A few days ago, I received yet another notice from MAS, the Singaporean regulator about new sanctions. A regular occurrence these days, but it got me thinking about how different AML teams operate today compared to a few years ago.
From what we see daily with many of our clients, the number one difference between how anti-money laundering teams work today compared to just a few years ago is speed. Speed in both the rate of external change and the expected speed of execution.
Today’s AML ecosystem experiences much more rapid change in multiple dimensions than during the somewhat slower times when the FATF was created in 1989. These factors then lead to a torrent of change impacting the teams dealing with KYC, KYB, and financial crime compliance in financial institutions, payment firms, and other regulated companies:
International economic sanctions have seen an incredible acceleration in the past few years, but the authorities really shifted gears shortly after Russia’s invasion of Ukraine in 2022. The number of designated entities on sanctions lists has surged due to enhanced enforcement and the inclusion of more nuanced types of sanctions, such as sectoral sanctions that target specific economic activities. This increase reflects a broader trend of using sanctions as a key tool for international policy, resulting in the need for constant updates and adjustments to the sanctions lists maintained by the United Nations, the EU and the US.
Fortunately, most financial institutions can rely on name screening providers and their products that include sanctions screening and automatically update that part. But with rapidly expanding sanctions lists, targeted individuals now also use more advanced sanction evasion tactics such as hiding sanctioned owners behind additional layers of shell companies or moving top-co’s into more secretive jurisdictions.
Looking at Hong Kong figures, an astounding 9.2% of currently registered companies are new entities set up within the last 12 months. This isn’t merely a testament to business vibrancy but also a stark reminder of the highly dynamic nature of the corporate landscape, especially considering the 94,000 dissolutions of corporate entities in the same period. KYC-ops departments and compliance teams face two simultaneous challenges: The high pace of change increases the risk of missing crucial details. At the same time, traditional digital support tools such as entity databases are now significantly behind the quickly changing reality, reducing their usefulness sharply.
Some jurisdictions have always been business-friendly and made it straightforward to incorporate a new venture quickly, though in most countries, this still was an expensive and slow process when the FATF created their first anti-money laundering recommendations in the 90s. Today, we face a very different world. Many jurisdictions compete on the ease and speed of incorporation. As an entrepreneur, I love how comparatively little effort it took to create our four subsidiary companies in different parts of the world for KYC. But criminals, terrorists, and (see above) individuals and entities targeted by sanctions now also have it much easier creating extremely complex multi-national corporate structures with byzantine flow of funds in efforts to disguise true executive control and the actual movements of dirty money.
At KYC, we work very closely with company registries in our main markets, and the picture is similar across the board: Over the past ten years, yearly company registrations have surged. In some jurisdictions, they nearly doubled in this time frame. Consequently, 9% of all currently registered companies in Hong Kong, for example, were created only in the last 12 months. In the UK, this figure is a staggering 16% (800,000 new companies out of 5.4 million registered). We found the exact same picture when we investigated the rate of changes to directors and shareholder structures.
The overwhelming majority of companies are created by entrepreneurs for valid reasons, but a part of the acceleration must be attributed to sanctions evasions and increasingly sophisticated criminal activity.
KYC teams and onboarding specialists in regulated institutions must now cope with an ever-increasing rate of change and increasing international interconnections in corporate structures across countries, regions and continents. But in difficult economic times, they need to do this without expanding budgets or manpower. And they must do so faster than ever before, as we will see in the next point.
Another critical trend adding to the risks is the increasing prevalence of cross-border corporate structures. Companies structured with parent companies outside the local jurisdictions are no longer just the realm of large multinational corporations or trading hubs like Hong Kong and Singapore. In today’s globalised world, with trade flows and supply chains often transcending countries or continents, medium-sized and even smaller companies can have corporate structures extending across country boundaries. In this situation, beneficial ownership structures of companies can be complex and opaque, designed to obscure the flow of funds and the true nature of ownership using layering as a money laundering technique. Or they might accurately reflect a legitimate company’s needs for operating in multiple geographic locations. This trend makes it ever more challenging for compliance teams to distinguish between legitimately complex and artificially layered structures.
Fintechs, virtual/neo-banks, and digital brokers have moved the goalposts for a good onboarding experience to open new accounts, create a new debit card, or transfer funds internationally in seconds rather than days. They have optimised for mobile and then optimised for a low number of clicks (or rather taps) and information requests. This is a fantastic development for consumers, but it changes expectations everywhere, including in business banking.
Relationship managers and compliance teams are now caught between the rising pressures of a high-speed sanctions environment, dealing with fast-changing and more complex structures on the one hand and expectations of almost instantaneous onboarding and transactions on the other.
Unfortunately, slowing down won’t be an option for AML compliance. Many of the above trends seem to be permanent and will intensify rather than reverse in the foreseeable future. Of course, being less compliant with regulations is not an option. And petitioning regulators for more lenient oversight is likely to fail as well.
So, what can compliance teams do to cope?
Compliance teams and management are well advised to plan accordingly and optimise operations to cope with even greater rates of change. These are some areas to work on:
With these measures in place, the increased pace of change in AML is no longer a threat but a huge opportunity to improve customer experience, operations, and regulatory compliance simultaneously.
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But what is the underlying change, exactly?
From what we see daily with many of our clients, the number one difference between how anti-money laundering teams work today compared to just a few years ago is speed. Speed in both the rate of external change and the expected speed of execution.
