What is happening in the financial AML and KYC space? Interview with Manfred Wandelt, Deloitte RegTech Lab

Ahead of RiskConnect 2019 edition, The Paypers sat with Manfred Wandelt, Senior Manage at Deloitte RegTech Lab to discuss about what is happening in the financial AML and KYC space

Manfred Wandelt will be a keynote speaker at the upcoming RiskConnect conference, organised by Web Shield, which takes place in Warsaw, Poland. During the two-day conference taking place on 19-20 November 2019, risk professionals, compliance officers, and anti-fraud experts will be sharing their professional experience and discuss the latest trends and challenges in the risk management industry.

Nice to meet you Manfred. Could you please tell us more about the Deloitte RegTech Lab? How does your professional background tie in with the lab’s main objectives?

The RegTech Lab was found as a strategic and future-oriented initiative by Deloitte.

Under the keyword RegTech the terms ‘Regulatory’ and ‘Technology’ merge. Behind them lie innovative software solutions that can significantly advance the digitisation of the regulated environment. Regulatory technologies (RegTech) automate risk management processes, facilitate regulatory reporting, prevent fraud, enable companies to learn about regulatory changes around the world, and support strategic planning.

Our RegTech Lab allows our clients to tackle their toughest, most complex challenges and keep pace with rapid regulatory changes. They work alongside with our regulatory specialists, industry partners, and research experts to experience and co-create smart, scalable regtech solutions to digitally reinvent their business.

Personally, I have worked many years for international banks and for more than 18 years as consultant in the environment of Anti-Financial Crime and unfortunately had to find out that existing compliance practices are increasingly ineffective. Already back then I recognised the urgent need to adopt modern technologies as part of a compliance strategy. This is where regtech comes into play and offers every consultant an expanded field of action.

It all fits together excellently, as long as you're open to new things.

What is the state of play of the AML and KYC processes/strategies within financial institutions?

Recently, the three European Supervisory Authorities (ESAs)  published a second joint opinion on the money laundering (ML) and terrorist financing (TF) risks impacting the European Union’s (EU) financial industry. The ESAs found that transaction monitoring and reporting suspicious transactions is still a cause for concern, particularly for companies processing high volume transactions.

The message from regulators is clear — the days of box-ticking are over when it comes to compliance practises relating to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT).

Banks and other financial institutions are the gatekeepers of the financial system and hold a high level of responsibility to prevent financial crime. They have worked hard to establish know-your-customer (KYC) and anti-money-laundering (AML) policies, procedures and systems to support their efforts. However, changes created by technology and increasingly common cross-border transactions are rendering the platforms they currently have in place ineffective.

Last but not least, the scandals surrounding several major banks have made clear that it is still very difficult for obligated parties to really know their customers and, in part, the customer of their customers.

After all, the application of the KYC principle is still risk-based and it requires many years of experience and specialist expertise. As already addressed, many obliged persons are lacking exactly this one, because in the past one had to set up more a generalist KYC factory and, thus, the really ‘hot blood diamonds’ were not noticed. In addition, it has now become apparent that off-shore KYC factories have made only moderate use of the risk-based approach. As a result, clients have begun to rely on near-shore KYC factories, and here too, for a global enterprise, it is still difficult to produce the hope for quality through existing and sustainable experience and expertise.

A paradigm shift has to be supported by regtech to establish an efficient system to fulfil the requirements. With traditional means we will no longer be able to work efficiently and in a timely manner as well as according to the expectations of the regulator.

What makes it so difficult for banks/businesses, in general, to pull their act together and fight/prevent money laundering scandals/involvement?

To be honest, as long as people who enable money laundering wittingly or unwittingly see opportunities, profits, commissions, bonuses, and a pay rise the situation will not change.

The desperate actions of the European Union to tighten rules against money laundering are proof of the shifts on the regulatory side. Previous reforms to tackle a series of banking scandals are now deemed inadequate and show that regulators bear some responsibility for poor levels of AML supervision with regard to the imposition of inadequate penalties.

As long as the added value of KYC and risk prevention is not seen and is punished very humane, we will again and again have such scandals out of greed.

How will new technologies such as machine learning/artificial intelligence better fight financial crime?

Regtechs master the interaction of innovative technologies and regulatory expertise. They have a flexible set-up and can react more agile to new requirements and guidelines than it would be possible with traditional approaches by financial institutions. Holistic compliance solutions enable greater data security and detailed impact analysis of regulatory requirements based on granular, proprietary data. For example, regtechs can recognise and monitor interrelations between existing and implemented requirements. This creates transparency in the regulatory environment that was not previously available.

As 2020 is just around the corner, could you share with our readers your top three predictions for the European regtech space?

The global regtech market is growing exponentially, powered by significant regulatory changes such as MiFID II, PSD2, GDPR, and AML, which all brought with them extensive new obligations for financial services companies. Currently valued at USD 2.3bn, the regtech market is expected to reach USD 7.2bn by 2023, coupled with a predicted 500% increase in investment in the sector by 2020, from USD 10bn in 2017 to more than USD 53bn at the end of the decade.

Regtech transforms compliance and risk from support functions into business – and that will be a must in the future. Regulatory pressures require fast implementation, which often conflict with financial firms’ development and transformation calendars that have to change. Regtech solutions are in the process of understanding business and compliance engagements to allow them to align their solutions with current regulatory frameworks.

I predict that regtech will move far beyond being used simply for regulation.

About Manfred Wandelt

Manfred is Senior Manager at Deloitte Enterprise Risk Services practice in Frankfurt since September 2015. He is member of the Anti-Financial Crime team, heading AML/CFT. He is also responsible for all RegTech related subjects, specifically the development of new solutions and prototypes based on client needs. Manfred has more than 17 years of consulting experience across the Financial Services Industry working with national and international clients. Additionally he has more than two decades of work experience in Banks.