Financial Crime Compliance: Risks and trends in 2021

1. Growth of fintech

The digital future was arriving before Covid-19, but the pandemic gave it a shove. As the crisis disrupted access to traditional bank branches and disincentivised the use of cash, so it caused a rapid uptake of fintech, particularly in the Middle East and Africa.¹

Banking access through fintechs holds tremendous possibilities for financial inclusion in such regions, but from an FCC perspective it requires banks, other financial institutions (FIs) and fintechs to consider our shared risks, particularly for cross-border payments. Fintech companies cover everything from supply chain finance to card aggregation, and the smaller ones can change their direction and products almost overnight. In the start-up phase, many lack internal compliance expertise, which can lead them to miss critical risk management activities and create risks for the banks they work with.

These risks are multifaceted. The anonymity of some fintechs’ clients, for instance among those that aggregate payments, impedes oversight, with the required identifying information sometimes dropped from the chain of payments. This makes it harder to understand exposures to high-risk or sanctioned countries.

The speed and complexity of digital transactions, meanwhile, makes real-time monitoring a challenge and places more risk management reliance on controls implemented by a fintech. Also, the regulatory environment continues to develop. For example, in Asia many regulators are enabling sandboxes to allow fintechs to test products and services.  This places greater stress on banks to ensure commensurate risk management practices are adopted by the fintech.

2. Digital crime

Fintechs are not the main FCC challenge in the digital arena, however. At Standard Chartered’s Correspondent Banking Academy webinar on 27 January, we polled attendees on what they saw as the main risks of 2021. Our expert audience gave a clear answer on what they thought were their biggest risks in 2021. 50% cited ‘cybercrime and fraud’, 26% said ‘fintech and emerging technologies’, 19% opined ‘sanctions’ whereas only 5% said ‘high net worth clients’. Whereas 10 years ago the most common response may well have been sanctions risks, in 2021 it was unquestionably cybercrime and fraud.

The global recession caused by Covid-19 has disrupted the business models of criminal organisations as well as law-abiding ones, and 2021 could well be marked by a surge in first and third-party fraud. Cybercriminals continue to target vulnerable targets which now includes workers left jobless by the pandemic. For example by hiring them as digital money mules to launder the revenues from fraud. In December 2020 Europol and 26 national authorities identified more than 4,000 money mules working globally.²

3. Policy changes

Not all 2021’s changes will relate to Covid. New regulations will also require FIs to adapt. A new anti-money laundering law mandates the creation of a unified strategy among federal US regulators and law enforcement. This will give the US and the world better transparency about what regulators want, but it also creates greater complexity in other areas. ³

The new US administration will also revisit sanctions and terrorist finance rules. This could be particularly consequential when it comes to China, in relation to which there was a range of novel interventions in the closing months of the previous administration. Although the policies of the incoming Biden administration are not yet fully defined when it comes to these countries, further clarity is likely to emerge as the year progresses.

Covid-19 has exposed the fragility of global trade, and how the interconnectedness of international supply chains be strained in times of crisis. Corporates must monitor carefully how the Biden administration modifies the trade wars and sanctions regimes inherited from the Trump administration.

What correspondent banks must do in 2021

How to navigate this rapidly changing environment is a question with many potential answers. If banks want to environmental, social, and governance goals, they can’t just terminate high-risk relationships, whether with individuals, correspondent banks or fintechs, especially in emerging markets. Promoting inclusion means carefully strategising and investing into risk management activities that enable development and access.

We see de-risking  as a last resort. In our view, a better way is to focus on people, knowledge and cooperation.

• Understanding the products, markets and digital channels of clients , and the emerging risks from them, can reduce risk while retaining financial inclusion.
• Cooperating and sharing with regulators to understand which methods of generating suspicious activity reports lead to the most effective law enforcement.
• Working with colleagues within your own organisation and in other organisations -the correspondent banking eco-system - to scan the horizon not just for today’s risks, but tomorrow’s as well.

With this approach, we believe we can manage the risks from the rapidly changing environment facing FIs, while at the same time expanding the financial inclusion and trade on which the world’s Covid recovery depends.

This article contains insights from Standard Chartered’s Correspondent Banking Academy’s webinar on Global FCC Risks & Trends.