Why the RegTech and FinTech Industries are Fundamental to AML/CFT

May 30, 2022 by Sam Strand

Over the last decade, the FinTech and RegTech industries have revolutionized the effectiveness, cost, useability, availability and overall nature of AML/CFT regulatory compliance. Today, a wide selection of services empowers businesses to easily secure their transactions and ensure regulatory compliance, all without compromising customer experience – a contribution so significant that it has been recognized in a report by the global leader in AML/CFT legislation: the FATF.

A Pervasive Threat – Money Laundering and Economic Crime 

Money laundering – the “cleaning” of criminal revenue to disguise its illegal source and facilitate its use in legitimate, everyday activities – has become a major concern for the vitality of our global financial system. A 2020 report by Deloitte estimated that money laundering makes up 2-5% of the global GDP, as much as $2 trillion. Pieter Alberts, senior operations manager at the Financial Intelligence Centre, said that South Africa is losing between $10 billion and $25 billion annually in illicit financial flows. 

Although combating money laundering is a clear and urgent task, doing so in a way that does not undermine or harm businesses is equally important. The Financial Action Task Force (FATF) – an intergovernmental organization and global leader in AML policy – published a report titled Opportunities and Challenges of New Technologies for AML/CFT. By discussing the opportunities for revolutionary AML/CFT programs offered by new technologies, the FATF’s report examines how the Fintech, Regtech and Suptech industries are driving revolutionary new approaches to AML/CFT compliance

Boosting AML/CFT Compliance Effectiveness  

The FATF’s report included a survey that examined how new technologies are being developed and deployed for AML/CFT. Commenting on the results of their Digital Transformation questionnaire, the FAFT noted that…

“85% of respondents agree that AML/CFT effectiveness in general is the most significant benefit of the use of new technologies…Respondents declared speed, flexibility, capability and better governance as the outcomes of new technologies contributing to greater AML/CFT effectiveness.”

Respondents also noted that new technologies can significantly reduce the costs associated with effective AML/CFT programs – a factor that greatly increases AML/CFT effectiveness by providing stakeholders with better, more accessible tools for less money.

For developing economies in which businesses typically have less capital to devote to security and regulatory compliance (like in South Africa), reduced costs are vital for enabling the widespread adoption of effective AML/CFT programs. Since 2009, South Africa’s incident rate for economic crime has been, on average, 27 percentage points higher than the global average.1 In 2020, South Africa was tied with China for the country with the highest reported incident rate of economic crime.  To secure South Africa’s economy, the widespread adoption of AML/CFT programs is essential. 

However, in 2020, the FATF released a report evaluating South Africa’s AML/CFT regulatory system. The report identified several critical weaknesses, one of which was a discrepant focus on AML controls. Although many of SA’s larger Financial Institutions (FIs) were focused on creating and maintaining effective AML/CFT regimes, many smaller FIs were only focused on meeting the minimum requirements for regulatory compliance. Although this is understandable because smaller FIs do not have the same resources as major banks, innovation and the creation of new cost-effective technologies will continue to close this resource gap.   

“New technologies have the potential to make anti-money laundering (AML) and counter terrorist financing measures (CFT) faster, cheaper, and more effective. They can improve the implementation of FATF Standards to advance global AML/CFT efforts, ensure financial inclusion and avoid unintended consequences such as financial exclusion.”

As South Africa’s economy grows and becomes increasingly digitalized, innovation from the RegTech, Fintech and Suptech industries will be central in provisioning more accessible AML/CFT services and promoting their widespread adoption.  

The Transformation of FICA Compliance 

Efforts to combat economic crime and close the net on money laundering have led to a web of compliance obligations, many of which negatively affected customer experience. South Africa’s Financial Intelligence Center Amendment Act (FICA) is a perfect example. Although necessary to help secure South Africa’s economy and protect businesses and consumers from economic crime, FICA compliance quickly became a notoriously laborious process. 

Initially, FICA compliance cost businesses time and money by forcing them to engage in inefficient and lengthy administration that consumed human resources. The labour-intensive process of ensuring compliance also contained many moving parts that rendered it vulnerable to non-compliance or fraud. For customers, FICA compliance entailed complex paperwork and time wasted standing in a bank queue. 

In 2017, ThisIsMe transformed the South African RegTech industry by cutting FICA compliance down from two weeks down to three minutes – an achievement that got the company featured as one of the Emerging 50 Rising Stars on 2018’s FINTECH100 list. 

The transformation of FICA compliance – enabled by new technologies – allowed businesses to save time and money and ensure the highest levels of AML/CFT compliance, while consumers benefited from easier documentation provision and near-instantaneous identity verification

Streamlining Compliance, Boosting Efficiency and Optimising Data Analysis Using APIs

An Application Programming Interface (API) is a type of software that allows different applications to connect and communicate. APIs have immense utility within AML/CFT programs, due mainly to their immense flexibility. APIs can be used to streamline compliance routines by connecting customer identification software to monitoring tools, or integrate risk assessment tools with customer risk profiles to quickly generate risk profiles. 

“Respondents to the Digital Transformation questionnaire mentioned APIs among the most used and relevant solutions to the identified money laundering and terrorist financing problems.”

Tasks that require the processing of large data sets – such as risk assessments and analysis, customer due diligence, and transaction monitoring – can all benefit significantly from new AML/CFT technologies like APIs.  

“APIs allow integration to happen much more quickly and with much larger datasets. This is particularly relevant as one of the most difficult challenges for many financial institutions is the integration of many different and often incompatible systems, including legacy technologies and specialised tools, created by different developers.”

By streamlining administration and freeing up human resources, technologies like APIs have addressed the labour-intensive process of regulatory compliance that originally plagued FICA compliance. 

The Road Forward – Public and Private Sector Cooperation 

Cooperation has thus far paved the way for widespread innovation and the transformation of AML/CFT compliance. 

“Increased communication and cooperation between the public and private sector, informed by the type of information and analysis provided by this report, together with an emphasis on responsible adoption of new technologies and effectiveness, in particular with regard to data protection regulations, will be key to overcoming these challenges and fully realizing the promise of responsible innovation to strengthen the effectiveness of AML/CFT measures."

By combining public sector legislation with private sector technological innovation, South Africa has been able to modernize its economy and actively move towards a secure economy based on transactional security. Today, businesses no longer have to choose between lower costs, improved efficiency, and world-class customer experience. When ensuring regulatory compliance, businesses can have their cake and eat it too. 

Enhanced Due Diligence, KYC and Identity Verification Services South Africa

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  1. PwC. Global Economic Crime and Fraud Survey. 2020.