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Consultants around a meeting table discussing KYC cases

Category: Expertise strategy

The future of preventing Financial Economic Crime and the importance of KYC

As financial markets navigate the complexities of the digital age, the vigilance against financial crimes takes center stage. Understanding KYC protocols, AML regulations, and broader financial crime trends is vital for maintaining financial integrity. This article discusses key developments in compliance, KYC, and AML.

The Financial Economic Crime landscape today is very volatile due to disruptive technological innovations, ever-changing expectations from supervisors and society, alongside the struggle to find and retain talent.

In this blog we will highlight a few of the main trends and developments within Compliance and KYC/AML. Overall, cost reductions, increased focus on risk-based approaches and efficiency are the key elements that drive these trends.

Regulations play a crucial role in preventing financial economic crimes. These regulations require financial institutions to establish controls that can detect increased risk and report suspicious activities. By adhering to these guidelines, institutions can identify and prevent money laundering, terrorist financing, and proceeds of crime.

 

New legislation and supervision

The new Anti-Money Laundering regulation (AMLR) from the European Commission includes an action plan for a comprehensive Union policy on preventing money laundering and terrorism financing.

Consultants around a meeting table discussing KYC cases

The regulation will be overseen by the Anti-Money Laundering Authority (AMLA) that will be established in Frankfurt in 2026 and will consist of approximately 430 people, supervising the 40 riskiest financial entities, and it will also oversee the non-financial sector.

The AMLR will have six priorities of which two might have the most impact:

1. Partnerships for information sharing

The AMLR establishes a framework for the exchange of information within partnerships, for both private and public partnerships when the client presents a higher risk or when additional information is needed to decide on whether the client poses a higher risk and to ensure compliance with their AML/CFT obligations and task.

The information shared within partnerships may contain KYC data, including data about customers and their Ultimate Beneficial Owners (UBOs), as well as transaction data (including suspicious transactions). Such partnerships can also involve collaboration between financial institutions and crypto asset service providers.

This priority has raised some concerns with regard to the feasibility of information sharing and the rights and freedoms of natural persons and the General Data Protection Regulation (GDPR). Even though a data protection impact assessment needs to be carried out prior to the partnership for information sharing between organizations, the supervisory checks should be risk-based according to the EU. The conclusion can be that it simply becomes too complex and time consuming.

 

2. Single Rulebook against Financial Economic Crime

The Single Rulebook aims to provide a single set of harmonized prudential rules which institutions throughout the EU must respect. The aim is to create a level playing field for financial institutions and crypto asset service providers, to apply legislation in a more uniform/consistent manner, as well as create a supervisor that will oversee the major players.

The benefits of a single rulebook can be obvious, however, some financial institutions are worried that their efforts in the previous implementation of local initiatives such as risk-based industry baselines will be undone.

Source: Council of the European Union 


 

  “Criminals move illicit proceeds through numerous intermediaries to avoid detection. Therefore it is important to allow obliged entities to exchange information not only between group members, but also in certain cases between credit and financial institutions and other entities that operate within networks, with due regard to data protection rules."

Council of the European Union

 


Automation and technological developments

To ensure organizations can enhance the customer experience and at the same mitigate Financial Economic Crime risks more effectively and with reduced costs, investments are needed in disruptive technological systems. Traditional manual processes are giving way to digital solutions:

1. AI powered KYC

AI-backed KYC tools will aid businesses in streamlining the process of customer onboarding, which involves identity verification (for example via enhanced biometric authentication tools), customer due diligence and performing a risk assessment of the customer. These tools can identify fraudulent documentation and are able to run data analysis in an automated manner.

2. Enhanced automation and personalization

In addition to the AI tools, the onboarding platforms need to be updated to ensure that clients can complete all necessary KYC documentation online or in the app seamlessly with a few clicks and uploads. It will also provide an opportunity for a more personalized approach where questions are changed based on the client type such as their characteristics, demands and the risk level they pose.

3. Data protection

We can expect an increased focus on data protection which will require the Implementation of stringent authentication and authorization procedures. In addition, compliance frameworks need to evolve to accommodate new data privacy requirements.

Senior security consultants around a table

Other trends and developments

It should not come as a surprise that criminals will find new ways to commit crimes to stay ahead of the innovations at financial institutions, crypto-asset service providers or law enforcement agencies. They will also exploit new technologies like AI to create for example deepfake videos for authentication purposes or use new ways to facilitate transactions via crypto.

Recent publications by Chainalysis and TRM Labs have indicated that even though the percentage of illicit activities with crypto-assets went down in 2023 in comparison to the numbers of 2022, the total of value received by illicit wallet addresses was still higher than 20 billion US Dollars.

In a recent presentation provided by the Office of Foreign Assets Control they have announced that they will continue to keep on focusing on sanction evasion using crypto-assets and via Decentralized Finance (DeFi) as they have seen that Russia has been using alternative payments methods (like crypto-assets) to circumvent the sanctions against the country.


 

AI-driven KYC tools will streamline onboarding with enhanced authentication and automation, while platforms will offer seamless interactions amidst a focus on data protection and compliance evolution.

 


At this moment the level of knowledge on crypto-assets at financial institutions is very low, there is still unclarity in laws and legislation worldwide or sometimes even non-existent (e.g. DeFI and NFTs), and the level of supervision on crypto-asset service providers is different throughout jurisdictions.

 

Conclusion

The future of KYC lies in embracing technology, collaboration, and adaptability. As regulations evolve and customer expectations change, businesses must stay informed and implement efficient KYC practices.

At emagine, there is a great emphasis on technological innovation and new legislation and we help our clients to remain compliant. We offer clients the strategic insights needed to stay ahead of new developments or mitigate financial economic crime risks when clients outsource their KYC/AML files to one of our nearshoring locations.

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