RegTech, or regulatory technology, is revolutionizing the way that Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance is managed and reached. The application of cutting-edge Regtech technologies to streamline and improve these processes is helping financial institutions (FIs), virtual asset service providers (VASPs) and other regulated businesses reduce costs, improve their security and scale into new markets.
The evolution of RegTech solutions comes amid a surge in fines being meted out to regulated businesses over failures or lapses in implementing efficient KYC / AML on their prospective and current customers — in 2022 alone, there was a 50% rise in such fines handed out globally.
RegTech solutions provide automated data collection capabilities, improved risk assessment procedures, streamlined customer onboarding processes, fraud detection systems, and more to ensure compliance with relevant local and international regulations.
By leveraging advanced analytics and machine learning algorithms along with ongoing monitoring capabilities, organizations can quickly identify suspicious activity or potential money laundering attempts and take appropriate action. As such, RegTech has become an invaluable tool for businesses looking to stay compliant with complex and evolving KYC/AML regulations.
Let’s take a look at the top 5 ways RegTech can optimize KYC / AML compliance for regulated businesses.
One area where RegTech has been particularly useful is in ID Document Verification (IDV).
IDV is a critical process for FIs and VASPs to identify their customers and prevent fraud. However, it can also be a time-consuming and cumbersome process, especially if done manually. This is where RegTech comes in. RegTech solutions use advanced technologies such as artificial intelligence (AI) and machine learning (ML) to help streamline the IDV process and improve its accuracy.
RegTech solutions can scan and verify different types of ID documents, such as passports, driver’s licenses and national ID cards. By using ML algorithms, these solutions can identify any alterations or modifications made to the documents, such as digital photo tampering or forgery. They can also verify the authenticity of the ID document against various databases, such as national identity registries.
RegTech can also help FIs and VASPs comply with regulatory requirements related to IDV. These solutions can automatically flag any suspicious activity, such as repeated attempts to use the same ID document, which may indicate fraudulent activity. Identifying such issues is a key component of complying with AML and KYC regulations.
RegTech provides an efficient and effective solution for IDV for FIs and VASPs. Its advanced technologies can help improve the accuracy and speed of the IDV process, while also ensuring compliance with regulatory requirements.
2. CDD / AML Screening
One of the areas where RegTech has made a significant impact is in the field of Customer Due Diligence (CDD). CDD is a critical KYC process that FIs and VASPs undertake to identify the customers they deal with, understand the nature of their business and source of funds, and assess any potential risks associated with establishing a relationship with them.
AML screening is a crucial part of CDD, and RegTech plays a crucial role in streamlining the AML screening process. AML screening involves searching through vast amounts of data to identify any suspicious transactions or patterns of behavior that may indicate money laundering or terrorist financing. RegTech solutions help automate this process, making it more efficient, accurate, and cost-effective.
RegTech solutions such as Automated KYC onboarding platforms use advanced algorithms and AI to analyze transactions and identify any potential red flags. These solutions can also detect patterns and trends that may not be immediately apparent to human analysts, resulting in more comprehensive screening.
RegTech solutions are also designed to keep pace with the evolving AML regulations and guidelines. For instance, many RegTech solutions can adapt to constantly changing global regulations, sanctions lists, Politically Exposed Person (PEP) lists and other watchlists and update the CDD screening processes accordingly. RegTech can also carry out adverse media checks screening and corporate structure and ultimate beneficial ownership (UBO) checks as part of a Know Your Business (KYB) process.
RegTech has significantly improved the CDD process, particularly in the area of AML screening. The best solutions out there provide more accurate and efficient screening processes and can adapt to constantly changing regulatory regimes and rules.
3. Case management and workflow solution
One of the main applications of RegTech is in the management of KYC cases — a normally resource-intensive and error-prone process for companies that undertake it using manual methods.
RegTech can help automate and streamline KYC case management, making the process faster, cheaper, more reliable and reducing the burden on internal compliance teams. RegTech solutions can analyze vast amounts of data from various sources, such as public records, social media, and watchlists, to identify potential risks associated with customers. As we’ve already mentioned, regtech tools can also automate customer IDV processes, minimizing the need for manual checks.
By automating compliance processes, RegTech can reduce the risk of human error and increase the accuracy of reporting. RegTech solutions can also provide real-time monitoring and alerts, which can help financial institutions detect and respond to potential regulatory violations promptly.
4. Risk Scoring and Ongoing Monitoring
One of the key areas where RegTech excels is in risk scoring and ongoing monitoring. By leveraging technology such as AI and ML, RegTech solutions can quickly and accurately assess risk levels based on a wide range of factors, including past behavior(s), market conditions, and regulatory changes.
This helps businesses to identify potential risks before they turn into major problems, allowing them to take proactive measures to manage risk and prevent financial losses. RegTech solutions can also provide ongoing monitoring and alerts, ensuring that businesses are always aware of any changes in a customer’s risk levels that may require further attention and/or investigation.
In addition to improving risk management processes, RegTech can also help businesses to reduce compliance costs and enhance their overall efficiency. By automating many of the tasks involved in compliance, RegTech solutions allow businesses to free up resources for other important activities — not least their core business.
The most efficient RegTech solutions take a risk-based approach to IDV, KYC and AML. This allows businesses to allocate compliance resources efficiently, carrying out more extensive checks on higher risk customers while processing lower risk customers using more simple processes.
With advanced risk scoring and monitoring capabilities, RegTech is a powerful tool that can help businesses keep pace with regulatory requirements while remaining agile and responsive to emerging risks and subtle changes to their customers’ risk profiles.
5. Transaction Monitoring and Crypto AML
In the crypto industry, transaction monitoring and AML compliance are particularly important, given the anonymous and decentralized nature of crypto exchanges.
RegTech is helping in several ways to ensure that crypto transactions and wallets are not being used for money laundering. One of the key ways is through automated transaction monitoring. This involves the use of algorithms to analyze transactions and flag any suspicious activity. These algorithms can analyze transaction patterns, amounts, and other factors to identify potential money laundering activity.
Another way that RegTech is helping with transaction monitoring and crypto AML is through the creation of smart contracts. Smart contracts are self-executing computer programs that can automate the approval or rejection of a transaction based on predefined rules. This makes it possible to enforce AML policies on the blockchain without relying on slow and complex manual processes.
In addition to these automated solutions, RegTech is also helping to improve Crypto AML and transaction monitoring with ML. ML algorithms can be trained to identify patterns of suspicious activity in large sets of crypto transactions. This makes it possible to flag suspicious activity that might otherwise go unnoticed.
RegTech is playing an increasingly critical role in ensuring that actors in both the traditional and digital financial industries are able to reach compliance with important and expanding KYC / AML regulations while remaining agile in an unpredictable global economy.
Are you looking for a market-leading RegTech solution that can help your business reach its compliance challenges? Get in touch and we can arrange a demo.