Know Your Customer’s CEO & Co-Founder Claus Christensen takes a look at the 10 AML & KYC compliance trends to watch in 2021.
The systemic changes that have emerged in 2020 are likely to be key and further evolve in 2021 as well. In the space of AML and KYC compliance, these changes have encompassed the way we work, the type of tools we use on a daily basis and the overall approach by regulators towards new technologies and procedures. Let’s take a closer look.
1. Remote work is here to stay
Back in February 2020, I wrote about the coronavirus outbreak in Asia and its impact on remote working policies, which ‘quickly turned from a “nice to have” to a necessity’. After nine months, the news of HSBC telling its 30,000 staff in Hong Kong that they could work up to four days a week from home made headlines. Interestingly, while office life in Hong Kong has returned to relative normality, with this decision the bank has signalled that it does not intend to go back to its pre-COVID office working habits. This is a clear example that the shift towards home working is here to stay, including for compliance teams.
2. RegTech is embedded in the new normal
As compliance teams had to perform all their functions remotely since the beginning of the pandemic, relying on RegTech solutions enabled organisations to ensure uninterrupted provision of services for the past number of months. In the coming months, we expect organisations to expand and better integrate these newly introduced RegTech systems within their overall infrastructure to build a long-term and comprehensive digital strategy.
3. Regulators will continue to play a key role in driving RegTech adoption
In 2020, financial regulators replaced diffidence with encouragement regarding RegTech adoption. This shift, which had already started, was massively accelerated by the coronavirus pandemic, as exemplified by the Financial Action Task Force (FATF)’s official recommendations to promote RegTech solutions for digital onboarding in April 2020. Throughout 2021, we will likely see more and more regulators embrace this attitude on both a national and regional level (e.g. the HKMA’s recent white paper to promote RegTech adoption).
4. The fight against money laundering remains a global priority
In 2020, we witnessed a generalised increase in public spending to introduce COVID-19 relief measures by many governments around the world. This is one of the many reasons why we are likely to see the fight against dirty money become an even more pressing priority for the international community, as exemplified by the FATF’s president decisive speech during the most recent G20 Summit in Riyadh. On that occasion, President Marcus Pleyer urged all G20 members to start leading by example to stop money laundering, remarking the importance of supervising both the financial and non-financial sector (including lawyers, accountants, and trust and company service providers) and highlighting the need for rapid availability of information on beneficial ownership across jurisdictions.
5. We’re moving towards a more unified pan-Asian approach to trade and AML
As we analysed in detail in this article in Regulation Asia, the new Regional Comprehensive Economic Partnership (RCEP) in Asia-Pacific is the biggest trade bloc in history. Its fifteen signatories (Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam) account for about 30% of the world’s population and 30% of global GDP. The initiative represents an important signal of regional cooperation and normalisation within APAC, which will no doubt have long-term economic implications and might even result in a more consistent approach to AML and financial regulations in the region as well.
6. The EU will strive to strengthen its AML strategy across the bloc
Following a series of money laundering scandals across the EU over the past few years, in 2020 the European Commission set out plans to assume new powers to combat financial crime across the bloc. These included the establishment of a single rule book on AML/CFT as well as the introduction of a new and stronger enforcement body. Given the challenges and delays in national implementations of AML directives over the past decade, we expect this discussion to remain a priority at EU level also over the coming months.
7. Crypto and virtual assets are entering the mainstream financial world
After years of living in a sort of regulatory grey zone, crypto and virtual assets are now being regulated on a large scale, primarily due to the release of the FATF revised AML/CTF standards for virtual assets in 2019 (this is one of the topics at the centre of our recent interview with 100x Group’s Malcolm Wright). After a year, the global watchdog published a report on the progress made by the public and private sectors in implementing such guidance. According to the report, 35 out of 54 reporting jurisdictions had already implemented the revised Standards, with 32 regulating Virtual Asset Service Providers (VASPs) and only three prohibiting their operation altogether. As progress is being made also in the implementation of the ‘travel rule’, the mainstream financial world appears ready to embrace blockchain as a trusted way to transfer value.
8. The demystification of the Cloud is underway
Misconceptions about financial regulators’ stance on cloud-based solutions have been surprisingly long-lived, but the tide may be finally turning. For example, in its recently released white paper, the HKMA brought attention to its previously released guidance on how banks can assess cloud solutions before outsourcing internal functions to them, demonstrating a very nuanced and open approach to the use of this technology in financial services. This is great news for cloud-based RegTech providers as such misconceptions have historically represented a barrier to more widespread adoption. As Patrick Jenkins wrote in the FT back in July 2020, “after years of foot-dragging, many [banks] have been abandoning their cautious approach to cloud-based services”.
9. Continuous compliance retraining will be needed
The strong wave of new regulations, together with unprecedented technological advancements, have radically transformed the compliance function over the past fifteen years. As compliance processes become increasingly digitised and previously untapped segments of the population turn to online transactions, continuous technical training for compliance officers will become a priority for regulated organisations around the world.
10. A renewed interest for Digital identities and KYC Utilities is on the horizon
In 2020, due to the closure of thousands of bank branches around the world, millions of people who had not done so before were forced to turn to digital banking. For instance, in the UK, 12% of the nation’s population(6M) switched over to digital banking when lockdown measures were introduced in March and April. To further secure and streamline digital finance operations, there will likely be a resurgence of interest in Digital identity and KYC Utility initiatives. As explored during our talk at the ICA BIG Compliance Festival in October, the new programme will not only be aimed at individuals but will also cover the corporate KYC/Know Your Business space.