As 2023 gets underway, we explore some of the most likely trends that compliance departments across a wide range of sectors will face over the coming year.

If we learned anything from 2022, the unpredictability of geopolitics can turn the world upside down in just a matter of days.

While we have no crystal ball to tell us exactly what the future will bring, we can still make some educated and informed predictions as to what might take place over the coming year.

Regulation is expected to become considerably tighter as the economic situation deteriorates. Yet many businesses may well attempt to circumvent regulations as they combat economic pressures, or be reluctant to invest in their compliance frameworks as they shortsightedly see this as an area where they can shave costs.

Yet increasing intolerance to criminal activity may well see enforcement agencies finding themselves under pressure to take even greater action against organisations that break the rules.

So, with this in mind and to help you prepare your defences accordingly, we have compiled a list of our predictions for the most likely compliance trends that will emerge over the coming year.

1. Increased coordination between regulatory authorities

There have been a number of moves by major jurisdictions to increase the coordination and cooperation between regulatory authorities in order to deliver a more unified approach.

In the EU, the Anti-Money Laundering Authority (AMLA) is due to be launched in order to counter weaknesses in the bloc’s AML/CFT framework. The AMLA will establish a coherent framework for the AML authorities of member states and create a common supervisory culture with cooperation and collaboration at the centre of its aims. While the AMLA is unlikely to be fully operational until at least 2025, its establishment is paving the way for greater cooperation to be the watchword for jurisdictions across the world.

In the US, the National Defense Authorization Act (NDAA) will have a major impact on anti-money laundering (AML) regulations, including the Bank Secrecy Act (BSA). Key areas relate to how information is shared among the agencies that govern AML requirements.

Going even further, the Financial Action Task Force (FATF) has urged public and private sectors to work together by using new technologies to make efforts to combat money laundering and terrorist financing more efficient and effective.

“If we operate in bubbles – a bubble fighting crime – a bubble protecting privacy rights – a bubble for the private sector – a bubble for developing new technology – then we fail to address the real problems we face today. Connecting the dots across our various specialisations lets us see the bigger picture and solve the big problems of today and tomorrow.”

~ Dr. Marcus Pleyer, President of the Financial Action Task Force (FATF)

2. Greater self-regulation

Instead of simply waiting for regulatory bodies to punish offenders, some sectors are taking matters into their own hands and are looking to bolster their defences through knowledge sharing.

The British Antique Dealers’ Association (Bada), the Society of London Art Dealers (Slad) and the Association of Art and Antiques Dealers (Lapada) have joined forces to commission a series of training videos on AML legislation. Created by the art compliance specialist Rakhi Talwar, the new resources will take into account the UK Treasury’s updated guidance on AML obligations, which was published in June 2022.

In the financial sector, a number of groups, such as the Association for Financial Markets in Europe have already created working groups in order to develop best practices for ensuring better compliance.

In the UK, the banking sector will undergo some significant changes in how it regulates itself in the wake of new AML rules emanating from the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022. Once enacted, it will require banks to enforce far stricter controls on their customers’ financial activities.

Whether it comes as a result of internal or external initiatives, self-regulation is a powerful way for organisations to address the growing threat of money laundering and other illicit financial activities.

In addition to avoiding punitive fines and regulatory intervention, self-regulation can strengthen the reputation of the sector as a whole and as a result lessens the scrutiny of the authorities.

3. Tightening of regulations for the crypto sector

No surprises here, considering the turmoil of 2022 and the collapse of FTX and BlockFi that has left many firms in the crypto sector on shaky ground. As a result, crypto exchanges, brokers, and digital asset management firms will all be under greater pressure to verify the identity of customers and report any suspicious activity.

Two major regulations are in the pipeline: The European Parliament will vote on adopting the regulation on Markets in Crypto Assets bill (MiCA), a regulation that would see the establishment of harmonised rules for crypto-assets at EU level, thereby providing legal certainty for crypto-assets not covered by existing legislation. In the US, if the Lummis-Gillibrand Crypto Bill becomes law, it will help bring regulatory clarity to bitcoin, stablecoins, and digital assets by creating clear legal definitions and regulatory lanes for all digital assets.

Many other jurisdictions that have historically avoided regulation, such as Panama, Hong Kong, and Seychelles, are expected to follow suit, as the Financial Action Task Force (FATF) ramps up the pressure with new AML standards for the crypto sector.

For an in-depth look into the AML vulnerabilities faced by the crypto sector, a valuable compliance analysis is available to download for free here.

