AML KYC – Compliance Trends and Regulations 2023

Nowadays, the financial industry invests a lot more money in compliance than it did ten years ago. The way financial institutions handle regulatory compliance can be viewed as either a major roadblock or a business enabler for those looking to grow their businesses, enter new markets, or increase their product offerings.

The pandemic’s effects have only heightened the demand for innovation and technology. Where banks have previously automated their compliance processes through technology, this is likely to happen more frequently in 2023. The major changes in regulatory compliance for financial institutions in 2023 are what we will be discussing in this blog!

Brand – New Challenges

Companies didn’t particularly enjoy the added cost — a belief that compliance prevents the company from conducting business persisted at large companies and in some smaller ones — but leaders understood the value of the compliance function. While businesses built up teams and systems, spending on compliance frequently peaked, but EU and UK regulators have made it clear that they must maintain effective compliance.

According to Mark Spiers, a partner at the London-based regulatory consulting firm Bovill, “some firms have reduced teams from previous highs as they were in a change mode and are now in ‘business-as-usual’.” But those resources still need to be modified over time in accordance with the risks that particular firms are exposed to.

The senior management assumption that compliance can handle more tasks is a drawback of having ample resources, particularly when economic uncertainty necessitates the search for cost savings. The regulatory repercussions of data- and cybersecurity breaches, expanding climate impact reporting, guided investment in environmental, social, and governance (ESG) initiatives, and businesses exploring the opportunities of the crypto-sphere are some of the new challenges requiring compliance input today.

Let us now move on to the important 2023 regulatory compliance advancements.

Act against Money Laundering

The Anti-Money Laundering Act of 2020 (AMLA), which includes significant AML law reforms, was signed into law on January 1, 2021. Through the provisions contained in the following five titles, the AMLA aims to strengthen, modernize, and simplify the current AML regime:

• Enhancing Treasury’s Financial Intelligence, Anti-Money Laundering, and Counter-Terrorism Financing (CTF) Programs (LXI)
• Modernizing the CTF and AML Reporting System (LXII)
• Improving AML and CTF Oversight, Processes, and Communication (LXIII)
• Setting Up Beneficial Ownership Information Reporting Requirements (LXIV)
• Additional (LXV)

FinCEN, the main organization in charge of carrying out the majority of the AMLA, has completed work on a few provisions, but several others are still awaiting updates or are in the middle of the rulemaking process.

Article 1071

No later than March 31, 2023, the final rule governing the requirements for small businesses to collect data must publish. Institutions that must comply with these data collection requirements will have 18 months to put the procedures in place after the final rule is published. According to the proposed rule, institutions that had at least 25 covered credit transactions with small businesses in the two calendar years prior to September 1, 2022, would be governed by it. As a result, the vast majority of community financial institutions will have little time to complete one of the most difficult data collection projects that regulators have yet to launch.

Fintech

Fintech partnerships are here to stay, as evidenced by a recent survey commissioned by American Bankers Association-endorsed solutions provider Q2. According to 61% of respondents, partnerships with fintech companies are either the most crucial or a key element of their growth strategies. While there are many benefits to these relationships, they also introduce an often unregulated third party, which could lead to additional or increased risks. In response, regulatory agencies have raised the bar for financial institutions’ risk management practices and expanded their regulatory mandate to include ongoing change management and regular updates to risk assessments.

Overdrafts

The use of overdrafts by financial institutions will continue to be a significant concern for regulators in 2023. Regulators want to know what community financial institutions are doing to protect customers from unnecessary overdraft fees in light of some larger institutions’ restrictions on or elimination of overdraft fees. According to regulatory bodies, banks must take corrective action for overdraft re-presentations before any scheduled compliance exam. Recently, the Consumer Financial Protection Bureau also declared that it was going after fees charged for due returns of goods. In addition to the regulatory risk, plaintiffs’ lawyers are still looking for ways to file a lawsuit over overdraft fees associated with re-presented items.

Monitoring of cryptocurrency transactions

The likelihood of novel transaction patterns and suspicious activity increases exponentially as an investment in cryptocurrencies and investor skepticism about it both rise. Transaction monitoring programs at financial institutions frequently play a key role in the regulation-required prevention and detection of money laundering activity. Institutions must know their customers and spot potentially suspicious transactional behavior in addition to stricter due diligence requirements. To find these risks and take action before it’s too late, the transactional data that underlies them is an invaluable resource.

Evaluation bias

Even though many financial institutions have prioritized fair lending over the past few years, recent studies have shown how widespread appraisal bias is in the market. When an appraiser values a home less highly because of its location or the race of the owners, this practice refers to as appraisal bias. This bias affects not only lending transactions but also generational wealth, given how valuable real estate can be as an asset. Financial institutions are just now considering how to deal with appraiser bias because failing to do so could lead to a new type of redlining.