Today’s AML ecosystem experiences much more rapid change in multiple dimensions than during the somewhat slower times when the FATF was created in 1989. These factors then lead to a torrent of change impacting the teams dealing with KYC, KYB, and financial crime compliance in financial institutions, payment firms, and other regulated companies:
The surge in sanctions updates
International economic sanctions have seen an incredible acceleration in the past few years, but the authorities really shifted gears shortly after Russia’s invasion of Ukraine in 2022. The number of designated entities on sanctions lists has surged due to enhanced enforcement and the inclusion of more nuanced types of sanctions, such as sectoral sanctions that target specific economic activities. This increase reflects a broader trend of using sanctions as a key tool for international policy, resulting in the need for constant updates and adjustments to the sanctions lists maintained by the United Nations, the EU and the US.
Fortunately, most financial institutions can rely on name screening providers and their products that include sanctions screening and automatically update that part. But with rapidly expanding sanctions lists, targeted individuals now also use more advanced sanction evasion tactics such as hiding sanctioned owners behind additional layers of shell companies or moving top-co’s into more secretive jurisdictions.
Pace of change
Looking at Hong Kong figures, an astounding 9.2% of currently registered companies are new entities set up within the last 12 months. This isn’t merely a testament to business vibrancy but also a stark reminder of the highly dynamic nature of the corporate landscape, especially considering the 94,000 dissolutions of corporate entities in the same period. KYC-ops departments and compliance teams face two simultaneous challenges: The high pace of change increases the risk of missing crucial details. At the same time, traditional digital support tools such as entity databases are now significantly behind the quickly changing reality, reducing their usefulness sharply.
Speed of corporate entity changes
Some jurisdictions have always been business-friendly and made it straightforward to incorporate a new venture quickly, though in most countries, this still was an expensive and slow process when the FATF created their first anti-money laundering recommendations in the 90s. Today, we face a very different world. Many jurisdictions compete on the ease and speed of incorporation. As an entrepreneur, I love how comparatively little effort it took to create our four subsidiary companies in different parts of the world for KYC. But criminals, terrorists, and (see above) individuals and entities targeted by sanctions now also have it much easier creating extremely complex multi-national corporate structures with byzantine flow of funds in efforts to disguise true executive control and the actual movements of dirty money.
At KYC, we work very closely with company registries in our main markets, and the picture is similar across the board: Over the past ten years, yearly company registrations have surged. In some jurisdictions, they nearly doubled in this time frame. Consequently, 9% of all currently registered companies in Hong Kong, for example, were created only in the last 12 months. In the UK, this figure is a staggering 16% (800,000 new companies out of 5.4 million registered). We found the exact same picture when we investigated the rate of changes to directors and shareholder structures.
The overwhelming majority of companies are created by entrepreneurs for valid reasons, but a part of the acceleration must be attributed to sanctions evasions and increasingly sophisticated criminal activity.
KYC teams and onboarding specialists in regulated institutions must now cope with an ever-increasing rate of change and increasing international interconnections in corporate structures across countries, regions and continents. But in difficult economic times, they need to do this without expanding budgets or manpower. And they must do so faster than ever before, as we will see in the next point.
Cross-border structures
Another critical trend adding to the risks is the increasing prevalence of cross-border corporate structures. Companies structured with parent companies outside the local jurisdictions are no longer just the realm of large multinational corporations or trading hubs like Hong Kong and Singapore. In today’s globalised world, with trade flows and supply chains often transcending countries or continents, medium-sized and even smaller companies can have corporate structures extending across country boundaries. In this situation, beneficial ownership structures of companies can be complex and opaque, designed to obscure the flow of funds and the true nature of ownership using layering as a money laundering technique. Or they might accurately reflect a legitimate company’s needs for operating in multiple geographic locations. This trend makes it ever more challenging for compliance teams to distinguish between legitimately complex and artificially layered structures.
Onboarding speed expectations
Fintechs, virtual/neo-banks, and digital brokers have moved the goalposts for a good onboarding experience to open new accounts, create a new debit card, or transfer funds internationally in seconds rather than days. They have optimised for mobile and then optimised for a low number of clicks (or rather taps) and information requests. This is a fantastic development for consumers, but it changes expectations everywhere, including in business banking.
Relationship managers and compliance teams are now caught between the rising pressures of a high-speed sanctions environment, dealing with fast-changing and more complex structures on the one hand and expectations of almost instantaneous onboarding and transactions on the other.
Can we slow down, please?
Unfortunately, slowing down won’t be an option for AML compliance. Many of the above trends seem to be permanent and will intensify rather than reverse in the foreseeable future. Of course, being less compliant with regulations is not an option. And petitioning regulators for more lenient oversight is likely to fail as well.
So, what can compliance teams do to cope?
Compliance teams and management are well advised to plan accordingly and optimise operations to cope with even greater rates of change. These are some areas to work on:
- A tighter integration of AML operations with operational teams and relationship management. Silos are often the source of delays and duplicate work.
- Using technology to automate and accelerate operations. The process is well under way in retail banking with self-onboarding systems in place, but there is still a long way to go in SME and corporate banking, payment merchant onboarding and related areas.
- Putting the customer experience at the centre. We observe this approach in client organisations’ most successful digitisation projects. Instead of improving AML, financial crime/fraud, operations, and relationship management separately, a holistic approach with the customer journey at the centre can have the most impact.
With these measures in place, the increased pace of change in AML is no longer a threat but a huge opportunity to improve customer experience, operations, and regulatory compliance simultaneously.
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