Featured Article: Challenges and Opportunities of RegTech adoption in AML/CFT
By the Editor
In June 2019, the HKMA carried out a survey of Authorized Institutions and Stored Valued Facility licensees on the deployment of RegTech tools to manage their ML/TF risks. It was indicated in the survey that 34 percent of FIs reported was using RegTech to manage ML/TF though some early adopters were leading the field in their use of RegTech for AML/CFT. The survey also highlighted that FIs were facing challenges in a number of areas including budget, talent, mandate/priority, data/infrastructure and regulation.
Then in November 2020, the HKMA issued a white paper that laid out a two-year roadmap to promote RegTech adoption in Hong Kong banking sector. Since then, the HKMA has conducted a series of initiatives related to the use of RegTech for AML/CFT including:
A thematic review of how Ais integrate various external source information and data into their AML/CFT control systems to enhance effectiveness. The report issued in April 2021 also included good practices observed in some AIs’ adoption of RegTech in AML/CFT, such as network analytics.
The Report on “AML/CFT RegTech: Case Studies and Insights” was issued in January 2021. This initiative studied and shared comprehensive, end-to-end experience and success stories from the AML/CFT RegTech adoption journeys of AIs of different sizes and business scopes.
Apart from RegTech adoption in AML/CFT, the HKMA is also active in promoting the adoption of RegTech in every important aspect:
The HKMA launched the “Global RegTech Challenge” competition in March 2021 to further grow the local RegTech ecosystem in the banking industry.
In May 2021, HKMA upgraded the FinTech Supervisory Sandbox (FSS) which included opening the FSS to RegTech projects or ideas raised by banks or tech firms in order to help develop the RegTech ecosystem.
Last but not the least, the HKMA presented their flagship event “Unlocking the Power of RegTech” in June 2021 to accelerate RegTech adoption in Hong Kong. Participants from the global RegTech community, including financial institutions, RegTech providers, regulators and other industry experts, will be sharing their insights and experiences on RegTech adoption and its associated benefits.
Two years after the HKMA conducted the survey on the deployment of RegTech tools to manage their ML/TF risks, the Association is interested in whether there are substantial changes in the view of compliance officers on the challenge and opportunities? As the answer may be valuable to participants in the RegTech Ecosystem, we have invited some compliance professionals to share their insights to this question. Below extracts are some of their sharing:
1. Quote from the AML compliance head of the local branch of a multinational banking corporation from the United States:
“Many people, including myself, have a perception that RegTech adoption is about having a budget and support from management. When we started our journey on RegTech, we found that perhaps having a right mindset and environment to encourage innovation is more important. We should be prepared to accept failure when implementing new ideas but at the same time, realize that there is much to learn in the process. We experienced failure in one project that helped the team understand the data infrastructure better, which in turn fostered a successful adoption in the following implementation plan. This may be very similar to encouraging our staff to have the mindset of running a startup. Failure can be viewed as a fast track to identify bad ideas and improve our knowledge so that we can ultimately come up with a successful solution.”
2. Quote from the compliance head of a large local bank:
“In the past five years or so, with the business need, the technological advancement and with regulatory encouragement, RegTech in the area of AML/CFT has been developing rapidly. Many challenges have been overcome and there have been much RegTech developments in such areas as transaction monitoring, customer due diligence review and sanctions screening, all of which rely on expert database management. We see that we are in the crossroad now facing these existing/new challenges: does the industry have adequate expertise to support the ever increasing and complex requirements? The fraud and/or money laundering transaction types and red flags are ever changing too – can RegTech be advancing fast enough to cope with these changes? Do banks have the financial resources to support the developments? Do the regulators developing fast enough to take care of the developments so that banks can use more advanced tools? There are no answers at the moment and we will also see these as opportunities!”
3. Quote from the compliance manager of a successful local virtual bank:
“RegTech adoption is a ‘change’ journey: change in system, change in work process, change in skill sets, and ultimately, change in mindsets. Successful RegTech adoption depends on how thoroughly the stakeholders embrace the changes.”
Quote from the AML compliance manager of a large local bank: “RegTech challenges our traditional understanding of compliance and stretches our imagination about how compliance is achieved that knows no limits. In the next 5-10 years, we will continue to witness revolutionary transformations in the way we conduct our work today, with higher efficiency and less human errors. In short, RegTech is the indispensable future of compliance.”
4. Quote from the ex-AML compliance head of the local branch of a large Chinese bank:
“Three to four years ago, I tried hard, but in vain, to find any decent system to support ML/TF risks management. Although there were electronic recording of customer KYC data as well as rule-based systems supporting suspicious transaction monitoring and blacklist name screening, they were far from being effective and efficient. Since then, I witness a bloom in new technologies which leads to new ways in assisting compliance officers to manage ML/TF risks. Particularly in Hong Kong in which the HKMA has develop a two-year roadmap to promote RegTech adoption to banking sector. This is a golden opportunity for compliance as well as technology. However, I do see a significant challenge in talent availability. There are compliance talents and technology talents available in Hong Kong but professionals with both skills are hard to find. In particular, their fundamental trainings are so different and they seem to come from two different planets. How to amalgamate them in a team and learn from each other is a big real-world challenge.”
Even though we have not conducted a full-scale research, we do hope the readers find the above insights useful for your own RegTech adoption path.