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19 October 2021, 16:41

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Exploring the Key Challenges within AML and FinTech and Outlining our Recommended Tips to Overcoming These

The Problem

Anti-Money Laundering (AML) and Financial Crime legislation has been developed many times to adapt to the ever-changing global landscape. However, it has been reported to be the least effective of any anti-crime measure. In the first half of 2021 nearly $1 billion was issued on AML and data privacy fines, Fintech Global reports. Law enforcement and policymakers are often distracted by the immediacy of criminal behaviour rather than the proceeds of crime which is the real goal of criminals. What are the challenges of AML for FinTechs?

❖Deficient AML Systems & Controls
❖Increasing Economic Crimes
❖Leveraging technology
❖Rapid COVID 19 Trends




Challenges

Known and Unknown
Finding known and unknown financial crime patters is a huge challenge and graph database technology lacks sufficient expressive power to capture many known financial crime patterns. Perhaps using generalised patterns and industry pattern detection, modelled in the form of reasoning rules of the intentional component is a step in the right direction.

Uncertainty & Simplicity
The world is uncertain, raw data can be unclear, criminal behaviour is often unknown, and the recent Covid 19 has thrown spanner into the works of uncertainty. A successful rule-based approach based on sophistication and usability of language and its performance in encoding real-world cases with a high level of effectiveness will be useful.

Information Integration
With the ever-present threat of financial crime, internal and external information integration is critical. Moreover, the approach should support important properties, such as IT independence, decoupling critical tasks from specific programming languages, correctness and others, thanks to the adoption of a semantically unambiguous formalism and sophistication.

Nearly $1bn was issued in AML, KYC and data privacy fines during first half of 2021

Fintech Global, 2021



Key focus of FinTech AML Teams in 2021 and Beyond

New financial crime and anti-money laundering (AML) concerns across the globe and the emphasis on regulatory oversight means that financial institutions cannot lose focus on the critical responsibility to detect, investigate, and report suspicious activity. At the same time, institutions are being pushed to explore ways to deploy better technology to keep pace with fraudsters and money launderers. Financial institution financial crime and fraud groups have radically changed how they work; no longer in offices collaborating on investigations, sharing information, and learning from one another but working by themselves at home.

 

Recent Financial Crime Trends
❖COVID-19 Frauds
❖Crypto Frauds Binance
❖Digital Payment Risk – Straight through processing – End to end processing
❖ Digitalisation of trade
❖ Market manipulation – GameStop
❖ Cybercrime – Viruses – Malware – Identity theft
❖ Open banking – Players and Processing – Technology – Data

 

Systems and Controls & Technology

Covid 19 made fighting financial crime more difficult. In 2021, FinTechs should focus on tighter controls and interoperable software systems. While many end-to-end financial crime software applications exist, not all are on a single system for TM to case management and reporting. Firms should start focusing on integrating and building new technology which align with regulation and user friendly. As COVID-19 fades and AML teams return to offices, focus should be on AI, quality recruitment and training.




FCA Plan for 2021 and Beyond

The speech by FCA CEO, Nikhil Rathi and the FCA’s Business Plan 21/22 means FinTechs should keep an eye on:

❖ More intervention and tougher supervision by the FCA – The FCA anticipates intervening more often in real-time to prevent any harm to consumers and market integrity.
❖ Higher standards and more guidance – FCA has been continuously raising standards for FinTechs making sure that FinTech do not harm consumers and that they are resilient.
❖ Revocation of authorisations – FCA will be proactive and increase its capability to detect signs of misconduct and act faster
❖ Transparency with the regulator




Our Recommended Action Plan for FinTechs

DX Compliance has explored the issues faced within FinTechs and have created an action plan we recommend for the most effective solutions.

 

Pursue Prevent Protect Prepare
Have a forward-looking strategy for financial crime compliance, using sophisticated, user friendly and effective technology and regulatory innovation within FinTech. Apply new technologies on the FinTech landscape, and also technology that has been utilised in an innovative way, such as AI and Machine Learning solutions, to help uncover financial crime more effectively. Finding new ways to prevent financial crime with the right blend of technology and regulatory innovation is key to the strategy.

