Askender Ouazzani, IDR’s MLRO based in Luxembourg gives his take on the trends that will shape the regulatory landscape in 2024 and explores the challenges and opportunities for KYC professionals.
From a private markets perspective these trends are of particular significance with the ongoing democratisation of the asset class increasing the KYC challenge with a wider pool of investors encompassing retail and HNWIs.
Key trends:
- Regulators will continue a more aggressive approach: 2023 saw regulators becoming more assertive in enforcing AML/CFT/CPF regulations and this will continue into 2024. For instance, in the UK, the FCA has highlighted its “unwavering” commitment to reducing and preventing harm with “far reaching reforms” across its remit.
- Larger fines: Financial institutions that fail to comply with regulations will face increasingly significant penalties. Over the course of 2023 the FCA imposed record fines, totalling £52,802,900. In the US Deutsche Bank was fined $186M by the Federal Reserve for ‘material failure’ to fix historic AML issues in June last year, whilst November saw US authorities fine Binance a record $4.3bn for AML failures.
- Importance of transparency and beneficial ownership: Regulators around the globe will continue to place greater emphasis on transparency and beneficial ownership. In the US the CTA came into force on 1 January this year, requiring organisations to report information relating to their beneficial owners. More generally, Beneficial Ownership Registers are being implemented in various forms by jurisdictions around the globe.
- Collaboration around the application of emerging technologies in financial institutions: Regulators will continue to promote cooperation and information sharing between financial institutions and other relevant authorities in relation to emerging technologies in order to mitigate associated risks without stifling innovation. The Joint ESAs Report on Innovation Facilitators: innovation hubs and regulatory sandboxes provides an update on initiatives to promote cooperation, collaboration and the identification of risks associated with emerging technologies (in line with FATF Recommendation 15).
Top challenges:
KYC Talent – there is a shortage of qualified AML/CFT/CPF professionals in the workforce. Fund managers will therefore need to be proactive in recruiting and training these professionals to build out their in-house teams and / or working with service providers who can deliver these skills and expertise on an outsourced basis.
- Resource constraints – implementing and maintaining effective AML/CFT/CPF compliance programs is resource intensive, particularly in a global world with an ever-evolving regulatory landscape. Understanding investors and implementing a proportionate risk-based approach to ongoing monitoring over the lifetime of relationships will be key.
- Customer experience – reconciling effective compliance with AML/CFT/CPF requirements with a good customer experience can be challenging, particularly in the private markets where detailed information is required.
Opportunities:
- Harnessing the power of technology: Regtech companies will offer increasingly innovative solutions to help financial institutions automate and streamline their compliance processes.
Standardisation and centralisation of data – With the ongoing push towards understanding beneficial ownership, beneficial ownership registers and a global approach to sanctions and enforcements a central source of truth for investor data that’s approved to globally compliant standards will drive efficiency. Here portal tech and tokenisation of investor identity will be important.
- Right people in the right places – tech provides an opportunity to focus people in high value areas, be that monitoring flagged KYC risks, supporting clients or investors when they need advice or interrogating more complex beneficial ownership structures. In 2024, using tech as a tool to deploy people in value add positions will be an opportunity for firms as they grapple with a larger and more complex KYC workload.
