The Financial Action [Tech] Force

Last week, following its latest plenary, the Financial Action Task Force (FATF), the global AML watchdog, published two reports as part of an initiative to explore the opportunities and challenges of technological innovation in the fight against financial crime. The first of the two reports addresses commercially available and emerging technologies that can assist regulated institutions in their AML/CFT commitments as “digital innovations continue to emerge, at an ever-accelerating pace.” The report also highlights “the necessary conditions, policies and practices that need to be in place to improve the efficiency and effectiveness of AML/CFT.”

The initiative, according to FATF, ensures that the watchdog’s global AML/CFT standards remain both relevant and effective amidst an increasingly complex environment.

In today’s environment, institutions are able to leverage advanced technology to analyze big data, both structured and unstructured, more effectively, including clients of Sigma Ratings. According to FATF, emerging technologies can “improve the speed, quality and efficiency of measures to combat money laundering and terrorist financing,” while also helping “financial institutions and supervisors, assess these risks in ways that are more accurate, timely and comprehensive.” Notably, the report adds that while the use of regulatory technology (RegTech) is “highly encouraged, manual reviews and human input remains significant nonetheless.”

While embracing technological innovation is “highly encouraged” with countless benefits, some of the key challenges hindering compliance efforts include the use of legacy systems, which according to FATF, the “complexities and costs involved in replacing or updating legacy systems make it challenging to exploit the potential of innovative approaches to AML/CFT for both industry and government.” For the industry, the “cost-benefit analysis to adopt new technologies continues to be an obstacle to greater uptake of innovative solutions for AML/CFT, based in part on a real or perceived lack of regulatory incentives to pursue innovation.”

Yet, in addition to FATF’s initiative, regulators all around the world, including the European Union and Hong Kong, have made encouraging RegTech adoption a key focus of their supervisory efforts. For those in the United States, under immense regulatory scrutiny, the recently passed Anti-Money Laundering Act of 2020 (AMLA) “includes several provisions that address regulatory technology (RegTech) innovation directly or require regulators to consider actions that will involve RegTech.” Notably, according to Bloomberg Law, “even ahead of Congress’s mandate, the Office of the Comptroller of the Currency (OCC) on Dec. 17 and the Federal Deposit Insurance Corporation (FDIC) on Dec. 15 issued proposed rules that would give each agency greater flexibility to authorize innovative RegTech solutions."

Most importantly, according to the FATF, when “implemented using a responsible and risk-based approach,” emerging and advanced technologies can also help foster financial inclusion, bring more people into the regulated financial system thereby reinforcing the effectiveness of AML/CFT measures.

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