Effective Training and Robust Recruitment
By employing robust practical on the job training programme that is applicable and easy to understand will benefit the company. It is important to create rules to reduce false positive alerts and aligning regulatory metrics effectively.

Transparency
Financial market intelligence to build global positive perception and build the right culture, tone at the top, middle and frontline whilst employing data analytics to build trust transparency.




Conclusion: Our Practical Tips for FinTechs

Through our discussion with two compliance experts in our Digital Series we have come up with the following practical tips for Compliance Officers in Fintech. These are as follows:

Technology: RegTech and AI
Build regulation into your technology solution creates cooperation between your IT, compliance and business analysis. Algorithms that treat customers fairly is important to implement.

It is important to learn from others’ mistakes, such as having appropriate detectors for malware puts a stop gap in straight through processing for analysis and prevent payment fraud. Also, building clear lines of categorisation for client types allows for more efficient operations. As part of end-to-end processing ensures identity verification – name matching before transaction processing.

 

Risk Assessments:
It is vital to complete business risk assessments ensuring detail on risks are adequate and demonstrate evidence of control strength. Consider customers, geographical location, products and services, transactions and delivery channels.

Understanding the differences between financial crimes including AML/Terrorist Financing/Fraud/Bribery and Corruption/Tax Evasion relating to your products and services removes ambiguity. An aspirational state of customer risk management implements mechanisms preventing loss of customers and promote loyalty. Utilising big data effectively will impact the success of your AML compliance in FinTech.

 

Recruitment Strategy
Ensure to train staff on the end-to-end processes following clear and simple steps. Focus on real life scenarios to improve their knowledge and skills. It is also impactful to draw on existing staff skill strength before proceeding to recruit and focus on practical analytical skill set not just theoretical.

 

Governance and Oversight:
Ensure to create a compliance culture within your organisation. This begins with the tone from the top management levels and travels to the middle and bottom. Using Management Information to assess your risk and prioritise for effective resourcing will improve your operations.




Conclusion: Our General Practical Tips for FinTechs

Through our discussion with two compliance experts in our Digital Series we have come up with the following general practical tips for Fintechs to succeed.

Enhanced and Customer Due Diligence:
Clearly articulate the purpose and nature of relationship; link expected and actual activity; effectively differentiate between source of funds and wealth and document analysis carried out accordingly. This is becoming increasingly difficult as we enter global world; big vs small (Amazon/Paypal)

 

Transaction Monitoring:
Understand your customer’s financial behaviour/pattern; set effective bespoke and structured thresholds and scenarios in line with expected activities stated by customer. Understand the technological architecture of your transaction monitoring system and perform regular assessments of data feeds / integrity. Investigate TM alerts using due diligence already undertaken as well as external sources if necessary and document discounting rationale to validate decision to proceed with or abort transaction.

 

Suspicious Activity Reporting:
• Train, train train…staff on the process of raising internal SARs to the nominated officer/MLRO following clear and simple steps.
• Demonstrate the investigation and decision-making process as well as rationale for reporting (or not) a SAR and remember all you need is a suspicion. You do not need to crystalise that suspicion; if you have a suspicion, raise a SAR!

 

Governance and Oversight:
• Utilise three lines of defence and ensure there are no blurred lines between the first and second lines of defence, noting where second line are undertaking what may be deemed a first line activity – and the resultant reduction in first line financial crime risk ownership.




How DX can help

Dx Compliance is a full solution Transaction Monitoring through different combined technologies. We provide our software to financial institutions with the company in mind and offer in-depth and industry proven experience for many types of companies around the globe. DX aims to help achieve regulatory AML compliance by empowering compliance people in FinTech. We solve the problems explored in this blog by working with AML compliance officers in FinTech and using technology to help complete their workload. Find out more about DX Compliance solutions here.


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