Rise in financial crimes bodes well for regulatory tech

Tim Phillipps (APAC Financial Crime Network Leader and SEA Forensic & Analytics Partner) and Lisa Dobbin (Australia Financial Crime Network Co-Leader and Sydney Forensic Lead Partner) contributed a co-authored byline on how regulatory technology plays an increasingly important role in the effort to combat financial crime. This story first appeared in The Business Times.

The 21st Century, a digital and truly converged era where disruption is increasingly routine, has brought a sea change not just in the nature, but also the frequency and complexity of financial crime. Money laundering, bribery and corruption, tax evasion, fraud, sanctions violations, insider trading, market misconduct - all of these variants of financial crime attack the integrity of financial systems across the globe. A US$2.1 trillion problem, financial crime is, arguably, one of the world’s largest and most profitable industries. Bizarrely enough, if compared with the estimated 2017 GDP of the globe’s largest economies recently compiled by the World Economic Forum, financial crime would rank at number 9 – just behind Brazil and ahead of Italy.

The extent of the problem can also be seen in the recent “Russian Laundromat” scandal. This scandal saw US$20 billion moved out of Russia to 732 banks across 96 countries, including Hong Kong and China. It not only highlighted the transnational nature of financial crime, but also illustrated the breadth of the challenge for the stewards of the global financial system; financial institutions and regulators equally.

As a result, enforcement efforts have been ramped up, with a refreshed focus on stemming the flow of illicit funds. Regulated entities, especially banks, have long been reinventing and adapting their compliance programmes to meet both their legal and community obligations. In many cases, these would have involved huge levels of investment in compliance monitoring and enhanced technologies. According to the Lexis Nexis Risk Solution study last year, financial institutions in Asia Pacific spend an estimated US$1.5 billion on anti-money laundering compliance alone. Against this backdrop, organisations are also being pushed to strip cost and make productivity gains.

It is an ever changing environment. New technologies create vulnerability and threats for financial crime, but equally bring about opportunities to effectively manage the risk in near equal measure. It all comes down to focus. Criminals are focused on making money and financial institutions need to be vigilant in protecting it.

The enabler

Regulatory Technology, or “RegTech”, is often devoid of the innovation fanfare and publicly promoted startup funds of its sexier cousin, “FinTech”, nevertheless it plays an increasingly important role in the effort to combat financial crime, especially in the Asia Pacific region.

Unlike the “consumer experience” and competitive focus of FinTech, RegTech uses advancements in data mining, artificial intelligence and automation to bring insight and efficiency to solve complex problems, gain efficiencies and optimise processes for regulatory compliance and risk management. It makes use of various technologies such as blockchain, machine learning, robotic process automation, natural language processing, predictive analytics and even biometrics in an effort to strengthen and enhance the defenses of financial institutions.

Advances in RegTech often lead to more agile and comprehensive approaches than traditional manual methods when it comes to addressing these risks. Focused more on the institutional response than consumer interaction, their efficiency and effectiveness should ultimately delight shareholders and customers alike with profit and protection. 

Applied in the financial crime domain, RegTech solutions often rely on robust data amalgamations, combining diverse and apparently unrelated data in the search for more comprehensive regulatory insight. Increasingly deployed in real-time transaction monitoring and customer risk assessment processes, the impact can be both positive and substantial. 

To say the least, regulators in Asia like the Monetary Authority of Singapore, have been actively promoting an agenda to explore, define and encourage the adoption of technology that utilises machine learning to identify suspicious activity. 

Compliance has historically been a mandatory “have-to-have” response to meet regulatory expectations. With RegTech solutions, it introduces the promise of a path to revenue generation and market opportunity creation, without sacrificing on regulatory objectives and obligations. 

The challenge

According to one estimate, the total global spend on regulatory compliance technology will rise from $50 billion in 2015 to $118 billion in 2020; consequently, the solutions marketplace has expanded significantly.
The challenge that accompanies the RegTech promise is that organisations will be compelled to endlessly trawl through the myriad of solutions and choose the right technology to fit their business, not requiring them to “bet the farm” and still maintain a globally acceptable standard of compliance. While the promise is large in terms of reduced compliance cost and customer satisfaction, there remains a lurking threat of delivery failure.

We see great value in collaboration amongst key stakeholders – regulators, financial institutions and RegTech solution providers collaborating to advance the promise. The key will be innovating with intent – experimenting with small pilots or proofs of concept to test and validate. To drive the change in thinking needed, Deloitte regularly conducts RegTech “Labs” to educate executives and facilitate an agile RegTech experimentation strategy.

The stakes to protect corporations and the integrity of the financial system remain high. At the core, financial crime response necessitates constant reinvention and adaptability and RegTech may well be a large part of the answer and a gamechanger for organisations in the Asia-Pacific.

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