In today's rapidly evolving world, where revolutionary technologies and global connectivity are transforming financial systems, the fight against financial crime is now pivotal to growth and success. Fraud and financial crime which includes money laundering, bribery, corruption, cybercrime, insider trading and more, makes fraud and financial crime compliance integral to secure and trustworthy financial systems.
An estimated US$3.1 trillion in illicit funds flowed through the global financial system in 2023, according to NASDAQ research1. Money laundering accounted for trillions of dollars, funding a range of destructive crimes, including an estimated US$346.7 billion in human trafficking and US$782.9 billion in drug trafficking activity, as well as US$11.5 billion in terrorist financing. In 2023, fraud scams and bank fraud schemes totaled US$485.6 billion in projected global losses.
“The sophistication of techniques implemented by criminals in the digital age is making it difficult for traditional processes and technologies to keep pace,” says Éric Lachapelle, Partner and National Leader of Financial Crimes Services at KPMG in Canada.
What can forward-looking organisations do to combat financial crime’s costly and relentless impact on individuals, businesses and society as a whole? They should prioritise robust compliance measures, foster a culture of integrity and harness technology specifically tailored to mitigate today’s growing risk landscape.
A paradigm shift is inevitable — but it is more likely to be an evolution over time. This article explores six prominent trends expected to shift the model of disrupting financial crime compliance over the next five to ten years and the key actions organisations can take to better combat financial crime.
Trends shaping the future of financial crime compliance
- Geopolitical and economic environment: In today’s hyper-connected digital economy, geopolitical events and economic volatility in one region can have cascading effects on global markets and financial systems. Geopolitical tensions, trade disputes and sanctions can incentivise individuals and entities to engage in illicit financial activities that circumvent restrictions or take advantage of gaps in monitoring.
Geopolitical and economic shifts may lead to the migration of illicit funds across borders. Understanding these dynamics is crucial for organisations and regulatory bodies to develop proactive measures and strategies that effectively mitigate the proliferation of financial crime.
- Upward trend in the cost of compliance: The rising cost of compliance globally can be attributed to several interconnected factors, including global regulatory frameworks that are becoming more intricate and detailed. Financial institutions must navigate a complex web of rules and regulations, often spanning multiple jurisdictions. Regulators are imposing stricter AML and counter-terrorism financing measures. Moreover, the possibility of substantial fines for non-compliance causes organisations to invest in robust compliance programs, increasing overall costs.
Organisations can invest in technology to streamline compliance — but upfront expenses contribute to rising compliance costs. Adoption of advanced analytics and artificial intelligence for fraud detection may require significant investment in infrastructure, data management and skilled personnel.
Heightened awareness of third-party risks requires organisations to implement more rigorous due diligence and monitoring processes for their suppliers, partners and service providers, ultimately contributing to compliance costs. Overall, these factors suggest that the cost of compliance is likely to increase significantly over the next five to 10 years as organisations strive to navigate an increasingly complex regulatory landscape and mitigate crime risks.
- Growing customer expectations: The financial sector is being transformed by digital technology amid the proliferation of online services and fintech — and the evolving expectations of today's connected customers. It is, therefore, crucial for both the public and private sectors to invest in technologies. Moreover, regulatory bodies are encouraging the adoption of digital solutions for compliance processes.
As regulations evolve to accommodate digital advancements, those organisations that prioritise and invest in seamless digital experiences for compliance can gain a competitive edge. Customers prefer services that offer a smooth digital journey over those that rely on cumbersome processes such as KYC screening.
Organisations are now conducting the KYC due diligence process through virtual platforms. Digital evaluation of identity documents can reduce document fraud and enhance confidence in KYC processes, along with expediting customer onboarding. KYC has become a focal point for innovation around digital customer communication, automated workflow, electronic document apps, automation and analytic tools. To help ensure a seamless onboarding process, you should choose a provider that can offer you leading technology solutions for this new era of rapid and seamless services.
