The GCC has a long history as a trading hub. This activity has served it well, but downside of this success is the ongoing issue of trade-based financial crime (TBFC).
A significant overhaul of AML (anti-money laundering) regulations have followed, with a specific emphasis on the adoption of technology-based solutions.
These actions form part of a concerted drive to strengthen the region’s position as a reliable global financial centre. Regulatory bodies in the GCC have implemented stricter regulations, which have undoubtedly fostered a more compliant financial sector. For instance, the UAE confiscated more than Dh5.4 billion ($1.4 billion) from December 2021 to June 2023, primarily from cases related to professional and trade-based financial crime.
The fight will continue, however, as criminals find new ways to evade regulations. In response, financial institutions and other obliged entities must also use the latest methods to combat financial crime. This is where technology emerges as a transformative force in empowering financial institutions and other obliged entities to effectively combat TBFC.
Tech to the rescue
The biggest inherent challenge in this fight lies in the complexity of trade finance transactions. Banks struggle with the sheer volume of documents and messages that span months, often involving multiple parties and jurisdictions. Manual monitoring is not only time-consuming but also susceptible to human error.
Technology offers a powerful solution to this quandary through document digitization. By extracting and structuring relevant information from invoices, bills of lading, and other trade documents, the process of analysing transactions becomes streamlined and efficient.
This allows banks to focus on identifying red flags, such as discrepancies in pricing or inconsistencies in documentation, which could signify potential TBFC activity.
Given that mis-invoicing accounts for over 60 per cent of TBFC, the detection of price anomalies through AI, along with rules for currency and measurement conversions, would make a significant impact on illegal activity.
The ability of Natural Language Processing (NLP) to rapidly analyse vast amounts of data can also lead to new prices comparisons across various sources, not just geographically but also factoring in currency fluctuations and standard measurement conversions.
Imagine a system that could flag unusual patterns in customer behaviour, such as a sudden surge in trade volume with a high-risk entity. This level of granularity in anomaly detection represents a significant leap forward in the fight against TBFC.
Ready for change
Implementing these cutting-edge solutions is not without its hurdles. Compliance departments are not inherently technology departments and getting them to adopt new technologies is not always straightforward.
Raising awareness and building new skill sets is therefore essential for successful implementation. A cultural shift is necessary to move away from a reliance on traditional methods and embrace the power of technology.
Banks also have understandable concerns regarding data privacy and security when deploying advanced technologies. However, solutions compliant with global regulations, led by the EU’s General Data Protection Regulation (GDPR) ensure customer data remains protected.
Additionally, cloud-based services often anonymize specific customer information during analysis, especially across borders, minimizing data exposure.
Cost considerations can also make financial institutions question the need for upfront investment. However, the cost of inaction is far greater. Regulatory fines for non-compliance can reach astronomical figures, dwarfing the investment in technology.
AI-powered solutions can also significantly reduce the need for human resources, leading to savings and mitigating the risk of human error – a costly oversight in the world of financial crime prevention.
International collaboration plays a vital role in this ongoing battle. Regulatory bodies like the FATF and the European Commission’s DORA (the Digital Operational Resilience Act, passed in 2023 and coming into force from 2025) set global standards and promote the adoption of technology for combating financial crime.
This collaborative effort ensures that regulations remain relevant in the face of evolving threats and criminals don’t exploit loopholes arising from fragmented regulatory landscapes.
Keep the alliances going
Finally, a strong partnership between financial institutions and technology providers is key to developing cutting-edge solutions. Banks provide real-world data for testing, allowing technology providers to refine their offerings.
Additionally, customer feedback and evolving regulatory requirements play a crucial role in shaping the development of these solutions. This collaborative ecosystem fosters innovation and ensures that the technological tools remain effective in the evolving landscape.
I am confident that these measures will aid in mitigating financial crime compliance risks. While it’s impossible to eliminate risk entirely, advancements in technology lead to more accurate detections, fewer false positives, and fewer false negatives.
The most critical aspect in this fight is to minimize false negatives, as missing actual incidents of financial crime is more detrimental than flagging benign activities.
The progress we’re seeing in the accuracy of alerts is a good indicator that the region is making strides in detecting and preventing financial crimes. This will benefit the region’s progress toward a future as a technology-driven global trading center for many decades to come.
