I. Report Background and Purpose
On November 3, the Hong Kong Securities and Futures Commission (SFC) released the (Report on the Adoption of Regtech for Anti-Money Laundering and Counter-Financing of Terrorism), aiming to explore the application of compliance technology ('Regtech') by Hong Kong financial institutions in the AML/CFT compliance process.
With the continuous evolution of financial crime methods, traditional manual monitoring methods struggle to meet increasingly complex compliance requirements. Regtech is becoming an important tool for financial institutions to enhance AML/CFT compliance and efficiency. The SFC analyzed the application status, advantages, and challenges of various Regtech solutions in AML/CFT through a survey of 50 licensed companies.
II. Main Application Areas and Current Status of Regtech
1. Name screening (AML screening, 92%)
As the most widely used AML/CFT process, name screening has greatly reduced false positives and improved efficiency through automation technology. Regtech solutions commonly apply technologies such as fuzzy logic and AI, effectively identifying potential risks even when name spellings or formats differ slightly. These tools enhance the precision of screening, making the screening of high-risk customers or related parties more reliable.
2. Due diligence (CDD, 71%)
The application of Regtech optimizes the customer account opening and risk assessment processes, particularly in identity verification, data collection, and risk rating. Through automated customer risk scoring, financial institutions can complete account reviews more quickly and accurately and dynamically update customer risk data to timely identify potential AML/CFT risks.
3. Transaction monitoring (KYT/TM, 69%)
Transaction monitoring is a crucial part of the AML/CFT process, involving the detection of large transactions or unusual activities. Traditional monitoring based on rule settings tends to generate a large number of false positives, whereas Regtech solutions can significantly reduce false positives and prioritize high-risk transactions through AI and machine learning that dynamically analyze transaction behavior patterns and risk scoring.
4. Management Information Reporting (Reporting, 43%)
In reporting and information management, Regtech provides senior managers with a comprehensive overview of compliance status through data visualization and real-time monitoring tools, helping decision-makers quickly identify compliance risk points and resource allocation needs based on dynamic data.
5. Third-party deposit identification and due diligence (34%)
This section requires the identification of the source of third-party funds from customers to prevent illegal funds from flowing in. Some companies use API integration technology to obtain real-time deposit information from banks and utilize automated comparison tools to quickly verify the source of funds, ensuring compliance.
III. Main Advantages of Regtech Application
Source of the image: SFC: Report on the Adoption of Regtech for Anti-Money Laundering and Counter-Financing of Terrorism
The report points out that over 85% of licensed companies believe Regtech significantly enhances the efficiency of AML/CFT risk identification and management. The main advantages include:
1. Improve efficiency and resource optimization
Automated AML/CFT processes reduce manual review time and operational errors, allowing human resources to focus more on high-risk customers and transactions, further optimizing resource allocation.
2. Improve data consistency and quality enhancement
The application of data standardization and digitalization has improved data quality, making the review process more reliable. Through Regtech, financial institutions can establish data review processes more efficiently to meet regulatory requirements.
3. Provide stronger adaptability and update capabilities
The report shows that over half of the companies believe Regtech has helped them quickly adapt to new regulatory changes. Some Regtech solution providers can provide corresponding software updates based on policy adjustments, allowing enterprises to flexibly meet the latest compliance requirements.
4. Help optimize customer experience
By simplifying customer account opening and ongoing monitoring processes, Regtech helps reduce unnecessary verification steps and improve the customer experience. For example, the system automatically screens suspicious transactions, reducing inconvenience for customers by lowering false positive rates.
Source of the image: SFC: Report on the Adoption of Regtech for Anti-Money Laundering and Counter-Financing of Terrorism
IV. Main Challenges of Regtech Application
Despite the many advantages brought by Regtech, the report also mentions some challenges currently faced:
1. High implementation costs and more stringent infrastructure requirements
Some financial institutions, especially small and medium-sized companies, still have deficiencies in budget, data management, and system infrastructure. Additionally, the initial implementation costs are high, and actual long-term savings often only become apparent after the system stabilizes.
2. Concerns about data privacy and security
For solutions involving cloud storage, some institutions express concerns about data privacy and security, especially regarding compliance issues with cross-border data transfers. Therefore, the report recommends that financial institutions strictly review the security measures of suppliers and ensure data safety.
3. Require higher technical and operational experience
In terms of technology application, financial institutions need to ensure they have sufficient technical support to manage and maintain Regtech systems. Additionally, some licensed companies mentioned difficulties in adapting to new technologies and automated operations, particularly due to a lack of mature cases and industry experience.
4. More involvement and support from decision-makers are needed
Although most companies have received support from management, some institutions still lack effective promotion from senior management, leading to a slower implementation process for Regtech. The report emphasizes that a 'top-down' compliance culture is crucial for the effective application of Regtech.
Source of the image: SFC: Report on the Adoption of Regtech for Anti-Money Laundering and Counter-Financing of Terrorism
V. Future Outlook and Application Recommendations
The report also proposed a roadmap for the gradual implementation of Regtech. For financial institutions considering adopting Regtech, the report recommends:
● Gradually advance implementation applications: The implementation of Regtech is not an overnight success; it can begin with a specific process and gradually expand to a broader AML/CFT process to reduce initial costs and accumulate experience.
● Introduce management and supervisory human resources: In technology applications, institutions must ensure the appropriateness of data and system settings, especially when using AI models, sufficient human supervision is required to prevent false positives or misses.
● Select suitable service providers: If relying on solutions provided by external suppliers, institutions should ensure they have compliance experience and technical capabilities, and establish emergency plans to address technical disruptions and other unexpected situations.
Conclusion
For the industry and regulators, the recent heated discussions in Hong Kong regarding RWA and stablecoin-related regulations also reflect the importance of AML compliance.
The Hong Kong Securities and Futures Commission (SFC) has also kept pace with the times, launching this report, offering practical views and guidelines on the application of Regtech in AML/CFT compliance. With the rapid development of financial technology, the application of Regtech will become an important means for financial institutions to enhance compliance capabilities and optimize resource allocation.
Beosin has been deeply engaged in anti-money laundering compliance for over eight years, obtaining ISO and SOC2 international certifications, providing compliance solutions and anti-money laundering tools for over 300 institutions. Beosin maintains an open attitude towards new technologies and ideas, following the industry's advocacy of Regtech, and safeguards the compliance management of the industry through risk-based and technology innovation concepts. Beosin's collaborative efforts, sharing of successful cases, and practical experience in promoting technological innovation will help establish a stronger and more stable anti-money laundering compliance ecosystem.