Growing expectations for a modern digital journey in financial crime compliance are likely to be driven by a combination of technological advancements, changing consumer behaviors, regulatory encouragement, and the broader shift toward digital transformation in various industries.
- Significant and rapid developments in AI: Technology solutions that leverage data and advanced technologies are expected to drive the evolution of financial crime compliance. Good data governance and risk-based approaches to data lineage will provide a pathway to complete, accurate and timely data. Financial institutions will also move to an integrated solution supported by strategy.
Financial crime detection is expected to evolve dramatically over the next 10 years. The next generation of detection tools are likely to be more dynamic and use AI to assess real threats and enhance alerts requiring investigation. The global financial crime and fraud management tech solutions market is expected to experience significant growth between 2024 and 2031.2 AI is positioned to assume a pivotal role in combating financial crime, particularly fraud detection, and rapid progress to date is reshaping the banking and financial sector. It's inevitable that AI will soon become an essential component of the industry. Real-time monitoring, particularly for fraud and sanctions violations, will take precedence.
Institutions need a cost-effective, sustainable, and scalable tech solution to financial crime risk detection and investigation — using innovative technology such as workflow, analytics and machine learning to improve and accelerate risk detection and remediation. They also require a close follow-up on the regulatory framework and changes. There should be a rapid increase in the deployment of machine learning and AI to detect financial crime. This is likely to start with the use of machine learning in the first-level classification of alerts, earlier flagging of higher-value cases and less time spent reviewing false-positive alerts.
In addition, AI/ML model validation should give extra importance to the assessment of model transparency so that various stakeholders have a clear understanding of the mechanisms in use. ‘Explainability’ pertains to the capacity to comprehend and assess the decisions and rationale behind AI predictions.
Explainability creates transparency and trust. Users have an insight on the inner workings of the models. Algorithmic accountability allows developers, auditors, and regulators to scrutinise the decision-making processes and identify potential biases and errors. And human-AI collaboration helps to review and interpret outputs, provide feedback, and enhance the model. Lastly, error detection and debugging can help developers improve accuracy and reduce the potential risks associated with incorrect decisions.
AI algorithms can analyse substantial volumes of financial data in real-time and identify patterns, anomalies and suspicious transactions that could potentially indicate fraudulent activities. AI-powered systems can evaluate the risk linked to customers, accounts, or transactions by considering various factors, including transaction history, customer behaviour, geographic data and social network analysis. In addition, AI systems can monitor transactions, detect potential compliance violations, generate reports, and ensure adherence to relevant laws and regulations.
- Data analytics capabilities: Data aggregation can accelerate the implementation of effective financial crime systems. Combining data from diverse sources such as transaction records, social media and public records provides a broad-ranging view of individuals and entities. This holistic approach enhances the ability to detect and prevent financial crimes.
How data is stored and retrieved is just as crucial as its smooth flow through effective information-sharing mechanisms. Data quality significantly impacts the accuracy and effectiveness of financial crime detection and prevention. Forward-looking organisations are more likely to shift their focus — from simply adopting the latest regulatory technology to streamlining financial crime processes. How? By focusing on data providers that emphasise accuracy to reduce risk exposure, since inaccurate or incomplete data can lead to incorrect risk assessment, missed suspicious activities or false alarms.
While high-quality input data is indispensable, it does not guarantee high-quality output by default. Data processing and interpretation are vital — outputs could be flawed if data is inadequately processed, misinterpreted, or misapplied. Adopting robust data governance policies is imperative to ensure standards are adhered to, and human errors are minimised.
Predictive modeling, anomaly detection and forensic analytics are just a few of the advanced techniques that businesses are likely to use to detect and prevent fraud in the future. With financial systems becoming increasingly globalised, extracting knowledge and insights from AML/CFT data is no longer a specialized skillset confined to a select group of professionals. Today’s financial institutions are introducing various training initiatives organisation wide.
