Financial crime risk and compliance trends in 2023

The rapid increase in the number of compliance failures related to financial crime risk management has highlighted the importance that regulated businesses place on managing these risks more effectively.

Against this backdrop of increased regulatory scrutiny is a constantly evolving threat and risk landscape, with organised criminal networks using more innovative techniques to launder the proceeds of their criminal activities.

As criminals become more tech-savvy and agile, the fight against financial crime will become more challenging in 2023. Here are our predictions for financial crime risk and compliance trends this year.

1. Increase in fines and penalties for non-compliance with financial crime laws

According to a report by Fenergo^[1], global fines for failing to prevent money laundering and other financial crime surged more than 50 per cent last year, fuelling warnings that such penalties are not curbing the behaviour and systems flaws that allow criminals to channel money through the global financial system.

Banks and other financial institutions were fined almost USD$5bn for “anti-money laundering” infractions, breaching sanctions and failings in their “know your customer” systems in 2022, bringing the total since the global financial crisis to almost USD$55bn. Expect to see a crackdown on all forms of financial crime, including anti-money laundering (AML), tax evasion, bribery, and corruption and increased fines and penalties, both globally and within national borders.

2. Increased media scrutiny on financial crime and greater public awareness

In the early days of AML/CTF laws, the general public was largely oblivious to the extent of financial crime and the social impact of financial crime on society. This has changed in recent years and the business community, in particular, is becoming aware of the various forms of financial crime and the social harm it causes.

In Australia, for example, there has been considerable debate around the level of money laundering happening at a community level through hotels, pubs and clubs. This has led AUSTRAC, the Government agency responsible for detecting, deterring, and disrupting criminal abuse of the financial system, to launch a national educational campaign to help hotels, pubs and clubs to stop criminals laundering proceeds of crime through electronic gaming machines.

3. Increasing risks and vulnerabilities through new and emerging technology

The financial services industry worldwide shifted dramatically towards digitalisation during COVID, and the trend is accelerating. While this has some benefits, particularly for remote or immobile customers, it also brings challenges, particularly with an increase of anonymity posing increased financial crime risks related to customer onboarding and identity verification.

Similarly, increases in new and emerging technologies by organised criminal networks to conduct scams and to move illicit funds around the world in seconds is increasing the threat landscape. Conversely, the emergence of the adoption of regulatory technology (RegTech) to support regulated businesses in managing financial crime risk exposures is helping to counter these effects.

4. Increase in RegTech solutions to combat financial crime risks

While criminals are becoming more sophisticated and agile in their methods, so too are the responses to their activities. The main tool to combat financial crime is RegTech – Regulatory technology – which is the use of information technology to enhance regulatory and compliance processes.

While this has mostly been applied to heavily regulated industries like financial services and gaming and wagering we expect to see it deployed in a greater number of other industries and business sectors in 2023.

RegTech is on an upward trajectory in platform sophistication, and leading solutions now offer real-time reporting and analytics, a detailed audit trail, and better reporting to help decision-makers predict and respond to financial crime risks.

5. Recessionary impacts

We expect to see businesses and organisations having to use their human resources more strategically this year, as the impacts of inflation and the worldwide recession bite. These will provide headcount challenges for risk and compliance teams at the same time that their compliance requirements and threat levels increase.

This will force them to turn increasingly to automation and technology to ensure they meet their compliance obligations and protect their businesses and organisations from bad actors.

6. Increased pace of regulatory change

As the international threat of financial crime grows and criminals become more sophisticated, expect to see a lift in the pace of regulatory change. While global bodies are constantly reviewing their standards and requirements, individual member countries are also likely to ramp up their responses in 2023 through more legislation and guidelines. Also, expect an increase in the level of sanctions for non-compliance.

7. Greater information sharing

A strength of global anti-financial crime initiatives is the increasing collaboration and information sharing between member bodies. While FATF is the international standard-bearer, there is also greater cooperation happening between public and private entities within individual countries.

In Australia, for example, AUSTRAC’s Fintel Alliance aims to increase the resilience of the financial sector to criminal exploitation and support law enforcement investigations. Hailed as the world’s first public-private partnership on financial crime, the Fintel Alliance, brings together experts from a wide range of organisations involved in the fight against money laundering, terrorism financing, and other serious financial crime.

8. Increase in personal accountability regimes

The opportunity for company CEOs and executives to escape liability for failing to comply with financial crime regulations is closing fast. While, in Australia, AUSTRAC can take steps to enforce compliance and seek a penalty under current AML/CFT laws, expect sanctions to be upheld more rigorously with the rise of personal accountability regimes around the world. The expectations are now that all key decision-makers are familiar with AML/CFT laws and regulations and that they take steps to make sure their entities comply.

Also expect regulators to start making financial services firms responsible for reimbursing customers who fall victim to financial crime, even if the customer fell for it.

9. AML/CFT tranche 2 reforms

While Australia’s current AML/CFT regime currently applies to financial services, casinos, and bullion dealers, Australia is a laggard on the international stage and is one of just a handful of countries that have yet to expand AML/CTF laws to “gatekeeper” sectors like accountants and bookkeepers; lawyers and conveyancers; real estate, trust and company service providers and dealers in high-value goods.

In 2020, AUSTRAC estimated that over AUD$1 billion was laundered through the Australian real estate sector just by Chinese entities, while the Australian Federal Police (AFP) said that, of the $187 million in assets seized in 2021, $116 million related to real estate, highlighting the need for these long overdue reforms

10. Financial criminals will continue to thrive

There is a high level of financial volatility and geopolitical instability around the world, and this is likely to continue or even increase in 2023. As organisations lift their digital engagement with their customers, expect increasingly sophisticated cyber criminals to find and exploit security and anti-fraud vulnerabilities that arise from the chaos and pace of change.

[1] https://www.ft.com/content/7a4821e6-96f1-475c-ae55-6401e402061f

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