating an urgent need for robust anti-money laundering systems.

Fintech and Regtech companies are often targeted by such criminal activities, mainly due to the large number of transactions they handle. However, there is a suitable system to respond to this challenge: the integration of AML control solutions.

While both industries are experiencing increased risk of crime, they have also experienced rapid growth fueled by digital innovation. This has also increased regulatory scrutiny, particularly around AML compliance. There are still some questions about how fintech and regtech can effectively leverage transformative technologies to future-proof AML controls while enabling companies to meet compliance and effectively combat fraud.

Fintech, Regtech and Financial Crime

Technological innovations have revolutionized the global financial industry by developing new products, and these improvements have brought new criminal threats, account manipulations, and security breaches. Fraudsters and terrorists are seeking to take full advantage of newly developed business and financial models while looking for loopholes to exploit financial services. The importance of regulatory oversight of financial services is underscored by the AML laws that are being implemented in almost every country, with the goal of combating and stopping money laundering. AML laws authorize companies and governments to develop new technologies or integrate systems to digitally verify customers, verify transactions, check customers against watchlists, and more.

While the growth of the financial sector has exposed companies to high-risk crimes, I believe that fintech and regtech companies need to work together to create trustworthy and accurate anti-money laundering systems.

The harmful effects of financial crime

Money laundering, terrorism financing and other financial crimes can have serious consequences for both businesses and individuals:

• Loss of trust: Financial crimes affect people’s trust in regulators and financial firms, making it harder to maintain the stability of financial systems.

• Economic damages: The increased risk of crime may cause serious economic crises, destabilizing the financial market and limiting foreign investment and business development.

• Threats to national security: Financial crimes, especially organised crime, and terrorist attacks can directly threaten national security.

Anti-Money Laundering Regulations and Penalties for Non-Compliance

Given the ease and speed with which illicit money can be moved across borders, many countries have developed their own versions of AML frameworks. Yet all are aimed at combating money laundering and terrorist financing.

The European Union has developed a series of anti-money laundering directives, while the United States has the Corporate Transparency Act and the Bank Secrecy Act. AML regulations, with their rigid controls and procedures, serve as a defense against the integration of black money into legitimate financial systems. However, companies can face serious consequences for non-compliance, including sanctions, fines and reputational damage.

Highest fines for non-compliance with AML rules:

1. BaFin imposed a fine of USD 1.5 million on Commerzbank for serious anti-money laundering failures.

2. Bank of Queensland was fined $50 million for failing to comply with AML requirements.

3. The Federal Reserve imposed a massive $186 million fine on Deutsche Bank for anti-money laundering deficiencies.

Key Fintech and Regtech Opportunities

Citing the Financial Action Task Force (FATF) dialogue on financial technology and regulatory technology, the global financial regulator saw numerous opportunities for these sectors, spanning the security of financial systems as well as global concerns around anti-money laundering and countering the financing of terrorism.

Stakeholders and regulators have considered the use of biometric technology and centralized databases to verify customer identities and transactions using AI and ML-backed AML controls and Know Your Transaction (KYT) systems. Fintech and Regtech companies have the potential to create innovative solutions that will help the public and private sectors comply with regulatory requirements, combat money laundering, and secure financial integrity.

The benefits of combining RegTech and FinTech in AML

The continued growth of the financial technology and regulatory technology industries has yielded significant advances, including:

• We help companies improve their customer data collection and research processes.

• Quickly identify suspicious transactions with transaction monitoring and detection algorithms powered by artificial intelligence (AI) and machine learning (ML), providing more accurate results than rules-based systems.

• Providing financial institutions with access to advanced image analysis, data extraction and screening technology, enabling easy-to-use customer authentication.

• Leveraging the power of technology to automate compliance procedures such as AML screening, enhanced due diligence, transaction monitoring and suspicious activity reporting.

Combating financial crime in the future

Below are ways both sectors can work together to empower financial institutions to combat future criminal threats:

• Regtech and fintech companies can increase their use of AI, blockchain, ML, deep learning and NLP technologies to strengthen the effectiveness of fraud detection and anti-money laundering solutions.

• Both sectors can work together to develop more advanced anti-money laundering and counter-terrorist financing systems based on official government crime databases.

• Enabling businesses to handle sensitive customer data more accurately and ensure data is safe from breaches by prioritizing security and privacy regulations and developing anti-money laundering solutions.

• As regulatory scrutiny intensifies, companies must develop solutions that help them comply with regulations without incurring penalties for non-compliance.

To ensure equal participation of fintech and regtech in decision-making, a solid collaborative framework must be created to kick-start their partnership. To do this, a joint committee must be created where representatives from both industries can contribute and play their roles in developing solutions, while raising their prospects in a collaborative environment.

In addition, both industries need to understand the compliance challenges of enterprises to ensure the ideal combination of AI, blockchain and machine learning technologies. Conducting ongoing assessments to address these issues while engaging compliance experts can help fintech and regtech develop tailored solutions for enterprises by leveraging emerging technologies to effectively meet compliance.

Final thoughts

The world is evolving. Economies are becoming increasingly digital, and advanced technologies are empowering both financial institutions and money launderers. While the same fintech and regtech solutions are being used to manipulate financial systems, they can be fruitful in securing the economic fabric of businesses. As a regtech and fintech player, I believe that both sectors need to work together and develop AML control solutions while addressing the challenges faced by businesses, individuals, and regulators. With both sectors having their backs, financial institutions can certainly accelerate the fight against money laundering, while businesses can secure their assets and effectively comply with the requirements.

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