ComplyAdvantage The State of Financial Crime 2021 The State of Financial Crime 2021 Technology, regulation, and the future of financial crime compliance 1 ComplyAdvantage The State of Financial Crime 2021 Contents 01 Executive Summary 3 02 Introduction 4 03 COVID-19 & Digitization 5 04 Spotlight on Financial Crime 7 FinCEN Files 7 Convergence between Fraud, Cybercrime & Money Laundering 9 Sanctions 11 Crypto and Virtual Assets Service Providers (VASPs) 13 Terrorist Financing 15 05 Trends in Geopolitics & Impact on Financial Crime 16 Impact of Biden Election 16 Tensions between the West and Russia 17 Brexit 18 The rise of China 20 Political Unrest and OCGs 22 06 Regulatory Change and Enforcement 24 Global 25 North America 26 Europe 28 Asia - Pacific 30 07 Industry Trends 32 08 Key Dates in 2021 35 2 ComplyAdvantage The State of Financial Crime 2021 01 Executive Summary COVID-19 & Digitization Takeaway The shift to a digital world is creating many Firms should update their risk enterprise-wide opportunities, like authorized push payment fraud, assessments to take account of digitization trends and that can be exploited by criminals. identify ways to keep employees connected and motivated. Spotlight on Financial Crime Takeaway Financial crime developments will range from addressing Firms will need to ensure that they have robust, flexible, insights revealed by the leak of the ‘FinCEN files’ in the and integrated screening and monitoring systems in US, to the convergence of fraud, cyber, and money place to navigate the complexities of different types of laundering, the rise of crypto, and the ever-changing financial crimes. sanctions landscape. Trends in geopolitics & Impact on Financial Crime Takeaway Firms should follow global trends as part of their horizon Geopolitical events in the world can disrupt businesses scanning activities and be prepared to quickly update and reshape illicit finance operations, creating new AML/CFT policies, processes, and procedures to ensure criminal ventures and regulatory requirements that that they remain on the right side of the law. firms must identify and manage as part of their AML/CFT programs. Regulatory Change and Enforcement Takeaway A plethora of regulatory changes will take place In addition to incorporating regulatory changes into AML/ as governments seek to respond to new financial CFT programs, firms will need to ensure that they support technologies, such as Virtual Assets, and promote their assurance and audit functions in identifying and the use of technology to tackle financial crime which addressing potential regulatory issues. raises regulatory expectations and leads to stronger enforcement. Industry Trends Takeaway RegTech adoption, COVID-19 linked crime, the rise of Firms should be ready to address new threats, engage crypto, and the creation of innovative solutions through in cross-industry dialogue and seize opportunities to public-private sector collaboration are some of the innovate as industry trends change quickly. trends to be on the lookout for. 3 ComplyAdvantage The State of Financial Crime 2021 02 Introduction Welcome to ComplyAdvantage’s outlook for In 2021, firms will face many challenges. Fraud, cyber, 2021, a year that will continue to contend and money laundering will continue to converge as criminals exploit grand-scale digital adoption through with the fallout of the Covid-19 pandemic and computer and mobile-enabled crime. Geopolitics, anti-money laundering data leaks. particularly the 2020 US election, Brexit, the destabilizing effects of Russia, the rise of China, and Compliance has always been challenging. Compliance political unrest, will change how criminal networks officers have to educate organizations on emerging operate and how countries use AML/CFT tools to threats, the implications of evolving regulations, and retaliate. Corruption will continue to become more the onslaught of criminal behavior while balancing their attractive as trillions of dollars channel through the organizations’ risk appetite. Meanwhile, the monitoring international system via economic stimulus measures, and reporting of suspicious activity place organizations but also to support the delivery of vaccines. on the frontline of managing financial crime risks on behalf of governments. Against this backdrop, lawmakers, particularly in the US and European Union, have pledged to make the Last year proved to be a difficult year as Covid-19 AML/CFT frameworks more effective and have begun changed the way organizations worked. That, implementing the many legal and regulatory changes to compounded by regulatory divergence, the escalating do so. Hong Kong, Singapore, and the UK will further use of sanctions, and an increase in cybercrime and promote technological adoption