The Importance of RegTech in AML/CFT Compliance in the UAE
Introduction: The Global Financial Crisis and RegTech
The Global Financial Crisis (GFC), which began with the collapse of the U.S. housing market and peaked with the bankruptcy of Lehman Brothers on September 15, 2008, brought a tectonic shift in how banks approached risk and compliance. Although there were deep macroeconomic factors behind the collapse of major financial institutions, one of the most significant causes behind the GFC was aggressive lending practises that promoted risky home mortgages to borrowers who could not afford them.
The fall of Lehman Brothers triggered a global financial meltdown, sending shockwaves around the world. In the United States, millions lost their homes. In South Africa, the mining and manufacturing sectors were hit hard, leading to thousands of job losses, especially in industries reliant on global demand.[i] With a deeply interconnected global economy, whether an East Asian country reliant on exports or a remote island in the Pacific dependant on tourism, no nation was spared from the economic turmoil.
The lessons for financial regulators were very clear. They couldn’t let another such crisis happen. This caution ushered “The Decade of Financial Regulatory Reform: 2009 to 2019,”[ii] a period that fundamentally reshaped the financial regulatory landscape forever. During this time, the European Commission alone proposed over “50 legislative and non-legislative measures” in financial services, aiming to strengthen financial stability and prevent future crises.
Needless to say, this led to a significant increase in compliance costs for the banks. As reported in Forbes[iii], since the Dodd-Frank Act was passed in 2010, U.S. banks have seen their non-interest expenses rise by over $50 billion per year on average. Additionally, large companies report that the cost of staying compliant with regulations can reach up to $10,000 per employee.
In addition to the tightening of financial regulations, two more things were happening simultaneously throughout this decade:
1.?????? An incredible proliferation of data
2.?????? Rapid advancements in technology to tap into and leverage that data
This led to a top-down demand from banks and financial institutions to use technology to comply with regulations. They believed this approach would not only streamline the regulatory process by creating a unified framework but also reduce risks, human error, and the cost of compliance. This is precisely the purpose of RegTech. RegTech (Regulatory Technology), in simple terms, refers to the use of technology to enhance regulatory compliance processes. With the advent of advanced data analytics, machine learning, and generative AI, we will only see the burgeoning of RegTech in the coming years.
Initially, RegTech was most widely adopted in the financial services industry. However, it has since expanded beyond finance and now applies to various industries, including healthcare, telecommunications, precious metals, and environmental sectors. In this article, we shall explore the importance of RegTech in AML/CFT compliance and its use by organisations in the UAE.
AML/CFT as a Leading RegTech Application
In mid-2020 and early 2021, the European Banking Authority (EBA) conducted a general RegTech industry survey[iv] and a detailed market study, inviting all relevant stakeholders—financial institutions and RegTech providers—to share their views and experiences on RegTech solutions. A total of 115 financial institutions from 26 Member States and 147 RegTech providers responded.
Based on the responses from these organisations, along with a number of other methodologies used to gather data, the most commonly used RegTech solutions were found to be related to AML/CFT compliance, though a wide range of RegTech solutions is available in the market.
Source: European Banking Authority Survey
Use of RegTech in AML/CFT Compliance in the UAE
The use of various RegTech solutions in AML/CFT compliance in the UAE has been increasing every day. Organisations, including Financial Institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs), under the UAE’s AML/CFT laws, must collect accurate identification documents and verify customer identities before establishing business relationships as part of their Customer Due Diligence (CDD) requirements. They also need to conduct thorough risk assessments to identify, evaluate, and understand risks related to crimes such as money laundering and terrorist financing. This requires considering various risk factors—such as customer profiles, geographical regions, products, services, and delivery channels—before determining the overall risk level and implementing mitigation measures. Additionally, the entire process also includes screening customers against multiple watchlists.
For high-risk clients, Enhanced Due Diligence (EDD) is required, including gathering detailed background information on customers and beneficial owners, obtaining senior management approval before working with high-risk clients such as Politically Exposed Persons (PEPs), and increasing monitoring frequency to detect suspicious activities in real-time. Promptly reporting suspicious transactions to the UAE Financial Intelligence Unit (FIU), keeping due diligence and transaction records for at least five years, and organising them for easy access during audits are essential for organisations to stay compliant with the UAE’s AML/CFT laws.
