Key KYC and financial crime developments in 2023

Increased geopolitical risks increase money laundering opportunities

Geopolitical risk has increased significantly in 2022 and shows no signs of diminishing in 2023. The ongoing war between Russia and Ukraine is a key case in point and has resulted in Russia becoming the most sanctioned country in the world. There are also ongoing tensions with Iran, which has the second highest number of sanctions. The increase in the number of sanctions worldwide leads to a greater possibility of money laundering.

In 2023, we can expect to see the emergence of more complex money laundering schemes; trade-based money laundering (TBML), where money is moved through commercial transactions, is a particular problem. The US sanctions issued in November 2022 against several companies accused of facilitating the sale of Iranian petrochemicals to East Asian buyers are a good example of this trend. The challenge for financial institutions is that these types of money laundering schemes are hard to detect and will easily remain under the radar without a strong compliance infrastructure and robust controls.

The review of cryptocurrency regulation continues

As cryptocurrencies move more and more into the mainstream, so does the level of regulation surrounding them. The approach taken to crypto-regulation varies significantly from country to country, but there is an undeniable shift towards increased oversight of crypto-firms and the need to comply with KYC and AML regulations. For example, from 2022, the UK requires all cryptocurrency firms to be licensed and has also introduced cryptocurrency-specific regulations relating to KYC and AML.

In 2023, there will be a strong focus on regulating cryptocurrency firms. The collapse of the FTX cryptocurrency exchange in November 2022 and reports of lax controls will only add further impetus to the need to regulate the sector. The European Union (EU) is on the verge of approving the Markets in Crypto-Assets (MiCA) regulation, which will have far-reaching implications for crypto-activity in the bloc, covering money laundering, consumer protection and corporate accountability. If adopted, as expected, by the European Parliament, it is likely to come into force from 2024, which will mean a busy year for firms coming under it to prepare for implementation.

Payment companies and fintechs are upping their KYC game

The universe of payment companies and fintechs has expanded significantly in recent years. New challengers have emerged to challenge traditional players and improve the customer experience through a slick digital-first approach. However, there are concerns that these challengers lack the necessary infrastructure or compliance controls. In April 2022, the UK’s Financial Conduct Authority (FCA) published an analysis which found that challenger banks need to improve the way they assess financial crime risk, with many focusing on rapid customer onboarding rather than customer due diligence.

As challenger brands become an increasingly important part of the financial services landscape, we expect regulators will inevitably focus more on their compliance processes. Many money laundering scandals are complex, with sophisticated transaction patterns that escape basic scrutiny. As a result, requirements to combat them are becoming increasingly thorough and detailed, as demonstrated by the US Treasury’s 2022 National Illicit Finance Strategy. Newer providers will need to ensure they have the compliance infrastructure in place to keep pace with the changing regulatory environment.

Metaversus and implications for money laundering

Metaverse, often referred to as the 3D Internet, has only become prominent in the last two years. People in the metaverse can represent themselves in the form of an avatar and, increasingly, it is believed that for some, the metaverse will represent a whole new world in which they can present themselves. If a person chooses to present themselves to a financial services company through their avatar, rather than in real life, this would present challenges in terms of integration. There is also the possibility of moving money into metaverses, often through the use of digital assets. Again, this presents a number of potential loopholes for money laundering. The metaverse may still be in its infancy and the absolute amount of financial crime may be limited, but as it continues its upward trajectory, the level of concern will increase. There will therefore be increasing pressure for the industry to establish its position and approach to tackling financial crime in the metaverse.

All in all, 2023 looks set to be another challenging year in the fight against financial crime. Financial institutions will be pushed to ensure they have a strong compliance infrastructure in place. Traditionally, this has meant increasing the number of staff in compliance departments, but in this era of the Great Recession, combined with staff cuts, this is not always possible, nor is it the most effective approach. As money laundering becomes increasingly complex, there is a greater need to invest in technology to support KYC and AML processes. In particular, the use of simple screening and rules-based approaches are no longer sufficient. However, there are significant opportunities to leverage machine learning (ML) and artificial intelligence (AI) technologies more effectively. The use of intelligent automation techniques such as optical capture recognition (OCR) to decipher documents is one such example. Investing in these capabilities also allows institutions to retrain their staff and assign them to more investigative roles. Financial crime may be increasingly sophisticated, but so are the tools in place to combat it. It is therefore up to financial institutions to use them.