Every year, we highlight predictions for the year. We are doing so again this year, though it seems ever-more difficult, as the world is increasingly VUCA. What’s VUCA? Check it out here.
As in past prediction newsletters, we break down the evolving threat & opportunity landscape, as it relates to our focus here at Sigma - primarily across financial crime, regulatory, reputational and increasingly, ESG-related risks. We break our views into what is probable and what is possible (though, some of the predictions are inevitable)
These predictions are meant to be thought-provoking and useful to risk teams who are thinking through how they stay ahead of risk and apply a more lateral lens in 2022. It is also designed to be a quick read - so don’t miss it!
With that, here are the Sigma ‘22 predictions:
Financial and non-financial institutions will continue to innovate and invest in more analytical approaches to risk management, particularly on the back of years of fines, crisis, missteps and re-shuffling of bank executives (the latter of which will drive change). We noted last year that less than 15% of financial crime compliance work today is analytical, with the bulk of the effort centered on administrative work. And this report from McKinsey further highlights how few organizations are leveraging external data today - though, this is set to change. What’s more, institutions that innovate out of a crisis outperform those that don’t by a whopping 30%; imagine what this kind of boost could do for efforts to stem illicit finance flows.Targeted financial intelligence providers will increasingly drive smarter decision making and processes for financial institutions evaluating risk across their customers and their customer’s customers. Trailing indicators like sanctions lists, enforcement actions and PEP lists, while a regulatory requirement, will begin to give way to more advanced data and data-driven analytics that help organizations see around the corner, cover more ground and file more robust suspicious activity reports. At Sigma, we are indexing a growing number of proprietary risk events and indicators from around the world.
The entire art market is about to undergo a major transformation regarding AML requirements (and it is certainly not the last industry to face this change). The rise of the global art market, non-fungible tokens (NFTs), art-related marketplaces and the quantum of money changing hands has shined a light on the industry which has invited regulation that will soon take hold. You can still buy a Bored Ape, but there will probably be some more scrutiny around it. Fintech, DeFi and the disruption of traditional payrails will only accelerate from here. Pent-up institutional demand for crypto custody, new and innovative approaches to fintech-ify global B2B payments and the disruption of traditional payment channels will continue to accelerate and require innovative approaches to guard against financial crime-related risks while ensuring a seamless customer experience. Not to mention the fact that billions remain unbanked globally - this is set to change.
Regtech will increasingly shift to making institutions more effective in fighting financial crime (versus the traditional approach of technical compliance). Per the Wolfsberg Group, effectiveness includes: i) legal compliance; ii) useful suspicious activity report filing; and iii) reasonable, risk-based set of controls. Regtech is in a unique position from here to aid on all three points, but increasingly, on the third point via new approaches to data (both on collection and data transformation that can help institutions better refine where and what to look at). At Sigma, we see a range of firms (ourselves included) increasingly focused on helping our clients improve effectiveness.
‘22 is the year perpetual KYC (pKYC) efforts really take hold. It just makes too much sense from both an efficiency and a budgeting perspective for organizations to not move away from reactive, periodic KYC reviews to proactive, continuous KYC approaches. The road from ‘here to there’ is not straightforward and equal for every organization, but the availability of up to date, networked data makes pKYC possible and is an area we are significantly investing in at Sigma.
National AML priorities will become more prominent globally. The United States kicked off an initial set of national AML priorities in ‘21 as part of the AML Act (e.g., corruption, cyber, etc.) We expect other nations to introduce their own priorities (which are useful in focusing industry on what to look for). From here, institutions will need to align their resources and their data capabilities to attack these priorities and provide useful intelligence and information to law enforcement. As currently designed, most institutions would struggle to prioritize their data, however, that will begin to change in ‘22.
Non-credit and credit increasingly intertwined. Organizations require a holistic view of risk and the blending of these risks will accelerate further - particularly as non-credit risk can effectively be another reason why a borrower may not repay. We highlighted some of this overlap previously in conjunction with Fitch Ratings.
Greater scrutiny of the private investment industry’s compliance efforts. As seen in 2021, advocacy groups will continue to pressure the Biden administration to expand AML rules specific to the private investment industry (a space that has had far less scrutiny traditionally).
An unsettled world brings opportunities for increasing division (including across various sanctions programs, as well as through outright conflict). We argued last year that China would continue to develop and implement its own sanction regime. We were right and this will continue to create interesting tradeoffs for companies who wish to operate globally. Moreover, ‘21 saw considerable global unrest, with Kazakhstan adding to this theme to begin ‘22 (and sabre rattling from Ukraine to Taiwan). The ODNI summed this theme up nicely in a report in March ‘21 entitled “A More Contested World”.
Greater adoption of Central Bank Digital Currencies as more jurisdictions roll out their own versions. While China enters 2022 with a first mover advantage in CBDC, with the United States still in the research phase, approximately 39 jurisdictions have advanced to development, pilot programs, or actual launches according to reports with many more sure to follow.
Risks from EMI are on the radar (and as a result crypto) following recent reporting. Bloomberg and others have warned that EMI - or “e-money” licenses in the UK pose potentially significant AML risk. The online forum in the image below notes a few EMI providers that the user can use to move 50,000 euros in one transaction. Possible
Crypto to ‘cool-off’ a bit, which may actually bring less volatility to more established projects. 2021 saw some major ups and downs across crypto, with a number of projects gaining ground on Bitcoin (e.g., Solana, Algorand, etc.). We expect the hype to level off and give way to something that is more stable. We predicted last year that there would be further focus on the “G” in the Environmental, Social and Governance (ESG) framework. We see continued focus on the “G”, much like there has been on the “E” and “S”, particularly when missing the mark on governance can up-end the entire concept (see Wirecard). That said, much is needed to get the most out of the entire framework - at least as it was originally intended. Some, including most recently a Bloomberg deepdive, wonder if ESG data providers are actually fueling a mirage.
Regarding the “E” in ESG, environmental crime will continue to take a more important role in financial crime compliance more broadly. Already, environmental crime (and cybercrime) is included as a predicate offense to money laundering in the EU 6th AML Directive and the FATF has been arguing for the inclusion of environmental crimes as well (noting that environmental crimes account for an upper bound of $281 billion per annum in criminal gains).
The pace of “major leaks” will continue, exposing further how wide scale the problem of fighting financial crime and associated corruption is for the world. This may become exacerbated as some nations teeter on the brink between fragile and failed (example given, Afghanistan, which was the most searched news story on Google in 2021). NGOs will continue to publish this information and highlight figures that are believed to be at the center of the problem.
Stuart Jones, Jr is the Chief Executive Officer and Founder of Sigma Ratings. He is a former senior U.S. Treasury official with extended leadership tours in Afghanistan and the Middle East, where he covered both macroeconomic and counter illicit finance matters for the Department. For his service, Stuart received the Secretary’s Honor Award and the Treasury Department’s Meritorious Service Award.
To get in contact with Stuart, please email firstname.lastname@example.org