2022 was a momentous year for banks, fintechs and other financial institutions (FIs), with the sector facing nearly $4.2 billion in enforcement actions for regulatory compliance failings. In our annual financial institutions fines research, Fenergo reported that crypto firms and their employees were issued with $193 million in fines, a 92% surge from 2021.
Events like the war in Ukraine, skyrocketing interest rates, and the ongoing impact of the Covid-19 pandemic will likely continue to affect the landscape, influencing criminal typologies and enforcement trends.
So, what’s in store for FIs in 2023? We’ve asked our subject matter experts on AML, crypto, ESG and digital transformation for their predictions on what financial services can expect in 2023.
1. The Tension Between Privacy and AML will Rumble on in 2023
Rory Doyle, Financial Crime Policy Manager, Fenergo.
The European Union’s (EU) ruling that invalidated public access to registers of Ultimate Beneficial Ownership (UBO) information in EU states sent shockwaves through the compliance world and beyond. Transparency International, among others, have condemned the ruling as a setback for combatting financial crimes like corruption.
Large-scale leaks and scandals from investigative journalists in recent years – such as the FinCEN Files, Paradise Papers, Pandora Papers and the Panama Papers - will be hampered and may cease in the coming years without access to the registers.
Of course, other key financial regions have historically not had the same transparency as the EU, so the impact on global AML efforts and investigations could be pretty minor. The US, for example, maintains a central UBO register but doesn’t allow public access. The same is also true of Singapore’s Register of Registrable Controllers (RORC) and Hong Kong’s Significant Controllers Register (SCR), to name a few.
For FIs, the ongoing clash of privacy and AML compliance doesn’t seem like it will be resolved anytime soon, and the fact remains that AML breaches still carry much higher penalties than data privacy breaches.
Financial Action Task Force (FATF), the international AML watchdog, is due to release updated guidance around beneficial ownership in February of 2023, something FIs in member states will need to keep an eye out for.
2. The War in Ukraine will Continue to Steer AML Trends
Further sanctions measures and guidance for regulated entities will likely continue in 2023, much in the same way they characterized 2022. FIs and other regulated firms are still coming to terms with a dramatically different landscape compared with January 2022 so, in 2023, it’s crucial that they keep laser focused on accounts and relationships that may have connections to sanctioned entities and individuals, including politically exposed persons (PEPs). Our research into enforcement actions in 2022 saw a rise in fines for non-compliance with AML and sanctions regulations and, given the current tumultuous geopolitical climate, 2023 may well see a continuation of this upward trend.
The Anti-Money Laundering Whistle-blower Improvement Act was signed into law by US Congress in late 2022 to specifically target Russia and enforce sanctions against the country, further evidence of this war being a constant driving factor behind international policy.
3. 2023 will Make or Break Crypto
Over the last year, crypto has dominated conversation within and beyond the financial services sector. Its legitimacy has hung in the balance for a few years now and, despite widely reported distrust of digital assets, adoption doesn’t seem to be losing momentum.
Despite the bad press, institutional banks are continuing to invest in crypto yet the risk it presents to consumers and investors has put it firmly on the regulators’ agendas, where it will gather momentum during 2023.
No discussion of crypto is complete without mention of the collapse of FTX late 2022, the effects of which are still playing out at the time of writing.
In 2023, FIs will expect guidance on the Markets in Crypto-Assets (MiCA) regulation. However, it won’t be clear until 2024 if MiCA will cause as much of a stir as FATF’s Travel Rule. Nevertheless, FIs should use 2023 to closely follow the developing legislation and be ready for the incoming changes.
Regulators globally seem to either be banning digital assets outright (such as China, Egypt, Iraq, and Qatar) or are scrambling to bring this new asset class under the remit of existing enforcement frameworks.
But will all the bad press result in a so-called ‘crypto winter’? It remains to be seen, but 2023 is certain to deliver as many, if not more, twists and turns than last year.
4. Financial Institutions Must Prioritize ESG in 2023
Edel Brophy, Head of Regulatory Compliance.
In May of 2022, the US Securities and Exchange Commission (SEC) doled out the first ever fine for ESG failings. The fine, totalling $1.5 million, was then topped by the second-ever fine in November of 2022 which was a whopping $4 million also issued by the SEC.
So, what does this mean for FIs going into 2023? Clearly ESG is increasingly a priority for regulators, and this is translating into serious enforcement actions against those falling short.
With ESG reporting being the new compliance game-changer, we see the EU leading the charge with having already implemented a number of key regulations under the EU Sustainability Action Plan, with many jurisdictions well in the process of following suit either having or in the process of affecting taxonomy, disclosure and reporting requirements. At an international level we see the International Sustainability Standards Board (ISSB), the global standards-setting board, continue to develop a comprehensive global baseline of sustainability-related disclosure standards guidelines. These will provide investors and other market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.
FIs will need to keep a close eye on jurisdictions beyond their own, to keep up with updates rolling in like Japan’s recent ESG mandate and the follow up actions to commitments made at the recent COP27 summit.
FIs want to remain compliant, but the answer is not to hire armies of additional people – we cannot create an operational problem while solving a compliance problem. The right way is to explore automation of data and processes, and to consolidate the operating model.
Last year’s fines were levied against two of the world’s largest household names in asset management investment advisory, but it’s safe to say that regulatory scrutiny will begin to trickle down to FIs of all sectors and sizes now that the warning bell’s been sounded.
5. Digitalization Will Continue to be a Priority for the Financial Sector
Stella Clarke, Chief Strategy & Marketing Officer on digital transformation within financial services.
Market volatility and economic uncertainty since the Covid-19 pandemic, compounded by the war in Ukraine in 2022, have created incredibly challenging conditions for FIs. In 2023, digitalization will continue to be a priority in the financial sector, as FIs must conserve costs while navigating a challenging compliance landscape.
KYC review backlogs, compliance talent shortages, and the need to reduce spending were identified in Fenergo’s global KYC survey as key drivers for the investment in the automation of processes – such as KYC. Automation remains a key strategic priority to survive economic volatility. The return on investment that digitalization provides FIs means it will continue to be invaluable to FIs and regulators in the wake of the current financial crisis and certainly into 2023.