In one year — in 2015, more than 50,000 regulatory updates were introduced globally and the flow of regulations continues to this day; albeit, at a slower pace. The massive controls in place on banks and businesses and the complexities they have created is fueling a gold rush of intelligent technology upgrades from the static compliance systems of the past.
Noncompliance is not something banks or financial institutions (FIs) want to deal with at any point of time in the future. The cost of regulatory fines which have amounted to over $321 billion since 2008 illustrates the scale of damage from noncompliance. Add to that the hidden costs caused by reputational damage, such as drops in share prices and loss of important clients.
Investing in advanced compliance technologies is a good hedge against big losses to noncompliance. In 2017 the cost of noncompliance was recorded at an average of $15 million per FI — almost doubling from 2011. On the other hand, the average investment in compliance has been recorded at $5-million in 2017, which is a third of the average cost of noncompliance.
The new compliance applications powered by artificial intelligence (AI) technologies effectively reduced the man-hours required for managing compliance at FIs. The application of AI at FIs might have started with executing routine tasks; but now the technology is driving a revolution that can resolve highly complex compliance requirements; and regulators around the world are cheering its adoption.
The trends arising from the need to effectively manage the complexity of today’s financial compliance are not limited to technology. Compliance post-2018 will likely require a more holistic approach that combines the power delivered by technology as well as ensuring data quality and availability. Finding the right data sharing models in the financial industry is another rising trend that will probably see more application in 2019. The different FIs and public sector organizations will need to share more data on entities domestically and across foreign jurisdictions.
All regulators today see information as a core component in successful crime fighting. Many regulators are starting to do just that, and this trend will likely intensify in the coming years. A recent example of public-private partnerships is the FinCEN Exchange and the Joint Money Laundering Intelligence Taskforce, respectively in the US and the UK.
Information sharing also delivers mutual rewards to the parties involved, nurturing the emergence of a culture of collaboration in the financial industry. However, for collaboration to succeed across borders privacy laws and domestic regulations will need to find more leveled legal frameworks.
Information sharing also leads to the faster resolution of who-owns-what, or the ultimate beneficial owners of entities. The identities of ultimate owners, who hide in a pile of shell corporate entities, will become easier to investigate and determine.
New regulatory laws pertaining to information sharing and beneficial ownership may have been drafted already, to be presented in 2019. How these changes could impact bank-client relationships and risk assessments remains to be seen. Banks will need to consider the consequences of such compliance requirements in the future.
The basis of such cooperation in information gathering requires access to precise datasets that answer specific questions per entity. This makes AI technology most suited for playing the most powerful role of extracting and interpreting these multi-origin datasets to produce meaningful insights. By no means can human compliance operators deliver the same results as AI systems would. It’s simply an impossible task for humans.
Blockchain technology is another future player in the ecosystem of compliance. Blockchain’s utility as a continuous storing device of transaction histories, its highly secure nature and its possible interconnectivity across industry lines makes it a real contender for satisfying information transparency and ownership identification. The technology is also optimal for realizing higher efficiencies across departmental transactions, which dramatically reduces the cost of operations. In trade finance for example, banks can apply blockchain to reduce the long trail of paper and data-storage requirements for trading partners and FIs.
Another near-future change could be new regulatory requirements that seek a proof of compliance solution efficacy. This could begin with transaction monitoring systems, which are the primary filtering stage against financial crime.
Other changes impacting compliance management and adding to its existing complexity is a push to overhaul existing sanctions regimes. The US and UK regulators seem to be arming up to create more complex frameworks that better define how International sanctions are applied globally. The need for doing this has emerged on the heels of a widening gap in foreign policies across continental jurisdictions — what’s good for the US and UK may not be good for Europe or the Asia Pacific market regions.
Today’s business world is driven by data. Data is what FIs need to optimize their compliance intelligence and be able to satisfy the ever-expanding regulatory requirements worldwide.
The successful tagging of data for effective real-time analysis, and sharing it with other FIs and public entities will almost surely reduce the burden of compliance in 2019 and beyond. Data will continue to be the primary focus of compliance vendors and regulators to effectively and efficiently detect and fight financial crime.
By Belal Hejawi