Digital banks face rapidly escalating threats as technological developments in cybercrime make it easier than ever for financial criminals to commit fraud. Against this backdrop, how can digital banks build resilient, robust and customer-centric compliance frameworks to stay ahead of the regulatory curve?
- The threat from cybercrime is rapidly increasing. Digital banks need to close gaps in AML processes and comply with the latest developments in the regulatory landscape.
- Across the globe, regulators are paying particular attention to the virtual asset space.
- A new Refinitiv Expert Talk takes an in-depth look at the relationship between flourishing crypto markets and rising AML challenges. The Expert Talk also explores how technology can help market participants manage crime and compliance in the dynamic virtual asset world.
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Enabling technology
Digital transformation in the world of banking has been swift and welcome, delivering speed, efficiency and lower costs to customers and providers alike.
Both digitally native banks and, to an extent, their traditional counterparties have leveraged leading-edge technology to deliver easy, engaging experiences for clients – but this same technology is also unwittingly aiding and abetting financial criminals, who are increasingly able to exploit new, technology-enabled opportunities to commit fraud and launder money.
Despite significant efforts on the part of banks and financial institutions (FIs) across the financial services sector, gaps in anti-money laundering (AML) processes continue to result in ever-growing fines and illicit activity that is spiralling out of control.
Navigating the regulatory landscape
Alongside this scenario, the regulatory landscape governing the banking sector is complex, and differs across jurisdictions.
One thing is certain, however: regulatory bodies across the globe are all focussing greater attention on the virtual asset space, with implications for digital banks and virtual asset service providers (VASPs).
The Financial Action Task Force (FATF), as part of a 2021 update to the 2019 risk-based guidance on cryptocurrencies, extended AML and CFT obligations via the Travel Rule. VASPs are now required to identify the originators and beneficiaries of transfers above a certain threshold and transmit this information to VASP counterparties,
In the U.S., there is heightened scrutiny of the crypto space, with the Office of Foreign Assets Control (OFAC) specifically targeting individuals and entities using cryptocurrency for illicit activities, as well as any financial services firms or VASPs that enable such activity – even unknowingly.
There is also a Bank Secrecy Act (BSA) Travel Rule requiring all FIs to pass on certain information to the next FI under a given set of circumstances.
In the EU, the so-called ‘Crypto Travel Rule’ has been mandated since mid-2021, with the European Commission calling for consistency with the FATF Travel Rule.
Best-practice considerations
Our Expert Talk unpacks some key considerations for industry players to ensure a best-practice response to financial crime and AML compliance, setting out a 5-point plan that covers the full client lifecycle.
Conducting thorough due diligence and completing know you customer (KYC) processes during the client onboarding stage is of course crucial, but ongoing monitoring also remains key, because risk changes over time and new risks can emerge at any stage in the ongoing client relationship.
Other considerations include:
- Undertaking transaction monitoring for any red flags that could indicate potentially illicit activity
- Ensuring that change of circumstance alerts are in place, because client circumstances remain dynamic and can change at any time
- Implementing holistic risk scoring that takes into account the full range of factors that contribute to an individual customer’s risk score
While remaining compliant and minimising illicit criminal activity are clear goals for any FI, just as important is ensuring customer-centricity. A favourable client experience is no longer a nice-to-have and has become a key differentiator for successful firms.
In the past, many necessary compliance processes, by their very nature, negatively impacted clients, but this scenario no longer holds.
Both data and technology, when smartly employed, can help digital banks and FIs to tick all the boxes – building robust compliance frameworks, lowering risk and delivering compelling customer experiences.
Download the full expert talk: How digital banks can turn AML/KYC challenges into opportunities
