How digital can compliance become with RegTech?

Reg and Tech are two different worlds: one legal and one digital. Combined into RegTech, they are the future of compliance. But how digital has compliance already become? Insurance companies and financial institutions have already gone a long way towards digitalization. But they want more:

  • Accelerating and largely automating processes in order to reduce costs
  • Becoming more flexible for new regulatory requirements (such as the Fifth EU Money Laundering Directive)
  • Improving analytics

There are several ways to do this:

Structuring data for KYC and Customer Due Diligence (CDD)

KYC data is not always up to date. Banks and insurance companies therefore often perform special quality-assurance actions and gather missing data from new and existing clients. If well-structured KYC data is available, high-quality analyses can be performed to compare client behavior with the KYC profile. Tech helps in getting to know the client and his activities even better and detect anomalies right away.

Finding ultimate beneficial owners (UBO)

Business models are often opaque. This is especially true when corporate structures are designed so that they obscure the people or transaction flows involved. Verifying the UBO, or ultimate beneficial owner, by conducting a comparison with the transparency registry is a contribution RegTech makes to compliance security.

Reducing false positives in money laundering analysis

RegTech contributes greatly to automating the prevention of money laundering and the financing of terrorism (CTF) by comparing huge quantities of data from sanctions and PEP lists with the data from new and existing customers and detecting transaction patterns and fraud. RegTech delivers savings potential, especially when it reduces false positives. Each false positive involves manual effort. It pays to limit this effort by improving analysis quality.

Preventing market abuse and insider trading

Employees quickly become entangled in conflicts of interest. No matter whether the unauthorized securities trading is intentional or inadvertent, the risk falls on the financial institution in the first instance. RegTech assists with continuous monitoring of stock trading on the part of the bank and its employees, allows preclearance of third-party-bank business, and supports the maintenance of insider registers.

Monitoring payment in real time

Today, transaction monitoring is largely automated. Amount, recipient, recipient country, BIC, transfer details, etc. are checked in real time. RegTech can create a better IT environment that quickly integrates changes that are due to the regulator or to internal policies.

Relieving investigation units

When IT systems detect anomalous transactions or personal data, the only thing to be done is to clear up the incident quickly. This often involves manual effort in which companies employ entire investigation units in complicated cases. Their work contributes to making future analyses more precise and false positives progressively rarer.

Legal checks of cross-border business

Many rules must be observed for cross-border financial business. As soon as an institution receives digital information from a law firm, country-specific rules can be queried directly. The many diverse rules and constant updating makes cross-border business without RegTech scarcely imaginable.

Using machine learning to learn from data

Machine learning (ML) is considered a super weapon in compliance automation. Compiling the knowledge of compliance or investigation experts and continuously improving compliance machine learning models is a promising way.

Digitalizing regulator requirements

The interface between the legislator and banks or insurers is not very “Tech”. It is extremely rare for a regulator to deliver data or rules that can be directly imported. RegTech is a good investment for transferring regulations to companies’ productive environments more quickly. If the rules are delivered electronically, integration times are shortened and costs greatly reduced.

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