AML in the digital transformation era: towards a collaborative approach

New risks deriving from digital financial innovation 

The rapid digital transformation of the financial services sector has been deeply impacting the way consumers interact with financial institutions. The emergence of new financial players, services and products is changing the market structure and reshaping the way transactions are carried out. While technology can foster innovation in the financial sector, it also exacerbates a variety of risks, among which are ones related to money laundering and terrorist financing (ML/TF). These cross-sectoral risks are being increasingly addressed from a regulatory and supervisory point of view at both the international and European levels. 

According to the European Banking Authority’s latest Opinion on ML/TF risks affecting the EU’s financial sector, besides risks related to crypto-assets or the emergence of artificial intelligence and machine learning solutions, there are also ones linked to delivery channels. Several risks have been identified when focusing on the delivery of financial products and services by Fintechs, such as their reliance on outsourced service providers, their exposure to cybercrimes and the provision of cross-border transactions. Improving transaction monitoring and reporting suspicious transactions are essential for an efficient anti-money laundering and countering the financing of terrorism (AML/CFT) framework. 

The potential of data, technology and collaboration 

At the global level, the number of cashless digital payment transactions almost quadrupled between 2010 and 2022, growing from 282 billion to 1.143 billion. Financial institutions are increasingly exposed to numerous types of financial crime. In 2022, 67% of them were exposed to financial crime involving digital payments. It is crucial to considering the cross-border aspect of these transactions as they unfold in interconnected networks involving multiple financial institutions. For this reason, a comprehensive network view of payment data is fundamental to efficiently fight money laundering. In this respect, the Bank for International Settlements (BIS) Innovation Hub Nordic Centre is currently working on Project Aurora, which has recently concluded its proof-of-concept phase. It analyses how money laundering across institutions and borders can be countered using data, technology and collaboration.  

The project explores how artificial intelligence, machine learning, privacy-enhancing technologies and network analysis can support AML/CFT when applied to payment data in a collaborative analysis and learning (CAL) approach. This approach has proven to be more effective in detecting complex money laundering schemes than the siloed and rule-based approach financial institutions are currently using. The initiative also identifies the challenge of guaranteeing user privacy while protecting payment systems from financial crime. This specific issue is analysed in the BIS Innovation Hub’s Project Herta, which aims to explore how to best identify financial crime patterns while using the lowest set of data points.    

Technology, if well applied, offers opportunities to improve AML/CFT efforts. According to the Financial Action Task Force (FATF), data pooling and collaborative analytics can help financial institutions examine large amounts of data from different sources to identify suspicious patterns and trends more efficiently. Collaboration among financial institutions relies on data sharing, which is decisive in fighting multinational ML/TF schemes and which must comply with existing data protection and privacy requirements. Research is currently being done in the field of privacy-enhancing technologies, as they rely on cryptographic tools that enable different parties to meaningfully interact without disclosing underlying private information to one another. Much work remains to be done in this challenging domain, as protection of data privacy is at the base of an effective AML/CFT framework. 

The new EU Authority 

At the EU level, mitigation of AML/CFT risks is one of the priorities of the EU Digital Finance Strategy. In a joint vote in February 2024 the European Parliament and the Council of the European Union chose Frankfurt, out of nine competing cities, as the seat of the EU Anti-Money Laundering Authority (AMLA). Establishing this authority is the centerpiece of the AML package, a set of legislative proposals aimed at strengthening the efficiency of the EU’s AML/CFT framework. The AMLA will need to stay ahead of emerging technologies and their impact on financial crime while ensuring the compliance of obliged entities with current AML/CFT rules, a challenge that the new authority will have to increasingly deal with.  

This blogpost has been produced in the framework of the EU Supervisory Digital Finance Academy (EU-SDFA).

The EU Supervisory Digital Finance Academy (EU-SDFA) is a TSI flagship initiative aimed at supporting financial supervisory authorities in coping with the risks and opportunities associated to the use of advanced technologies in the financial sector. The European Commission – DG Reform has established the Academy in cooperation with the three European Supervisory Authorities (EBA – ESMA – EIOPA) and the Florence School of Banking and Finance part of the Robert Schuman Centre of the European University Institute (FBF-EUI).