Beyond the Horizon: Futureproofing against money laundering in 2024

For regulated businesses in the UK, identifying and mitigating money laundering is a key requirement, and its importance continues to grow as financial crime becomes increasingly more sophisticated.

As regulators work hard to close loopholes and legislate to better detect and prevent common financial crime, money launderers are also working hard to find new loopholes, and techniques to exploit the global financial system, making the ongoing task of anti-money laundering harder than ever.

The past few years have been some of the most challenging in terms of AML; in 2020, the pandemic brought increased risk as financial firms were forced online when many did not have digital-ready compliance systems in place – and many are still feeling the impacts of this three years on. Then, in 2022, when Russia invaded Ukraine, businesses had to react fast to the new risks created by a host of new sanctions.

This year alone has seen the emergence of a number of key trends that are making money laundering mitigation increasingly challenging, including the continued growth of high-risk industries such as crypto, and the opportunities – and threats – brought by the continued development of advanced technology, like AI.

Here we examine the growing threats for 2024, the likely regulatory responses, and how regulated firms can future proof their businesses against money laundering over the next 12 months.

High risk industries

The threat

The crypto market continues to be one of the most vulnerable sectors in terms of financial crime as bad actors are able to exploit the accessibility and anonymity of the blockchain to launder profits which can then be converted into fiat and integrated into the legitimate economy.

And while regulation is starting to tighten, with most mainstream exchanges now subject to Financial Action Task Force (FATF) guidance, and on September 1 2023, the Travel Rule - which requires the originators and beneficiaries of all transfers of digital funds to exchange identifying information and be able to guarantee the accuracy of that information – came into force, more than a decade of weak regulation has given the criminals a huge head start. Some organised gangs have been exploiting crypto for years, meaning their criminal activity is so embedded into the sector, it is proving difficult for the authorities to infiltrate.

The huge increase in online gaming is also creating new opportunities for money launderers; funding legitimate online gaming and gambling accounts with dirty money, working together to manipulate results including intentionally losing to one another to ‘clean’ cash.

The response

Businesses within these high-risk industries are nowhere near where they should be in terms of having proper AML procedures in place – SmartSearch’s new report - EV Uncovered III -Emerging financial sectors – has discovered that just 20% of crypto businesses and 16% of gaming firms ‘always’ verify the identity of new customers, while just less than 1% of online gaming and betting firms are checking the source of funds daily.

Therefore, expect to see these high-risk sectors come under much higher regulatory scrutiny which may well lead to more stringent compliance requirements and harsher consequences for those firms that do not comply.

We are also likely to see more coalition between countries – particularly the US, UK and EU – as they start to adopt a more robust global regulatory framework to mitigate the growing threat of these high-risk industries.

We also expect to see RegTech firms focus on developing AML solutions specific to gaming and gambling, as well as the crypto sector and other decentralised financial systems.

AI and other advanced technologies

The threat

Artificial Intelligence is now so advanced that the technology can perfectly simulate an individual’s face, voice and mannerisms, making it almost impossible to spot what is real and what is fake.

Notable AI advances include Microsoft’s VALL-E, a text-to-speech AI model that can copy someone’s voice using a three-second audio sample, and ChatGPT from Open AI which can design scripts and create content in any language or dialect in the most natural of ways.

Obviously, these technologies were not developed for use by criminals, but as was inevitable, bad actors are manipulating this technology for their own gain.

The response

However, just as AI firms are developing advanced technologies for good, and criminals are exploiting them for bad, RegTech firms are responding by integrating innovative technology like AI, machine learning, behavioural biometrics such as keystroke dynamics and other behavioural patterns, for more accurate user authentication and fraud detection.

By utilising these technologies to detect anomalies and patterns indicative of fraudulent activities, RegTech firms are able to create ever more accurate and robust solutions to help businesses protect themselves from even the most sophisticated fraudsters.

High risk countries

The threat

Russia’s invasion of Ukraine resulted in the UK, US and EU imposing extensive economic sanctions on Russia and Russian nationals and businesses. Breaching these sanctions has serious consequences, but many firms are finding it increasingly difficult to stay up to date - there are currently sanctions in place against more than 1,600 individuals and almost 240 entities, but the list is growing all the time.

Those who have been under sanctions now for almost two years are getting desperate, meaning their money laundering attempts are becoming more prolific – and harder to spot. And, with no end in sight, regulators will continue to impose further sanctions and restrictions as they attempt to cut Russia off.

There is also the conflict in the Middle East, which has brought even further sanctions – on November 14 the UK and US announced a new tranche of sanctions on four Hamas senior leaders and two financiers in an attempt to restrict the terror group’s ability to operate and disrupt the group’s acts of terror. These restrictions include travel bans, asset freezes and arms embargoes.

The response

The UK, US and EU countries will continue to impose ever-more stringent bans, freezes and embargoes in an attempt to cut these terrorist organisations off at the source. We will also likely see much better collaboration between regulators, sectors and countries. Money laundering is not prohibited by country borders, and therefore any attempts to stop it need to take a global approach.