Governance, social, and environmental

Although regulatory bodies have acknowledged the financial risk posed by climate change and have released draft principles that give an idea of what to expect in the future, no specific environmental, social, and governance (ESG) regulatory guidelines for financial institutions have been provided. While climate change continues to be the main concern, other ESG priorities are gaining ground. The Acting Comptroller of the Office of the Comptroller of the Currency recently made some comments that suggest regulatory agency cooperation may increase as more specific guidance is created. Expected to happen in 2023.

A CMS update for cryptocurrencies

Digital assets are now more commonplace as a means of investment and transaction than they once were. Does your compliance program adequately address the unique risks and related regulatory requirements for digital asset activity? Regulation mandates that institutions address any known compliance risks, and cryptocurrency introduces a previously unheard-of level of risk. New regulations for digital assets are on the way, and the current administration and federal regulatory bodies are increasing their scrutiny of cryptocurrencies.

Next, The top 5 compliance automation trends that you should be aware of are as follows.

Latest Trends

There is no doubt that more AML regulations will implement globally, especially in the area of cryptocurrencies and digital financial markets. These are the latest trends in AML KYC Domain –

Artificial intelligence (AI), machine learning, and compliance in regulatory contexts

Today’s currency is data. And aside from Big Data, what other types of regulatory documents are available for use? Therefore, it should come as no surprise that AI and machine learning have made their way into regulatory technology to aid in managing and governing vast amounts of regulatory data.

According to this article by Regulation Asia, AI and machine learning aid in the conversion of regulatory knowledge into useful information. However, they require assistance as they learn the regulatory language.

Knowledge graphs, taxonomies, and compliance

The logical extension of artificial intelligence and machine learning is taxonomies and knowledge graphs. To put it simply, a taxonomy is a system of classification that enables us to categorize objects and describe “the domain of information through a standardized vocabulary.” This is accomplished by drawing connections between ideas and identifying additional ways to express the same idea. On the other hand, the knowledge graph’s job is to gather the information, simplify it, and organize it into knowledge-based data.

However, how does this factor into your organization’s or your tool’s compliance automation? As previously stated, machine learning and AI are logical extensions of the knowledge graph. Combining them will greatly increase machine learning’s capabilities. Knowledge graphs not only offer high information reliability and explainability but also significantly improve machine learning’s potential, which has a direct bearing on the viability of digital compliance solutions.

Embedded conformity

There is now a new compliance automation system available. By offering value-added technology, regulatory technology is no longer just a “nice-to-have” but rather a business accelerator. Mature providers need to join the bandwagon for this change to be widely accepted. With Credit Suisse, Apiax has already been successful in securing such an adoption.

For us, embedded compliance is what compliance automation entails. It is now possible to combine business processes and regulatory technology. As regulatory technology enables businesses to take advantage of business opportunities, cut costs, and mitigate risks, more and more businesses are incorporating it into their corporate structures.

Technology for international compliance and regulation in APAC

Financial institutions must comply with an expanding number of constantly evolving regulations if they want to serve a global clientele. What is frequently referred to as a cross-border framework must be actively managed and ensured by them. We conducted a cross-border compliance survey to determine the areas where businesses have the most difficulty.

91% of the surveyed businesses still obtain legal information the old-fashioned way, which includes memos, phone calls, and emails. As a result, financial institutions have a lot of opportunities to use compliance automation for cross-border compliance.

APAC has experienced impressive growth rates over the past ten years and is now a crucial region for the financial sector. The top three offshore wealth centers in the world, Hong Kong, Singapore, and Switzerland, stand to gain the most from this change. Enabling growth, innovation, and customer focus despite regulatory complexity has become one of the major challenges for the financial services industry in the APAC region, just like in other financial centers around the world.

Automation of compliance for meeting preparation

Planning and documenting client meetings become increasingly difficult due to rising regulatory complexity, making it impossible to continue serving clients’ needs. Preparing for client meetings shouldn’t be a hassle in today’s digital and always-connected business world. Access to digital compliance rules based on all applicable regulations, directly embedded into the tools you already use, is possible through compliance automation. Relationship managers are able to realize more client interactions with greater assurance thanks to actionable answers to the most pressing regulatory questions regarding client meetings.

Last Words

Adopting new compliance technology puts teams under additional strain in the short term, and its implementation requires careful planning to be successful. Although compliance consulting companies are frequently hired to assist financial firms in growing their operations or adapting to regulatory changes, they are increasingly being asked to assist businesses in integrating technology and the human team. To learn in-depth about the AML KYC domain, you can try the Vskills Certified AML KYC Compliance Officer certification. In order to combat illegal operations and the movement of money through banking channels, this Vskills certification seeks to enhance the standard of compliance with RBI directives.