RegTech solutions and AML compliance: what future for financial crime?
| DOI | https://doi.org/10.1108/JFC-04-2020-0051 |
| Published date | 22 May 2020 |
| Date | 22 May 2020 |
| Pages | 776-794 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Esman Kurum |
RegTech solutions and AML
compliance: what future
for financial crime?
Esman Kurum
AML & Forensic library KPMG Luxembourg Société Cooperative,
Luxembourg, Luxembourg
Abstract
Purpose –This study aims to discuss the growing use of RegTech solutions by financial institutions to
comply more efficiently withregulation in terms of anti-money laundering compliance and morespecifically
its influenceon the evolutionof financial crime in the next ten years.
Design/methodology/approach –Based on two online Delphi surveys sentto a panel of international
experts composed of eight speciallyrecruited professionals and specialists of anti-financialcrime compliance
and RegTech,five main predictions have been developed.
Findings –It was found that artificial intelligence would become the most impactful technology for
financial institutionsto fight financial crime, and that there willbe a strong positive correlation between ever-
more elaborated complianceprograms and the level of sophisticationof methods used for money laundering.
Furthermore, the panel designatedregulators’recommendations as likely to be less influential than RegTech
solutions, and the time required to integrate RegTech solutions for AML compliance as the main future
challenge.
Originality/value –These predictions are meant to provide financial institutions and regulators with
useful outlooks. While the reviewed literaturefocused on the role of regulations on the evolution of money
laundering, this study puts stress on RegTech solutions and their impact on both complianceand financial
crime.
Keywords RegTech, Compliance, Technology, Financial crime, Money laundering
Paper type Research paper
1. Introduction
At a time of economic uncertainty and political instability, financial crime, which
encompasses money laundering and terrorism financing, is more than ever a topical issue,
especially for private financial institutions and public authorities. Whether it is about the
successive money laundering scandals involving several Nordic banks or the rise of ever-
more sophisticated terrorist organizations, these have never played such a significant role
on the world scene. For this reason, regulators are reinforcing the regulatory framework by
implementing stricter rulesin terms of anti-money laundering and terrorism financing to be
complied with by financial institutions. This push for more regulation is also supported
by the rise of technological innovations, namely, FinTech and RegTech, designed to,
respectively, accelerate the execution of financial transactions and improve risk
management for regulatory compliance. This topic is nowadays crucial, whether it is for
financial institutionssuch as banks, insurance and investment companies butalso society as
a whole because both money laundering and terrorismfinancing often have a heavy human
cost. The relevance of thisresearch linking RegTech to the fight against financial crime is to
go beyond established facts. The study of disruptive technologies applied to anti-money
laundering (AML) compliance aims at better forecasting the future outcomes of
JFC
30,3
776
Journalof Financial Crime
Vol.30 No. 3, 2023
pp. 776-794
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-04-2020-0051
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
technological sophistication and current regulatory requirements on the evolution of
financial crime. Thus, one questionarises: how might the use of RegTech solutions for AML
compliance influencethe evolution of financial crime and the way it will be tackled?
2. Literature review
2.1 Financial crime and anti-money laundering compliance: between innovation and data
2.1.1 Typologies and theories of money laundering and financial crime. The use of more or
less sophisticated concealment methods designed by criminals to make dirty money look
like legitimate funds is an essential dimension at the heart of many money laundering
processes (Levi and Reuter, 2006) and thus callsfor more regulation and money-laundering
controls to be conducted by states and dedicated institutions. Nevertheless, money
laundering, to be properly defined, requires at least two analysis angles: a legal one and a
supervisory one, whichare mutually dependent (Stessens, 2006).
When it comes to measuring the efficiency of AML policies, using the game theory is
useful. The design of these policies plays indeed a crucial role in the global fight against
money laundering because it has a direct impact on the way regulated financial institutions
(FIs) apply and integrate them to their internal organization to comply with directives
(Araujo, 2010). This is even more significant when these policies influence regulatory
reporting within FIs by leading employeesto over-reporting and thus make the information
more abundant but less reliable when it comes to detecting suspect activity related to
potential money launderingschemes (Takáts, 2011). Thanks to the successive methods used
by money launderers to recycletheir ill-gotten funds, money laundering often has an impact
on the legal economy as well because criminal organizations are constantly looking for
occasions to invest (Baroneand Masciandaro 2011).
The classification of financial crime by Gottschalk (2010a) gives an elaborated view of
financial crime by differentiatingfour main families, with fraud and manipulation being the
two most prominent families in terms of different existing methods. While this
representation enables a detailed vision of what financial crime is, the classification of
financial crime by Irwin et al. (2011) puts the focus on money laundering and terrorist
financing as the two main branches of financial crime. It has been shown that the
motivations for financial crimes could mainly be explained by behavioral, organizational
and managerial sciences (Gottschalk, 2010b). Drawing an exact and constantly updated
typology of financial crime is then necessary for FIs to effectively fight against money
laundering (ML) and terrorist financing risks, which should be done through a reinforced
collaboration betweenFIs and public authorities (Irwin et al., 2012).
Defined as the process of transforming ill-gotten funds into legitimate money through
more or less complex schemes (Daniali, 2014), ML has become a critical issue with its
expansion and ability to easily finance terrorist o rganizations (Sa lami, 2017). However, this
term encompassesa lot of different techniquesand usages. ML primarilyrelies on the type of
channel used by criminals to launder ill-gotten funds: money can be laundered through but
also outside traditional banking and FIs (He, 2010), knowing that the traditional ML scheme
includesthree essential steps, namely,placement, layeringand integration (Gilmour,2014).
2.1.2 Enabling continuous regulatory innovation: the close link between FinTech and
RegTech. FinTech refers to technologies designed to facilitate and automate financial
services. Basically, the notion of FinTech refers to innovative financial services solutions
such as cashless payments, crowdfunding platforms and virtual currencies (VCs) that have
been emerging over the past few years. With more than US$83bnspent every year on AML
compliance programs in the European Union (LexisNexis, 2017), managing such costs and
reducing them is today a critical issue for FIs whilethey have to face increased competition
AML
compliance
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