But of course, no amount of regulation will actually stop criminals attempting to access their funds so that they can continue to fund their illegal activities.

It is therefore vitally important that UK firms are not only updating their sanctions and PEP lists in real time, but that they have the most robust and accurate identify verification processes in place.

Terrorists will attempt to steal a legitimate identity – or use shell companies and other structures to hide their own – to access the legitimate economy. Therefore, any businesses that receive funds but cannot establish the identity of the client, beneficial ownership or source of wealth will not only be exposed to a heightened risk of breaching sanctions but could be enabling terrorist funding.

Keeping on top of compliance and ensuring requirements are met can be a difficult and cumbersome process with huge risks of error; therefore in 2024, we expect to see continued adoption of RegTech solutions that automate compliance processes, reducing the burden on organisations and improving overall efficiency.

How can SmartSearch help?

The best way for regulated firms to meet their requirements and protect their business is to adopt the very latest in digital identity solutions; ideally, a system that offers secure and efficient customer onboarding and risk mitigation with increased emphasis on real-time monitoring to quickly identify and respond to suspicious activities.

SmartSearch is one of the leading digital compliance providers in the UK. Its innovative solution offers identification, verification, screening, data hosting and real-time monitoring all from one easy to use, cloud-based platform.

What’s more, thanks to continual improvements and enhancements, that are employed both in response to regulatory changes and customer feedback and in anticipation of changes in global regulatory frameworks with a focus on strengthening AML measures and enhancing KYC processes to address emerging challenges.

Staying ahead of the game

Past examples of how SmartSearch has helped regulated firms combat the ever-changing AML landscape include:

• High Risk Country Report - When Russia invaded Ukraine, and regulated firms were required to immediately comply with the new sanctions imposed on Russia, SmartSearch customers were protected thanks to SmartSearch’s ongoing monitoring system. However, non-client firms relying on other verification and screening methods were struggling to ensure they had a clean and compliant customer database. So, SmartSearch launched a brand-new High-Risk Country Report service to enable any non-client business to immediately check their customers for links to Russia, Belarus, or any other high-risk countries.

• Ultimate Beneficial Owner checks - Years before rules around identifying the Ultimate Beneficial Owners (UBOs) of corporate clients came into force, SmartSearch had already built the capacity to ascertain this information within its business checks service. 

• Digital onboarding - two years before the pandemic hit, SmartSearch launched a fully integrated app for onboarding, something that ensured its customers were ahead of the game when lockdowns were enforced, and all business moved online.

Future-proofing into 2024

The latest iteration of the SmartSearch platform was launched at the end of 2023 and is taking digital compliance to the next level with the launch of several key updates.

Driven by the latest technology, regulatory requirements and customer feedback the new platform offers clients the ‘gold standard’ in AML and KYC with improvements in the following key areas:

1. Triple bureau identification and perpetual KYC (pKYC) – SmartSearch takes global data from Experian, Equifax and, now, also TransUnion – the three largest credit reference bureaus in the world as well as the Dow Jones Global Watchlist (comprised of more than 1,100 real-time PEPs and sanctions lists) which is updated daily to identify, verify and screen an individual or business in a matter of seconds.  It then automatically re-runs client searches continually, delivering instant access to the latest search outcomes and audit trails (pKYC) for when future due diligence is needed to futureproof clients’ AML compliance.

2. Automatic record keeping and ongoing monitoring – The SmartSearch platform automatically uploads and hosts the results of every check to ensure watertight record-keeping and monitors each entry daily against Global Watchlists to ensure an ‘audit ready’ clean and compliant position. This ‘real-time’ service is absolutely vital following the additional sanctions against Russia – sending an alert if any identified changes impact the AML risk – and in light of sanctions likely to be imposed as a result of the conflict in the Middle East.

3. SOF Checks - This innovative technology uses open banking to determine the source of the funds the potential customer is using/planning on using, a vital tool given most emerging money laundering trends are being enabled because of weak Source of Funds checks.

4. Improved User Management - improves efficiencies, saves time and creates a seamless customer onboarding process by offering frictionless compliance that fits seamlessly into existing processes. Furthermore, all SmartSearch services are now available through RESTful APIs, meaning clients can be integrated quickly and efficiently.

5. Automation and Configurability - solutions can be fully tailored to each businesses’ unique needs including custom risk profiles and configurable watchlist screening and clients can create bespoke, fully automated workflows that are able to assign, notify and create applications based on rules and integrate seamlessly into their current processes via a co-branded/white labelled interface.  

Through the new, enhanced platform SmartSearch has not only improved the accuracy and reliability of the but also its usability, by enhancing configurability, automation, and integration.

All these improvements not only make life easier for clients through improved efficiencies, but they also give them the peace of mind that, because SmartSearch is ahead of the game, they have in effect future-proofed their business against money laundering for 2024 and beyond.

To find out more about how SmartSearch can help your business manage the increased threats of money laundering, visit www.smartsearch.com