The Impact of Rising KYC & AML Regulations in Europe26th February, 2019
Global attention to money laundering and financing of terrorism has grown exponentially in recent years.
As criminals find new tactics, global financial regulations constantly evolve to try and keep up. In this new environment, businesses face increased risks of penalties and reputational damage if they are not equipped to replace their long-established manual processes and adapt their internal procedures to the new status quo.
At the same time, the world has become a much more interconnected place where companies that want to expand beyond their home market are presented with amazing possibilities for growth. However, with every new jurisdiction come different regulatory requirements which no financial institution can afford to overlook. In this new landscape, European regulations have played a key role in leading the way for the rest of the world to follow.
Recent high-profile cases of alleged money laundering in banks have increased the general public’s and the regulators’ attention on the penetration of dirty money and fraud into European societies, so it is likely that the existing requirements will be continuously adjusted as the institutions’ knowledge of these criminal practices deepens. To add a further level of complexity, the evolution of customer expectations is adding new pressure on organisations to deliver seamless, fully digital and mobile experiences.
To address the new status quo, the European Union has introduced a number of financial regulations over the last few years. To truly understand this rise of financial regulations, it is important to consider the macro-economic and geopolitical context that preceded their introduction.
The decade from 2007 saw the world – and the European region in particular – being swept by what later became known as the Global Financial Crisis and the Great Recession that followed it. As countries got into a recession with tangible economic consequences, a large part of the general population struggled to understand the mechanisms that got their national financial systems in trouble in the first place. As a corollary to the growing mistrust in corporations, people started to feel the need for more transparency on how their personal data was being stored and used by companies.
At the same time, news stories such as the Panama and Paradise Papers propelled general awareness about the extensive penetration of money laundering practices in our societies. Finally, tragic terrorist attacks renewed the urgency of introducing extensive strategies to prevent terrorism financing across jurisdictions.
A number of regulations were thus introduced to address one or more of the general issues the financial sector had been facing for the previous ten years. In particular:
– The Fourth & Fifth Anti-Money Laundering Directive (AMLD4 & 5) were aimed at counteracting the extensive penetration of money laundering in our societies by introducing more thorough checks and better cooperation between countries;
– The Payments Services Directive (PSD2) was introduced to stimulate customer-centric innovation in banking, with a focus on preventing payment fraud and misuse of electronic financial tools;
– The updated Markets in Financial Instruments Directive (MiFID II) was primarily driven by the need for more transparency in financial investment operations;
– The General Data Protection Regulation (GDPR) was the EU’s response to the general public’s request to regain control over personal data.
The timeline above showcases at a glance how the European regulatory landscape has changed over the past few years, with a growing number of regulations coming into force in quick succession.
Historically, the role of risk and compliance professionals has always been the one of the gatekeepers who would put processes in place to protect the organisation against damaging individual behaviour, hefty regulatory fines and reputational consequences. In this new, stricter regulatory environment, this role has become even more fundamental.
In particular, the growing risk of economic and reputational repercussions has been pushing the compliance function closer to the centre of the business structure. The approach to compliance is ceasing to be an afterthought or a “tick the box” exercise, becoming more proactive and strategic.
With multiple regulations coming into force in the span of a few months around 2018, compliance professionals have found themselves in need of a more flexible and dynamic approach to their function, one that would allow for prompt changes to adapt to the new requirements as they are introduced.
In our recently released white paper, we’ve conducted an analysis of the most important financial regulations introduced in Europe over the past few years. We have taken a closer look at how legal and risk teams have been driving change across their organisations working with multiple stakeholders to review operational workflows, update technological infrastructures and propose a new approach to compliance.
If you’re interested to find out more, you can download our white paper on the topic here.