Sophie Proctor
Welcome back to our financial crime market outlook series, where we’re looking at North America and some of the key factors that we should be aware of in this upcoming year. According to a report by Global Market Insights, the anti-money laundering market is set to hit $5bn by 2027 as the influx of cashless transactions and unethical activities receives additional government focus.
Here are just some of the laws, regulations, and focal points for financial crime prevention in the US this year.
Legislation: what’s to come?
The Anti-Money Laundering Act 2020, which includes the Corporate Transparency Act which came into effect in 2021, actively encourage financial institutions to adopt advanced technology to fight money laundering and terrorist financing. The AMLA regulation will require businesses to disclose beneficial ownership information to the US government through its Corporate Transparency Act, thereby further addressing the knowledge gap where individuals can form shell companies to obscure any sources of wealth.
For large corporations, there are lengthy Know Your Customer (KYC) and Customer Due Diligence (CDD) processes with complex structures. The transparency of these structures should be aided with the final regulations from the AML Act, to reduce compliance breaches and mitigate risks. This constant monitoring of internal and external data, as well as risk assessments, will require more advanced technology. This year, institutions may want to look closer to see how this will affect their processes and what it means for their compliance teams.
FinCEN developments
In January 2022, the Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) that would establish a pilot program for sharing suspicious activity reports, to combat illicit finance risks, in accordance with Section 6212 of the AMLA. This would allow US banks to share Suspicious Activity Reports (SARs) with their foreign counterparts to strengthen efforts against money laundering and terrorist financing.
In a press release published by FinCEN, the Acting Director Himamauli Das said, “We urge stakeholders to provide input to assist us in developing a program that will help combat illicit finance risks and promote enterprise-wide risk management, while ensuring adequate safeguards are in place to protect SAR confidentiality.” Any public comments on this program are due to be given by the end of March 2022.
Technology on the rise
For institutions to successfully implement KYC policies and be proactive when it comes to AML, advanced technology is needed. This will also help to reduce false positives and over-reporting by banks. Increasing the use of artificial intelligence (AI) and automation may also be widely adopted as a form of streamlining the compliance process, both in terms of time and scalability. The rise in sophisticated scams has led to the increasing need for technological advancements like AI and cloud computing, assisted with human intervention.
Financial institutions will need to consider adopting enhanced AML software as the percentage of digital payments continues to rise. This software will likely include cloud adoption which could play a leading role in fraud detection and security across financial institutions. Common measures which may become standard across the US include encryption, multi-factor authentication, firewalls, and access management.
The crypto landscape
An additional thing to keep an eye on this year will be cryptocurrency regulations, as well as crypto-related scams; according to a report by the Independent, crypto scams were 30% higher in 2021 than 2020.
Likewise, there will need to be close attention placed on the rise of crypto wallets – unlike an actual wallet, they don’t store the funds, but instead store the keys needed to access the cryptocurrencies. The holdings themselves, live on the blockchain. In a report by the Financial Times, $15.8trn worth of cryptocurrencies were traded last year, including a staggering $14bn sent to crypto wallets with known criminal associations, according to research from data company Chainalysis. This was more than double the figure in 2020.
A further revelation in this report, was that cryptocurrency scams cost investors $7.8bn in 2021, with about $3.2bn worth of cryptocurrency being stolen. This was a 516% rise from 2020. The report published by Chainalysis commented on the rise of Decentralized Finance (DeFi) stating, “As DeFi has continued to grow, so too has its issue with stolen funds… We’ve also seen significant growth in the usage of DeFi protocols for laundering illicit funds.”
European Central Bank president Christine Lagarde said in January 2021 that bitcoin was “a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity”. This year could be cornerstone for the mainstream adoption of cryptocurrencies, coupled with enforced regulation from the Biden administration.
The adoption of cryptocurrencies by the video gaming industry will also be something to keep watch on during 2022 and the various AML considerations. In a report by Capital Com, Gareth Randal, managing director of Authentix Management stated that “We’ll be seeing a lot more AAA games being developed such as Illuvium, allowing gamers to earn as they play.” You can read our article about NFTs in video games and what this means for the AML industry here.
Regulating cryptocurrency
DeFi and KYC were not traditionally going hand-in-hand when it came to the cryptocurrency exchanges, however, to comply with regulations, this has begun to occur. Founder of the exchange ShapeShift, Erik Vorhees, called the need for KYC ‘unethical and dangerous,’ according to a report by the Financial Times, as he deemed it dangerous and left those vulnerable to identity theft from hackers.
However, there has been an increase in government intervention to regulate these assets. The Digital Asset Market Structure and Investor Protection Act, introduced by Representative Don Beyer (D-Va), “would protect consumers and promote innovation by incorporating digital assets into existing financial regulatory structures.” 2022 may bring further strides into crypto regulation and efforts to fight money laundering through the blockchain.
Regulating real-estate
A final point of scrutiny in the US is the real estate market, which has been receiving attention from the Biden administration in recent months, in particular all-cash transactions. In a report published by Global Financial Integrity, from cases reported in the last five years, more than $2.3 billion has been laundered through real estate in the US, as it is used to hide and launder proceeds from illicit activity.
Also highlighted in this report, is that the US remains the only G7 country that does not require real estate professionals to comply with AML laws and regulations; showing there is a need for a robust system to gather sufficient client due diligence. Financial institutions will need to identify the risks posed by both residential and commercial real estate transactions, with the potential new regulations issued by FinCEN.
Overall, it looks to be a year of enforced regulations to come into play, which hopefully should offer sharpen some of the blurred lines in the industry.
To look back on last year and further insights on the shift we are experiencing, read our article: https://www.amlrightsource.com/news/in-the-year-2022
For solutions to protect your business against financial crime, explore our range of products here: https://www.amlrightsource.com/solutions.