How data-driven suptech can change the game in fighting financial crime

We’re just halfway through 2022 and we have already witnessed a number of innovative new initiatives in the banking supervisory innovation landscape.

New suptech initiatives are gaining traction in the financial services space

In January 2022, the European Banking Authority (EBA) announced the launch of EuReCA – the EU’s central database for anti-money laundering (AML) and counter financing of terrorism (CFT). The intention is to provide the EBA and the Competent Authorities (CAs) of all EU nations holistic information to monitor financial institutions (FIs), assess risks and potential impacts, and identify early warnings of emerging AML-CFT risks in the region.

Hot on the heels of this launch, in March 2022 Singapore’s regulator the MAS (Monetary Authority of Singapore) and BIS Innovation Hub announced Project Ellipse – a prototype supervisory analytics platform that can integrate regulatory, news, and media data to discover potential risks to FIs and the financial system in that jurisdiction.

Regulators have always focused on monitoring risks and steering FIs within their supervision towards stronger defenses. But now the emphasis is shifting heavily towards combining traditional and alternate data as well as advanced technology for forward looking analytical insight-based supervision.

The era of data-driven, next-gen suptech (supervisory technology) has arrived!

Suptech and the need for data-driven insights in fighting fincrime

Financial criminals are moving at an unprecedented pace in terms of the complexity and sophistication of their activities, enabled by cutting-edge technologies. Regulators and institutions are also looking at matching their defenses against such crimes by using disruptive technologies, in addition to tightened regulations and collaboration. While financial institutions form the first line of such defense in directly handling the flow of money, the reports they file with their regulators allow for further investigation and can trigger enforcement action on criminals.

Regulatory supervision is a huge task, as all reporting entities in that jurisdiction file suspicious activity reports (SARs) with their supervisors/CAs. This means tons of data is received from multiple institutions on suspicious transactions, individuals, and entities, which then have to be investigated by these supervisory bodies.

The UK’s FIU, for example, receives over 570,000 SARs a year, while the US’ FinCEN received over 2.3 million SARs in 2019 alone. In addition, these supervisory authorities also conduct examinations and audits on FIs to assess their adherence to regulatory compliance rules as well as the effectiveness of their systems and procedures to prevent and detect financial crimes. Authorities then impose remedial actions on FIs to address the risks and gaps identified. Manually processing all this information about each FI, connecting the FI SARs with audit findings and their progress on remedial actions, and analysing insights about multiple FIs in the same region to discover emerging fincrime threats is unfathomable.

Suptech provides innovative technological tools to regulatory authorities to improve efficiency through automation, digitisation of data, and reporting. Just like regtech enables FIs to strengthen their regulatory compliance functions, suptech enables regulatory authorities to monitor risk and compliance at FIs more effectively. But technology can only be effective if it is powered by strong data, and in the case of regulatory supervision, what matters is timely, comprehensive, accurate (continuously updated), and quality data on the FIs being supervised.

Composite regulatory data to propel AI-based intelligent suptech solutions

EuReCA (European reporting system for material CFT-AML weaknesses) will be a central reporting platform where CAs of all EU nations will submit reports of material weaknesses they have identified in FIs they supervise, the measures imposed to remediate them, and regular progress updates of each FI in responding to these measures. The EBA will assess and analyse the combined information to identify risks and early warnings of emerging threats in the region. The information will also be shared with CAs by the EBA both proactively and on request to support their supervisory efforts.

EuReCA is thus expected to host a huge volume, variety, and velocity of data, which if analysed using the correct tools and methodologies can uncover deep insights on FI behaviour and risk profiles, anticipated fincrime threats, geography risk, and other risks based on AML-CFT gaps. Digital reporting solutions for automated, structured, and quality data submissions and predictive analytics tools for generating FI and region-specific fincrime risks can reduce manual effort and improve EuReCA’s supervisory effectiveness. If this information is further combined with FIs’ SAR reports submitted to CAs, machine learning solutions can help CAs identify risky entities and transaction patterns of multiple FIs in a region, while network graph technology can enable the discovery of threat actors and linked entities using the region’s financial system.

Project Ellipse leverages advanced analytics, machine learning, and natural language processing on a combined dataset of regulatory reports, news, and media information to assess emerging risks and generate insights for intelligent supervisory decisions. Initiatives like these are trailblazers in innovative data-driven solutions that can make regulatory supervision activities more effective and efficient. As other regulators decide to adopt similar measures, data-powered digital suptech innovation will witness a sharp rise, which will in turn boost the industry’s fight against financial crime.

The way forward for data-driven suptech

Fighting financial crime is a collaborative effort, from institutions to regulators, law enforcement, technology partners, and all others associated in this chain. And as the saying goes, a chain is only as strong as its weakest link. Every player in this chain must develop strong defense mechanisms to prevent and detect crimes. Regulators are encouraging data sharing and the use of advanced technology by all industry participants.

While a lot is generally discussed about regtechs powering FIs’ defense frameworks, suptechs are now gaining prominence with pioneers like the EBA and MAS breaking new ground in this space. The success stories of EuReCA and Ellipse will drive further innovation in suptech and their adoption by supervisors worldwide. An exciting new journey has just begun.

About the author

Sujata Dasgupta is global head – financial crime compliance advisory at Tata Consultancy Services, based in Stockholm, Sweden.

She has over 20 years of experience, having worked extensively in the areas of KYC, sanctions, AML, and fraud across banking, IT services, and consulting.

She has worked with premier banks in several major financial hubs in seven countries across the US, UK, EU, and Asia.

She can be contacted on LinkedIn.