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The evolution of the regulatory sandbox in the fight against financial crime

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The evolution of the regulatory sandbox in the fight against financial crime

By Justin Bercich, Head of AI, Lucinity

The events of the past year have imparted one critical message: the power of working together. The trust between employer and employee surged as remote working became the status quo. Our local communities saw outpourings of support from essential workers and those in high-risk categories. And, in the science and pharma world, the extreme speed of the vaccination programme truly underlined the potential when industry leaders come together and work towards a common goal.

If we apply this perspective to the fight against financial crime and money laundering, it's evident that the call for increased collaboration has been gathering pace for years now. But until now, it's rare to see every affected party come fluidly together, share knowledge, and innovate as one; particularly regulators and banks – the two most important pieces of the anti-money laundering (AML) puzzle.

The COVID-19 pandemic has thrown the need for increased collaboration into even sharper focus. Lockdown restrictions saw a rapid spike in digital banking – with the use of financial apps and mobile banking services skyrocketing by 72% in Europe alone. However, more online customers mean more opportunities for financial criminals and money launderers to exploit. Therefore, the present is the perfect time to align our agendas, implement the lessons learned from the pandemic, and collaborate for the betterment of humanity.

Collaborate to innovate – the regulatory sandbox

Speed is the key in the fight against financial crime. New apps and services emerge almost every day, and while this speed is often necessary to get new products to market quickly, it can create wrong incentives wherein compliance with the latest regulations may be de-prioritised .

An example of a regulator attempting to overcome this obstacle is the UK's financial regulatory body (the Financial Conduct Authority, or FCA), which is expanding its regulatory sandbox approach that acts as a level playing field for companies of all shapes, sizes, and sectors to test new products and services in a controlled environment. This approach seeks to give companies the chance to test their compliance with the current regulations and determine whether their products are fit to launch.

In the UK, this approach isn't a new concept, but its actual application is evolving. Typically, regulators set the guidelines and rules within the sandbox for companies to test their systems and products against. But, increasingly, all the parties involved are being encouraged to collaborate directly with regulators to formulate the next level of policy.

How the sandbox will revolutionise anti-money laundering

Coined 'Sandbox 2.0', this new approach sees banks, fintechs, and regulators actively working together to develop policies that work positively for everyone. From an AML perspective there's very little understanding on exactly how emerging technology is helping to combat money laundering right now – outside of the actual creators of the tech itself, of course.

Without that level of wider understanding in the market, it's very difficult for regulators to establish robust and inclusive guidelines around AML detection, because they need to understand the specifics of how AML technology actually works.

That's why the open sandbox approach represents such an exciting opportunity for regulators, fintechs, and banks alike. By testing innovative AML solutions, regulators become better educated on the methodology behind these technologies, which means they can set policies that allow emerging solutions to work even more effectively against money laundering.

In turn, AML fintechs possess more autonomy and freedom to continue seeking new ways to innovate, pushing the banking industry forward in their pursuit of increased efficiency and customer satisfaction, to the wider benefit of society. From a global perspective, any country that embraces the open sandbox approach will invariably possess a competitive advantage over countries with rigid, one-sided regulations that impose more restriction and encourage less collaboration on the companies operating within its domain.

This truly represents the future of policy making – and is an approach that can be adopted and applied by any country or region. Most importantly, it's an approach that no longer relies on regulators to shoulder all the work, but is one that actively integrates more voices in the regulatory decision-making process.

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