With the increasing complexity and scope of these requirements, organisations in the UAE are turning to RegTech for AML/CFT compliance. ?Below are several of the important areas where RegTech solutions are being adopted:
KYC is the first step in the compliance process, and as the name suggests, it involves identifying the customer. This process is critical during client onboarding to verify a customer’s identity and assess their risk before establishing a business relationship. RegTech solutions are important here primarily for verification and fast onboarding. Another essential component is UBO (Ultimate Beneficial Owner) screening for corporate customers. UBO screening is essential for understanding ownership structures and assessing potential risks associated with hidden beneficiaries. RegTech solutions often use AI-powered identity verification and document scanning to simplify the KYC process. For UBO screening, they access specialised databases to accurately identify beneficial owners.
2. Risk Scoring
Risk scoring is the process of evaluating a client’s risk level by analysing various factors, such as their profile, transaction patterns, and geographic location. RegTech in AML/CFT compliance facilitates this process by assessing vast amounts of data, comparing client profiles to preset risk indicators, and objectively assigning risk levels. The solutions use advanced analytics and machine learning to efficiently process large data sets, allowing for accurate and timely risk assessments that reduce manual intervention and improve consistency in compliance standards.
3. PEP Screening
Politically Exposed Person (PEP) screening identifies clients in prominent public roles, such as heads of countries or senior government officials, who may pose a higher risk for corruption or bribery. RegTech in AML/CFT compliance cross-references client data with global PEP lists, including the relatives and close associates of PEPs, in real-time. This automation ensures accurate identification of PEPs, so that institutions may apply Enhanced Due Diligence (EDD) appropriately.
4. Sanctions Screening
Sanctions screening checks clients against various international sanctions lists to identify those involved in restricted or illegal activities. RegTech solutions automatically update these lists and ensure real-time checks against the latest information. Under Cabinet Decision No. 74 of 2020[v], organisations in the UAE are required to screen customers against the UNSC Consolidated List and the UAE Local Terrorist List and implement freezing measures and notify authorities if a match is found. Also, incorporating other key lists, such as those from OFAC, the EU, and the UK, provides a comprehensive compliance framework. Using RegTech for AML/CFT compliance related to sanctions screening helps prevent manual errors, ensuring institutions avoid business with sanctioned individuals or entities.
5. Adverse Media Screening
Adverse media screening involves scanning news sources for negative reports about customers that could indicate potential risks. Some RegTech solutions employ Natural Language Processing (NLP) to process large amounts of data from media and social platforms, identifying relevant news in multiple languages. Unlike regular search engines that retrieve information based on keywords, RegTech’s use of generative AI goes further by analysing the context and sentiment of content, allowing it to detect nuanced information related to compliance risks associated with a customer.
6. Transaction Monitoring
Transaction monitoring involves analysing clients’ financial transactions to detect suspicious patterns that may indicate money laundering or other financial crimes. Machine learning ?(ML) models are trained to spot red flags unique to each industry. What’s powerful about ML in RegTech is that these models don’t just stick to their initial training—they continuously learn and adapt to new risk patterns. This flexibility makes ML invaluable, as it allows organisations to stay a step ahead in identifying suspicious activities.
7. Documentation and Report Preparation
Documentation and report preparation ensure that all client information, due diligence records, and compliance actions are thoroughly documented for regulatory review. RegTech solutions can use AI to automate document generation and organisation, creating standardised reports that meet regulatory requirements. This automation minimises the chances of missing important details and streamlines the audit process, making it easier for institutions to demonstrate compliance with AML/CFT regulations while reducing manual reporting efforts.
Conclusion
According to Fortune Business Insight, the global RegTech market, which was valued at USD 12.82 billion in 2023, is projected to grow from USD 15.80 billion in 2024 to USD 85.92 billion by 2032, at a CAGR of 23.6% during the forecast period between 2024 and 2032[vi].
This demand highlights the immense growth potential of innovations and advancements in the RegTech space in the coming years. RegTech enables standardised processes that shift compliance from subjective human assessment to objective processes. By reducing both time and possibility of human error, RegTech enhances overall risk management, transforming how organisations, especially in regions such as the UAE, approach AML/CFT compliance. With automated, streamlined processes, RegTech enables institutions to respond more swiftly and accurately to evolving regulatory demands.
AKW Consultants' cutting-edge RegTech solutions can be tailored specifically to meet the needs of your business, supporting your organisation’s AML/CFT compliance to fulfil regulatory requirements and help you stay compliant efficiently and effectively.
References
[i] https://www.resbank.co.za/content/dam/sarb/publications/conference-papers/2009/51/Roger+Baxter.pdf