and innovation. Brexit fraud activity, forced organizations and governments will affect how the EU and the UK work together, and to think critically about their anti-financial crime the UK will expand its autonomous sanctions regime. efforts. In the final months of 2020, ComplyAdvantage The Financial Action Task Force (FATF) will continue interviewed 600 C-suite and senior compliance decision to set the global AML/CFT agenda under the German makers across North America, Europe, and Asia-Pacific. Presidency, with the current President, Dr. Marcus The respondents represented enterprise banking, Pleyer, likely to encourage a more granular exploration investments, crypto, insurance organizations, and of the use of RegTech for AML/CFT purposes. FATF fintechs. Their answers dive deep into the challenges will also continue its country assessments in the organizations face and give us a glimpse at the trends ‘Fourth Round’ of mutual evaluations, driving further that are likely to emerge in 2021. A look at the numbers: enhancements in national frameworks as countries such as Pakistan seek to avoid the economic and political • SARs filing was on the rise with 74% of respondents consequences of remaining on the organization’s ‘grey saying they filed more SARs in 2020 than the previous list’ of countries with significant AML vulnerabilities. year • While several countries are in the process of Firms will need to embrace the risk-based approach to introducing critical updates to their AML regulations, manage finite resources against an onslaught of criminal only 19% of respondents felt that AML regulations activity; and as the Covid-19 pandemic unravels, firms needed to be strengthened will need to be more creative in monitoring, training, and motivating employees working from home. • 93% of respondents stated that real-time AML risk data would improve their compliance operations • Improving fraud detection ranked highest with 69% of respondents indicating fraud as a significant driver of financial crime in 2020 2021 will be a year of opportunity to innovate and learn how to use data and technology to support efforts to fight financial crime. 4 ComplyAdvantage The State of Financial Crime 2021 03 COVID-19 & Digitization Financial institutions reported that the top three things approved and released, organized crime groups (OCGs) Covid-19 put pressure on were: increased fraud cases, will try to steal vaccines, selling them at profit or simply risk appetite, and operational processes. This is likely selling fake variations. The Financial Action Task Force to continue into 2021 as the world continues to cope (FATF) warned of numerous Covid-19-related risks with the pandemic and embrace technological adoption. including fraud, cybercrime, exploitation of economic In 2020, G20 countries committed to spending stimulus measures, and Virtual Assets Service Providers US$21 billion, injecting US$11 trillion into the global (VASPs) laundering the proceeds of the sale of Covid-19 economy, and releasing US$14 billion in liquidity to vaccines. allow indebted countries to fight the pandemic. The astronomical amounts of public funds flowing through The shift to remote working and national lockdowns has the international financial system have created a honey led to the quick adoption of e-commerce and digital and pot for criminals and corrupt actors. Governments will instant payments, leading to cash displacement in many continue to walk the fine line between making funds and jurisdictions and disrupting criminal payment corridors. support available to vulnerable individuals, companies, Before the pandemic, digital payments growth was and countries at pace while putting in place measures to estimated at 12.7% and expected to produce 726 billion tackle fraud and financial crime in a frictionless manner. transactions annually in 2020, with an estimated 60% of world GDP digitized by 2022. This now appears to be Economic stimulus measures, aid funding, investments an underestimate. Tokenized payments and crypto assets into health infrastructure, and the development and will increase and more Central Banks will pilot the use distribution of Covid-19 vaccines were vulnerable in of digital currencies. All of these changes will speed up 2020 and will remain vulnerable to criminals in 2021. the adoption of non-face-to-face automated customer Interpol has warned that as Covid-19 vaccines are onboarding and digital ID. 5 ComplyAdvantage The State of Financial Crime 2021 These changes will also have a major impact on firms’ As criminals exploit home working arrangements, firms ability to monitor transactions. Legacy monitoring will continue to face challenges in managing financial systems, often based on relatively inflexible rules, will crime risks while