Advanced analytics tools can identify intricate patterns and anomalies in financial transactions, helping to flag potentially fraudulent activities. By analysing historical data, predictive analytics can forecast potential areas of vulnerability and predict future financial crimes. This proactive approach enables institutions to implement preventive measures before fraudulent activities escalate. Integration of advanced data analytics is expected to revolutionise the fight against financial crime by providing proactive, real-time insights while fostering collaboration among stakeholders. This evolution will be crucial amid increasingly sophisticated criminal activities.
- Compliance and efficiency: The focus on effective financial crime risk strategies will increase over the next 10 years. There is an opportunity for regulators and the industry to work closely together on desired outcomes. Regulators worldwide are placing a strong emphasis on the significance of personalised, risk-centric strategies in the fight against money laundering and other unlawful financial activities.
Several factors currently hinder financial crime compliance and efficiency, including data privacy concerns during cross-border financial crimes. Jurisdictions have different legal standards and requirements for collecting, storing and processing data, which limits the sharing of information on financial crime. In addition, the cross-border nature of combating financial crime increases the risk of data breaches between different levels of cybersecurity measures and regulatory oversight. Moreover, financial crime investigations require sensitive financial information to be collected and analysed, making it critical that privacy and security are adequate to maintain both trust and regulatory compliance.
The focus on effectiveness in financial crime risk management is expected to increase as financial institutions recognise the need for more robust, adaptive and technologically advanced approaches to rising financial crime threats. The combination of advanced technologies, regulatory expectations and collaborative efforts will be central to achieving a more effective and resilient risk-management framework.
A KPMG roadmap for the journey ahead
A bold new era in fighting financial crime demands extensive transformation and sustained dedication industry-wide. And there is no time to lose. Here are seven key actions that organisations should consider to better combat financial crime.
1. Fix and remediate, but don't lose focus on the strategic
Financial crime transformation involves acting tactically while thinking strategically. First, define the target state to address immediate issues in a way that aligns with your future strategy. This starts with getting the foundations right to manage financial crime risk, such as developing a strong culture of compliance, establishing a target operating model that is fit for purpose, and building a clear governance framework. Board and executive ownership and accountability can help by effectively communicating the purpose and importance of a future strategy and allocating sufficient capital resources to succeed.
2. Strengthen customer due diligence
Financial institutions need to re-imagine the way they conduct KYC. This starts with digitising KYC to improve data quality, enhance compliance and improve customer experience by automating customer onboarding. Choose a digital KYC solution that aligns with your organisation's needs and compliance requirements and integrate identity verification technologies into it to authenticate customer identities remotely. This may include biometric authentication, document verification using AI algorithms, and liveness detection to prevent identity fraud. In addition, incorporate risk based CDD processes into your digital KYC solution to assess the risk associated with each customer and tailor the level of due diligence accordingly. Use AI-driven risk-scoring models to analyse customer data and behavior patterns and identify high-risk individuals or entities. Institutions should have more relevant KYC data to better understand today’s hyper-connected customers and their risk profiles. They should also develop perpetual KYC, moving from static customer review models to real-time monitoring with event-driven reviews. The potential benefits include improved customer experience and an enhanced risk-based approach that enables more efficient resource use.
3. Invest in employee training and awareness
Regularly update employees on the latest regulations, emerging threats and red flags associated with different financial crimes. Train employees on data analytics tools, transaction-monitoring systems and other technology for modern detection and investigation. Develop broad-ranging training programs that cover all aspects of financial crime compliance and offer flexible training through in-person workshops, online courses, webinars and e-learning modules. Bring in a subject matter specialist to share their experience on financial crime compliance. Offering refresher courses to keep employees up to date on new developments and fostering a culture of compliance is imperative.
