Thu, Dec 19, 2024
In one of the most consequential global election cycles in recent history, the implications for financial crime regulation and enforcement are coming into sharp focus. In 2024, countries representing over three-quarters of the world’s population have voted or are heading to the polls, and political transitions will inevitably bring significant changes to how governments manage financial crime and international regulations. For businesses and financial institutions, this is an era of both uncertainty and opportunity.
Particularly notable in a momentous election year is the issue of financial integrity of election campaigns, candidates and political parties, which has come under increasing scrutiny globally. Scandals or allegations around campaign financing have featured in many of this year’s elections. This is reflected in demand from competent authorities for Kroll’s support in this area, as part of efforts to help restore and build public trust in electoral systems.
Financial crime encompasses a broad range of illicit activities involving the misuse or abuse of financial systems and institutions for unlawful gain. It includes offenses such as fraud, money laundering, sanctions evasion, bribery, corruption, terrorist financing, tax evasion and cybercrime.
Promises to crack down on corruption often feature in political campaigns, in both developed and developing countries. In recent years, increased political pressure on regulators has impacted enforcement action and the tone from the top. While regulation and enforcement mechanisms in advanced economies typically maintain a certain degree of independence from the political process, elections can lead to significant shifts in the focus and intensity of financial crime regulation and enforcement.
Often, a change in administration can lead to either tougher or lighter-touch regulations and enforcement, also reflecting the state of economies and the need perceived by politicians to lighten the regulatory burden on companies to support economic growth. Of course, in financial crime, this can be counterproductive and make economies less stable and more vulnerable. Businesses need certainty and need to know their money will be safe and that they are operating in countries with high standards of integrity and rule of law.
Sanctions regimes are another area where political change, including foreign policy, could result in significant shifts. Under a second Trump administration, the emphasis may shift significantly. During his first term, Trump was known for his aggressive stance on sanctions. It is likely that he could take a tougher approach on security concerns with Iran and trade relations with China while taking a different approach to the Russia-Ukraine conflict.
This shift may change the focus of challenges that financial institutions have faced with Russia-Ukraine sanctions, but it also could introduce new challenges. Financial institutions must be prepared to adapt quickly to the changes, not just in the entities targeted by sanctions but in the complexity and nature of these sanctions.
The changing nature of sanctions will require businesses to have flexible, dynamic compliance systems. Institutions must be ready to implement systems that can respond swiftly to these new realities.
Similarly, regulatory approaches to artificial intelligence (AI), which is quickly becoming a critical tool in tackling the challenges of financial crime, vary considerably and may change or evolve as a result of the outcomes of this year’s global wave of elections. The article “Elections, AI and Regulation: Balancing Security and Innovation,” part of Kroll’s elections series, provides more insights on how the outcome of the US and other recent elections in Europe and elsewhere may impact the regulation of AI development.
Regulatory uncertainty notwithstanding, AI is likely to play a growing role in combating financial crime, managing sanctions and ensuring compliance. Its ability to process vast amounts of data efficiently makes it indispensable for financial institutions. However, AI is not a one-size-fits-all solution. For institutions with multiple legacy systems and data integrity and management challenges, implementing AI without fully understanding its underlying issues could exacerbate existing compliance problems.
AI can help streamline processes, making compliance more efficient and accurate. But without proper oversight and expertise, it could lead to unintended consequences. AI must learn from something, and if the former practice has not been effective, then it may simply optimize ineffective controls and give firms a false sense of security. This is where firms like Kroll come into play. They offer the expertise to evaluate an organization’s readiness for AI, helping them develop tailored solutions that align with their specific compliance needs. AI offers enormous potential for improving efficiency, but it must be integrated carefully and thoughtfully.
One of the most significant challenges facing financial institutions today is the potential for greater fragmentation in the implementation of global standards. As nationalism and protectionism rise, we may see this undermining collaboration across borders and the more joined up approach to fighting financial crime that we need. Challenges to a single, global standard may continue to rise, making it difficult for international institutions to maintain a globally consistent compliance strategy.
Financial institutions must now navigate a world where multilateral solutions are increasingly difficult to implement. They are facing competing or even conflicting demands that often vary across jurisdictions.
In some parts of the world, political polarization and instability have contributed to an erosion of trust and transparency in local institutions. This has led global financial institutions, for example, to derisk from certain jurisdictions and operations over concerns that AML and financial crime regulation and compliance are not sufficiently robust.
As global regulations, or at least their implementation by national authorities, face the prospect of fragmentation, financial institutions must be prepared to flex their compliance strategies depending on the country they are operating in. This will require greater agility and a more nuanced understanding of local political dynamics.
The 2024 election cycle has significant implications for how governments handle financial crime, sanctions and compliance. Whether it’s a shift in US focus or European countries pushing for stronger AML regulations, the global regulatory landscape will continue to shift. For financial institutions, staying ahead of these changes means investing in dynamic, adaptable systems and leveraging technology to improve efficiency, effectiveness and compliance. However, implementing these solutions requires careful planning and expertise.
Under a potential second Trump administration, financial enforcement and anti-money laundering (AML) efforts could see significant changes with ripple effects over the next four years. While President-elect Trump's previous term was marked by what has been characterized as an aggressive stance on sanctions, it also focused on a more lenient regulatory approach to stimulate economic growth. It’s likely that we could see a tougher approach on security concerns with Iran and trade relations with China, with less focus on regulating US businesses. This could lead to a more fragmented global approach to financial crime, with varying standards and enforcement levels across different regions. One area of concern is the potential for the proposed roll-back of beneficial ownership transparency. If implemented, this move could significantly undermine global standards established to combat financial crimes. Beneficial ownership transparency is crucial for identifying and preventing illicit activities such as money laundering and tax evasion. A change in transparency requirements has the potential to make it easier for bad actors to exploit the financial system, leading to a rise in financial crimes and a loss of trust in international markets. here is an opportunity to reform and streamline AML compliance to make it more effective and less burdensome.
By leveraging technology and improving data sharing, there’s the potential to enhance the efficiency of AML measures without compromising their effectiveness. This approach would maintain the integrity of the financial system while also supporting the competitiveness of small broker-dealers and community banks.
As financial crime regulation becomes more complicated, businesses must remain vigilant, agile and prepared to respond quickly to shifting regulatory demands. Whether dealing with new sanctions or ensuring the financial integrity of election processes, the stakes have never been higher. Focusing on refining these systems to ensure they are both effective and efficient will be crucial, especially as changes in the regulatory and enforcement environment are likely. A balanced approach that considers both the need for robust regulation and the burden of compliance costs would help protect the global financial system while addressing legitimate concerns.
One example of a balanced approach is the use of advanced technologies like AI to enhance compliance frameworks. By leveraging AI, organizations can automate routine compliance tasks, improve the accuracy of risk assessments, and detect suspicious activities more effectively. This not only reduces the manual workload but also enhances the overall efficiency of compliance operations. Additionally, ensuring high-quality data and robust governance is crucial to managing risks effectively.
Organizations across both public and private capital markets will need to adapt by integrating these technologies and maintaining strong data governance practice.
This article has been updated from October 30, 2024, to reflect post-election insights and observations from Kroll experts.
Kroll’s global Financial Crime Advisory team is comprised of seasoned compliance, investigative and regulatory professionals to help enterprises around the world defend against the rapid growth of financial crime.
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The Kroll Investigations, Diligence and Compliance team consists of experts in forensic investigations and intelligence, delivering actionable data and insights that help clients worldwide make critical decisions and mitigate risk.