4. Greater scrutiny of global supply chains

Human rights violations across supply chains have been exposed with increasing regularity, leading to more jurisdictions taking regulatory action. As a direct result, 2023 will see the introduction of a swathe of new legislation aimed at increasing transparency on human rights offences.

In December 2022, the European Council adopted a draft of the European Supply Chain Act, which will go before the European parliament in May of 2023. Once the Act has been passed, member states will most likely have two years to bring it into law.

Meanwhile, Germany has preempted this wider EU legislation with the introduction of the Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten (LkSG) or German Supply Chain Due Diligence Act (SCDDA), which came into full force on January 1, 2023 and affects businesses across the world.

Even if you do not currently operate in Germany or the EU, it is important to recognise that the Act will have a cascading effect. Many smaller businesses not currently in-scope could be affected in due course, as larger enterprises pass on the due diligence obligations imposed on them to their suppliers.

For an in-depth look into the AML vulnerabilities faced by the supply chain, a valuable compliance analysis is available to download for free here.

5. ESG programmes face major challenges

Environmental, Social, and Governance (ESG) is intended to provide a framework that helps customers, suppliers, employees, and investors see how sustainable an organisation’s operations are.

While growing concerns about the environment have compelled businesses to take ESG goals more seriously, a recent survey disclosed that despite it being a top strategic priority for 2022, the current bleak economic outlook has led many industry leaders to shelve their plans.

To add to the problem, many organisations have been accused of misleading customers about their ESG credentials in what is being dubbed ‘greenwashing’. One such case involves British Gas, where the energy giant claimed to have reduced its climate footprint by using ‘carbon credits’, yet an investigation revealed that half the carbon offsets held by British Gas owner Centrica are junk credits that were issued under a discredited scheme that critics have called a scam.

6. The fate of publicly available beneficial ownership registries hangs in the balance

For years, countless businesses and entities have used company structures as a front for a myriad of illicit financial activities. Corrupt politicians, sanctioned individuals, financial criminals, terror organisations, and drug gangs have all used a complex web of ownership structures to hide their true identity.

As a result, identifying the ultimate beneficial owner (UBO) of any entity has been one of the cornerstones of fighting financial crime. Transparency advocates, investigative journalists, and law enforcement agencies all welcomed the creation of publicly available beneficial ownership registries in numerous jurisdictions.

But in November 2022, a landmark court ruling from the Court of Justice of the European Union (CJEU), invalidated public access and led to many member states removing universal access to their public registries.

It is important to note that while they won’t be publicly searchable for the time being, qualified agencies still have the right to obtain information on demand.

Even so, many observers hope that 2023 will see increased pressure from the FATF and other international regulatory bodies, resulting in those countries once again opening up public access in order to deliver complete transparency.

The fact is that a consistent approach across all countries (not just the EU) for open public beneficial ownership registers is needed. Because transparency in our democracies is absolutely crucial if we are to hold people to account and maintain a consistent approach to fighting financial crime.

7. The increasing use of Artificial Intelligence

Many organisations are turning to artificial intelligence (AI) to assist them in complying with anti-money laundering and compliance regulations. It presents itself as a fast and extremely efficient method of monitoring financial activities, in order to determine if transactions are the result of illegal activities and also to monitor that customer behaviour is aligned with their stated purposes.

While the increased adoption of AI will see the development of more sophisticated models, there are still many observers who question its role.

In late 2022, the Dutch Central Bank (DNB) had prohibited challenger bank Bunq’s use of AI and machine learning to conduct AML monitoring. It led Bunq to sue the central bank, resulting in the Dutch courts siding with Bunq and a landmark verdict in favour of the use of AI for anti-money laundering processes.

Are you prepared for what 2023 will bring?

With the prospect of a global recession uppermost in the mind of many decision makers, it’s crucial that any budget cuts don’t impact the ability of the compliance department to protect the business.

History has shown that during times of economic uncertainty and hardship financial crimes inevitably increase. It also shows us that cutting back on compliance spending, results directly in an increase in the number and size of fines levied on organisations by financial regulators.

If you haven’t already upgraded and fully automated your systems, now is the perfect time to make the transformation. While it may appear counterintuitive, the fact is that the implementation of a leading automated system can actually reduce the cost of compliance.

To discover how we can help you to implement an automated solution that will reduce costs while mitigating risk, not just in 2023 but for years to come, request a discovery call today.

 

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