Digitising financial crime compliance

Customer Due Diligence (CDD)

CDD is an integral part of minimising the money laundering and terrorism financing risks of reporting entities. The Financial Action Task Force (FATF) and the Wolfsberg Group have been very active in digital and technological AML/CTF uplift. There is, and continues to be scope for technology to innovate and improve CDD processes to allow for more efficient AML/CTF compliance.

Examples of these improvements were identified in the FATF’s July 2021 publication on opportunities and challenges of new technology for AML/CTF.

Improved customer interfaces and experiences based on the availability of on-boarding devices used by consumers (i.e mobile phones, computers) were identified as a key benefit for consumers. The FATF considered various options available on these devices, notably biometric measures to identify and verify customers. For reporting entities, this presents an opportunity to streamline and reduce costs associated with the on-boarding of customers.

Recent changes in Australia, including the 2019 formal recognition of digital driver’s licences as acceptable forms of ID for customer identification by AUSTRAC are evidence of this growing trend in practice. Further to this, the Australian Government’s proposed digital identity legislation is another example of efforts to streamline for businesses such as reporting entities, the ability to rely on services that require their customers to verify their identity online.

Outdated CDD processes which do not transform or evolve with new products and technology, likely offer reporting entities impractical risk management.

Transaction monitoring and suspicous matter reporting

Digital uplifts and improvements with respect to transaction monitoring are likely to shift to a ‘follow the data’ approach to financial crime compliance. The emergence of artificial intelligence and machine learning technology-based solutions applied to big data can strengthen a reporting entities’ ability to monitor and report suspicious matters to Australian Transaction Reports and Analysis Centre (AUSTRAC).

The FATF in their July 2021 guidance on stocktake on data pooling, collaborative analytics and data protections noted these benefits; in particular:

• The use of data to develop historical models and trends for risk scoring to test effectiveness and assist with auditing;
• Understanding drivers of decision making and the output of that decision making based on financial or behavioural red flag indicators; and
• Adoption of application programming interfaces to allow data sets to be collected, stored and analysed more efficiently.

Reforms in Australia, including the passage of the Treasury Laws Amendment (Consumer Data Right) Act 2019 (Cth) provide existing ways for open banking and the sharing of information, whether for transaction monitoring, suspicious matter reporting or even CDD purposes.

The ‘Phase 1.5’ amendments to the AML/CTF Act in 2021, have also opened opportunities for reporting entities, to consider how information from reporting entities could be shared with other reporting entities.

Time to Prepare?

Australia’s AML/CTF laws will gradually evolve in order to keep pace with the technological hurdles and emergence of new products and services at risk of criminal exploitation. Reporting entities that are agile and adaptable to this changing landscape will be more competitive in preparing for future developments by:

• Developing appropriate strategies to identify, replace or adopt alternative methods to undertake CDD and transaction monitoring;
• Engaging with RegTech or FinTech providers to utilising new technology;
• Assessing the potential impact of technology on customers and products; and
• Engaging with regulators regarding the implementation of technological solutions to ensure compliance with this evolving regulatory landscape.