Financial crime compliance transformation

Banks in Hong Kong face growing pressure to strengthen their financial crime prevention and detection capabilities, particularly in anti-fraud and anti-money laundering (AML). A number of key factors are driving the need for transformation:

1. Evolving threats: Financial crime tactics are becoming more sophisticated, with cybercriminals, money launderers and terrorist financiers constantly developing new methods.

2. Regulatory scrutiny: Regulators are imposing harsher penalties for compliance failures. Banks must enhance their financial crime compliance programmes to avoid fines and reputational damage.

3. Data explosion: The growth of digital banking and payments is generating exponential increases in transaction data. Banks require more advanced analytics to identify suspicious activity amid the data deluge.

4. Efficiency gaps: Legacy systems and siloed teams often result in inefficient financial crime compliance operations. Transformation is needed to streamline processes and improve productivity.

To address these challenges, banks are investing in areas like advanced analytics, automation and cross-functional collaboration. But as the proliferation of technology gives criminals new avenues, banks must also budget for updating their technology platforms on an ongoing basis.

Another recent development is virtual assets. Banks will need to assess the risks associated with this new asset class, such as when onboarding and maintaining relationships with virtual asset trading platform operators and clients with the majority of their wealth / funds accumulated from virtual assets trading.

Regtech can help banks to assess financial crime compliance risk, and regulators are keen to drive the facilitation of technology. Beside giving the regulator more insights, regtech can also improve cost efficiency and enable banks to deploy compliance officers to more meaningful roles.

How financial crime compliance is handled within banks is no longer just a concern of specialists. The c-suite needs to be aware of potential threats and be prepared to take action, while financial crime compliance teams increasingly include talent with a broader skillset including technology expertise.

But while transformation is crucial to deal with evolving threats, banks do not need to transform everything and should retain the core parts of their financial crime compliance functions. Firstly, regulatory requirements mean that banks must maintain robust AML, know-your-customer (KYC) and other financial crime controls. They cannot outsource or eliminate these core compliance responsibilities.

Experienced financial crime compliance teams also have deep institutional knowledge about their bank's customers and risk landscape, which is critical for effective detection of suspicious activity. They also have strategic oversight that can help the bank make better decisions about products, markets and risk appetite. Maintaining this in-house expertise means that the bank can respond rapidly to any issues that arise, ensures operational resilience, and ultimately helps to avoid reputational damage.

By striking the right balance between transforming and retaining core financial crime compliance capabilities, banks can enhance their defences while preserving critical institutional knowledge. This hybrid approach will enable banks to stay ahead of financial criminals and protect their customers from the constantly evolving threats.