The RegTech industry knows that no regulator is able to promote any particular technology or RegTech provider, but there are plenty of other things that regulators in general - and the British Financial Conduct Authority in particular - can do to make innovation happen.

British compliance officers are in a Catch-22 situation. On the one hand, the UK's banks and financial institutions want to know where they ought to deploy technology to help them comply with regulations, but the Financial Conduct Authority (FCA) has made it very clear in the past that any use of new technology (including RegTech) is entirely at the bank’s own risk. This discourages banks from embracing the latest technology (even when it is obvious that it would diminish financial crime) because they know that the regulator might punish them for doing more, instead of criticised them for not trying harder. This is not just a Catch-22, but a Catch-22 with a nasty sting in the tail.

The FCA needs a mandate to encourage more financial institutions to solve their regulatory problems by experimenting with innovative technology. The Financial Crime Enforcement Network or FinCEN, the FCA’s American counterpart in the anti-money-laundering/sanctions field, is stronger and more enterprising in its efforts to encourage the adoption of RegTech, whereas the FCA is constrained by its remit, which does not include a duty to make the fields of risk and compliance more innovative.

Jamal El-Hindi, FinCEN’s deputy director, spoke about the importance of regulators encouraging AML innovation at the 2019 Money Transmitter Regulators' Association's annual conference in September. He said: “As a regulator with an interest in helping the private sector better identify and report illicit activity, FinCEN is striving to pave the way for more innovation and to remove some of that fear. To do this, it is important that we send a clear message that we are in fact actually encouraging innovation in the AML space.”

Therefore, there are two main ways in which the UK is falling behind the US. The first is that its resources (both in terms of legal power and manpower) to prosecute offenders (both corporate and individual) and impose fines or stricter penalties for serious offences are small. The second is that it ought to be doing more to encourage firms to deploy the best and most effective regulatory technology (RegTech) software in the fight against money laundering, fraud and other financial crimes.

Stronger penalties required – what should we learn from the US?

The FCA has been accused of failing to do enough to hold banks to account when it comes to anti-money-laundering (AML) safeguards. A Corruption Watch report in March found that a company that commits an economic crime in the US is far more likely to be hit with heavy criminal, civil and regulatory penalties than one in the UK. In fact, whenever banks in London and New York have been implicated in money-laundering and sanction violations, the UK did not launch a single successful corporate criminal prosecution against a British bank. The US, on the other hand, took criminal enforcement action against six of the big banks and imposed almost £3 billion in criminal fines.
 
It is clear the FCA ought to be more proactive in imposing penalties on those who launder funds and ought to encourage financial institutions to explore new technologies to comply with the UK's AML rules. Because of the FCA’s non-specific approach to approving Regtech software, there remain substantial barriers to widespread adoption. This is where the FCA could learn something from FinCEN, which has an established reputation for supporting regulated businesses to in their efforts to improve their AML processes.

It has, to be fair, shown some signs of doing this: in the six months to the end of June this year, the FCA imposed 10 fines totalling £319.2 million – more than five times the annual 2018 total of £60.5 million. It is also now starting to explicitly recognise the importance of technology in the fight against financial crime. This is an encouraging development and was the refrain of a recent speech by Megan Butler, who said: “don’t be afraid to use technology and innovate to keep criminals out.”

Furthermore, Nick Cook, the director of innovation at the FCA, is also thinking about promoting change by harnessing technology. In a recent interview, he said: “One of the things we are looking at is what that digital testing environment will need to look like, the role the regulator could play in supporting its creation, and whether it is something that can be scaled across jurisdictions.”

Support for RegTech solutions

The RegTech industry knows that no regulator is able to promote any particular technology or RegTech provider. Chris Woolard, an FCA director, has said it is not the regulator’s job to “create winners,” but it can endorse positive results, when appropriate. Regulators who have the job of enforcing the law should ask the right questions. How do you uncover adverse information? Do you rely only on Google? By asking the right questions you can proactively encourage the right results. This is especially important because we know that it is, in the words of the Financial Action Task Force's (FATF's) Concealment of Beneficial Ownership report, “often difficult for banks to conduct robust customer due diligence on foreign companies.”

In the US, FinCEN provides sandboxes to provide a safe space in which companies can develop new software to smooth the performance of AML processes and streamline protocols that spot and prevent financial crime. Organisations that work in these sandboxes are protected from financial penalties while they refine their new work practices.

Additionally, FinCEN has recently launched its Innovation Hours programme, by which it intends to meet financial institutions, regulatory and financial technology firms and other interested parties every month. These organisations will share information with FinCEN about innovative approaches to evaluating, maintaining and reporting information in accordance with the Bank Secrecy Act 1970, the better to protect the financial system against illicit financial activity.

One approach that is being taken is for the FCA and its counterparts across the Channel to set up a "global sandbox" to provide a safe space in which international companies can develop new software to detect financial crimes. This is an approach that the UK’s FCA has already stated it supports, with the creation of the Global Financial Innovation Network (GFIN) by an international group of 29 financial regulators and related organisations, which formally came into being in January. However, this focuses on innovation in the interests of consumers, rather than support for companies against financial crime. The FCA ought to develop this new policy further.
 
Taking the fight to the money launderers

While we wait to see whether the FCA will follow FinCEN’s lead, regulated entities should not hesitate to improve their own AML defences. There are already a wide number of RegTech solutions that can help them identify actual and suspected criminal activity and comply with regulations.

'Solutions' that feature advanced technologies such as Machine Learning (ML) and Natural Language processing (NLP) are already on the market. Augmented intelligence, in particular, can replicate the abilities of the very best 'due diligence' analyst by searching continuously for adverse information about customers that might reveal links between them and people suspected of such crimes as fraud, money laundering and bribery.
 
Such solutions use hundreds of terms in many languages to perform real-time searches of the surface and deep web, as well as other key global databases for information on any individual or company with which an organisation might want to do business. By harnessing this technology, regulated entities can go a long way towards making their AML processes fit to fight the new generation of money launderers while remaining compliant with the most stringent of AML regulations.

* Jane Jee can be reached at jane.jee@kompli-global.com