4. Deploy advanced technology integration, implement data analytics and monitoring systems
Machine learning should be explored by targeting specific use cases and your technology stack should develop holistically and strategically. Developing your technology blueprint early can help you to realise quick wins while working towards the strategic target state. Implement an AI-powered transaction-monitoring system capable of detecting complex patterns that indicate money laundering, fraud or other illicit activities. In addition, automate KYC and AML processes using AI algorithms to streamline onboarding procedures and ensure regulatory compliance. You can also deploy AI-powered fraud-detection systems to identify and prevent financial fraud, and utilise AI to automate regulatory reporting processes — ultimately reducing the time and resources required for compliance while improving accuracy and timeliness. As generative AI is anticipated to enhance all aspects of financial crime detection — including KYC, CDD, AML and fraud — we urge institutions to embrace, invest in and seamlessly integrate with AI to unlock its full potential and achieve cost savings.
5. Align transformation to a strategic plan and continue to innovate
Transforming your financial crime compliance program is a continuous process and should not be locked into a fixed timeframe. In the short-term, financial crime transformation needs to demonstrate value through enhanced efficiency, prevention and detection while pursuing long-term objectives. Gain an in-depth understanding of your organisation's overall strategic goals and objectives. Conduct a thorough assessment of the existing financial crime compliance framework, including policies, procedures, technologies and resources. Identify gaps, inefficiencies and areas for improvement that need to be addressed through transformation initiatives. In addition, engage key stakeholders across the organisation, including senior management, compliance teams, risk management functions, technology departments and business units. And seek to remain agile in response to changing internal and external factors such as regulatory developments, market conditions and emerging risks.
6. Empower financial crime operations
Too often, financial crime operations assume the recipient role rather than being an integral part of the financial crime ecosystem. However, key efficiency gains and end-to-end consistency can only be achieved using a stringent organisation-wide approach. Sourcing decisions should reflect your capabilities and scalability. These considerations are prompting more businesses to search for the right managed services provider. It’s time for managed services to be connected to transformation initiatives. They hold a wealth of knowledge on today’s soaring threats and can provide critical insights that inform risk assessments and rule-setting. However, to play this role effectively, your managed services provider should make a difference — combining an operations focus with a risk mindset, working with a fit-for-purpose operating model, and using process automation to drive efficiency.
7. Encourage collaboration and information sharing
Public-private partnerships (PPPs) are a possible way forward and there is an opportunity to grow their operational value. Global organisations are pivotal in encouraging and enabling public and private partnerships to improve the effectiveness of anti-financial crime measures. Creation of these collaborations and partnerships facilitate international collaboration by creating best practices, tools and standards for addressing financial crime activities.3 Success requires a multifaceted approach, such as developing joint initiatives focusing on various aspects of financial crime compliance — bringing together regulatory bodies, financial institutions and relevant industry associations. In addition, you need to implement secure communication channels and data-sharing platforms that adhere to relevant regulatory standards and best practices. Moreover, collaboration and information sharing can also be encouraged through knowledge exchange and capacity-building activities such as workshops, seminars and training sessions, where stakeholders can share insights, best practices and lessons learned in financial crime compliance. Encourage open dialogue and peer-to-peer learning among participants.
KPMG’s Financial Crime specialists are here to help
KPMG firms are some of the leading providers of services to help combat financial crimes. Our market-leading KPMG professionals have the experience and tools to help set you up for success. KPMG specialists can advise you on the:
- Development and execution of a technology strategy and operating model that supports the utilisation and development of existing and future data.
- Appropriate tools and technology for your unique business, help develop strategies, optimise analytics and data use, and help ensure a transition to innovative customer monitoring without compromising regulatory compliance.
- Deployment of the right tools, technology, strategy, analytics and data to help you move to innovative customer monitoring.
- Preferred practice insights and intelligence as you pursue a transformation and innovation mindset.
- Streamlining, optimising and digitising of operations related to financial crime compliance to drive growth and focus on intelligence.
Acknowledgment - This article was adapted from a report that was originally published by KPMG Australia - Financial Crime – A Paradigm Shift - KPMG Australia.
