Top 5 Compliance Challenges and Trends in 2021

If we thought 2019 ‘was quite a year’ and that 2020 would bring some challenges, then how on earth do we begin to verbalise the last 9 months? Despite epidemiologists warning of a once-in-a-lifetime pandemic, the most advanced nations in the world were ill-prepared for the scale of the fall-out. The effects of which are still being felt, and will continue to do so for many months, despite vaccines coming on stream. Confidently predicting what is going to happen in 2021 is very difficult, however, there are possibilities that we can forecast given the reality of the past few months.

Looking ahead to 2021 in Compliace 

During 2021, there will be the usual challenges but there is also the opportunity to see shoots of rejuvenation as vaccines become available, the world emerges from lockdown soon and Brexit unravels. I have gathered the top 5 challenges and trends of the year ahead and what all this means for the world of compliance.

1. The potential fallout from non-repayment of BBILs/CBILs

With the country grinding to a halt, along with many European and worldwide trading partners, the scale of the rapid launch of the various UK Government bailout schemes has been phenomenal. Since the Spring, over £60bn has been lent by Banks, and other certified lenders, to approx. 1.4m companies as part of the Bounce Back Loan Scheme (BBLS).

Despite an extensive reliance on customer self-certification, 27k rejected loans, with a predicted value of £1.1bn (source), already been reported, according to Catherine Lewis La Torre, Chief Executive of the British Business Bank. The swift deployment of the loans has delivered high levels of fraud and credit risk with The National Audit Office warning of government losses as much as £26bn (source).

The BBLS scheme will unravel from May 2021 as the loans are called for repayment, despite extensions and ‘pay-as-you-grow’ schemes to give borrowers flexibility. The government however will implement robust fraud investigation and debt collection arrangements to minimise the impact to the taxpayer.

Cash Flow management will be a focus for 2021 with businesses looking for additional funding to ride the continued fallout from the pandemic, combined with the pressure to commence repayments of the various loan schemes. Lenders will need to balance the fair treatment of customers with the mitigation of a significantly increased risk in their portfolio. Lenders will need to implement fast and reliable Customer Due Diligence for onboarding; have greater awareness of fraud and manage the ‘ambers’ (source) (those cases where additional investigation will be required); together with a robust monitoring and remediation process.

In summary we predict a greater opportunity for lending in 2021 with a shift to reduce borrowing from 2022.

2. Anti-Money Laundering landscape after Brexit

The UK has generally had tougher Laws against financial crime than is contained within the EU Anti-Money Laundering Directives, and that is unlikely to change after we leave the EU. This makes sense and safeguards the UK’s obligations towards any UN Security Council requirements.

But that’s not to say that we are going to ignore what the EU is doing entirely.

One of the key aspects of this is whether the UK can negotiate any direct access to the sharing of data held at Europol, which it has had, as a matter of course, as a member, but will lose unless a deal can be struck for access – much like the USA has done. On one level it would make sense for the EU to look favourably on the UK having access because although we are leaving the Union, we are still a part of Europe and hold shared values, interests and threats, as well as other key international partners, making foreign policy co-operation in all our interests.

As to 6AMLD, which includes 22 predicate offenses, covering things such as tax crimes and cyber-crimes, and looks to standardize money laundering definitions across member states, there is less concern. This is because the UK has traditionally held stricter and more rigorous AML Laws, that regulated entities, at home and abroad, are already used to complying with.

As a summary and on balance, then, the UK’s historically tougher stance on financial criminal activities puts us in good stead to continue to lead the way for our European partners and, although it’s unlikely to be a totally smooth path – in particular with regard to access to Europol – the indications are generally positive for the UK anti-money laundering landscape in 2021.

3. An explosion of Deepfake usage

Deepfakes are videos, images or audio recordings that have been distorted to present an individual saying or doing something they didn’t originally say or do. Rapid advances in AI algorithms means that they can be produced quickly and easily. 

Although deepfakes have been used for social sharing and entertainment, there has also been an increase in the use of synthetic media being used for identity fraud and client impersonation. In fact, recent months have seen the first publicly documented cases of deepfakes used for fraud and extortion.

As we head into 2021 regulated firms will need to prepare for the growing threat of deepfake media being used to infiltrate their company’s security and client due diligence processes.

Your firm could be affected by deep fakes in a number of ways, including:

• Onboarding processes could be subverted and fraudulent accounts created to facilitate money-laundering
• Payments or transfers could be authorised fraudulently
• Accounts belonging to high net worth or high profile individuals could be hijacked
• CEOs can be impersonated, leading to employees being tricked into unauthorised payment transfers or divulging sensitive information

Deepfakes should therefore be on the agenda for 2021 as businesses should be confident that they actively detect and prevent fraudulent attacks from deepfakes when onboarding clients.

4. Accelerated digital transformation required to deliver customer experience

Digital transformation is forcing businesses to change their model and adapt to the new market reality. Previously, companies have driven the change but now customers are demanding  the acceleration of digital interactions throughout their journey. Putting the customer first is already at the centre of many business strategies but technology has not always been on the agenda to the same degree.

With the pandemic driving rapid change to the way we interact businesses have now gained confidence in adopting digital technology at a far greater and quicker rate. We are likely to see regulated businesses using 2021 to deliver digital solutions to achieve transformation and avoid suffering financially before losing business to competitors.

5. Focus on Fraud

As the pandemic continues into 2021, criminals will continue to exploit vulnerabilities associated with this situation and use them as levers to carry out social engineering. Examples of such activity include false promises of delivery of vaccines and PPE designed to extract money from firms. Also requests for money to be transferred to individuals apparently trapped in an overseas country and unable to return home due to the pandemic. Firm must ensure that their controls remain suitably robust and that staff remain vigilant to identify and report such activity as it arises.

There will be continued attempts to exploit remote working models where individuals are not able to interact with fellow workers directly, and real time monitoring for fraud activity is much more difficult. Individuals working alone are more vulnerable to exploitation by fraudsters and may be not realise that they have allowed fraud to take place before it is too late.

There is no doubt that the FCA in particular is going to keep a close eye on the ways in which firms operate their anti-fraud controls in future. In the 2020/2021 business plan, the FCA has reinforced its commitment to fighting financial crime and intends to keep up the pressure of enforcement action where necessary.

But the key to preventing fraud still remains the same – ensuring people are adequately trained and educated on the subject of fraud awareness and apply this knowledge and understanding in their day to day work.

In summary 

So there you have a brief rundown of predictions for the industry in 2021. But keep your eyes peeled as we will continue to provide insight and commentary throughout the year ahead.