In terms of escalating financial crime concerns and the expanding scope of regulatory requirements, 2021 was a hard year for the financial industry. As a result, regulatory organizations focused on Anti-Money Laundering (AML) compliance and how to make it more strict to provide improved monitoring, detection, prevention, and eradication of money laundering and terrorism funding activities. This trend in compliance appears to be continuing in 2022, with more stringent regulatory updates to encompass as many new industries as possible that may be exposed to financial crimes, such as the cryptocurrency space. As a result, financial institutions must ensure that they are in compliance with the rapidly changing regulatory landscape and take safeguards ahead of time. This is pushing the need for the AML software markets.
The AML market is anticipated to grow with over a CAGR of 15% from 2022 to 2027. This growth can be majorly attributed to rising standards of regulations and compliances along with the increasing number of financial institutes, especially FinTechs. Further, the need for inhibiting cryptocurrency money laundering, and the rising demand and adoption of ai/ ml for AML are shaping long-term million dollars market opportunities for the AML vendors.
Anti Money Laundering Market Drivers
Higher Regulatory Compliances Pushing Demand for AML Software and Services from Banks
The amount of money laundered globally in a single year is estimated to be 2 – 5% of global GDP, or $800 billion – $2 trillion in current US dollars. To address this issue, governments and regulators all over the world have developed legislation and guidelines that have evolved. Regulators expect banks to have a unified view of their customers and their transactions across organizations and jurisdictions to identify odd transactions and behavior, as well as potential sanctions violations. Besides investing huge sums of money in systems and people, banks must adopt a broader and longer-term perspective. Due to this, banks and financial institutions (FIs) are struggling to meet multi-jurisdictional anti-money laundering (AML) compliance obligations, as well as an ever-increasing client due to diligence requirements.
Exhibit-1: Money Laundering Crime Fines Value ($million) and Volume (numbers) (2017-2021)
Source: Kroll, LLC
According to Kroll LLC, most of the all-major global banks have been sanctioned for AML or other financial crime failures in recent years. In addition, the number of money laundering fines issued rose to 55 in 2021 from 45 in 2020. This reflects the predominant emphasis that global regulators have placed on ensuring that AML measures are robustly functioning at the world’s major financial services institutions. More, regulators are now focusing their enforcement efforts on other financial services companies, such as asset managers and cryptocurrency exchanges. Thus, the demand for AML software and services from banks and financial institutes (Fis) is surging sharply in the short term.
Growing Number of FinTech to Increase the Demand for AML
Technological advancements in the financial industry have introduced new money laundering risks, particularly in relation to the growing use of mobile devices, increasing the rate and impact of money laundering crimes. With transactions taking place online via apps or the web, regulatory authorities across the countries are concerned about how new technology can be used by criminals for money laundering and other illegal conduct. Most fintech companies, like any other financial institution or business, are subject to AML regulations. Failure to report suspicious transactions is a criminal offense in most countries and can result in a jail sentence as well as penalties. This is harmful to fintech companies since it will reduce their market share and uptake, as well as lead to a negative profile. Thus, every fintech is expected to adopt the AML systems to adhere to strict legal regulations and compliances.
Exhibit-2: Total No. of FinTechs from 2018-(Nov.) 2021
Source: Statista, nForming analysis
The total number of FinTechs has grown with a CAGR of more than 21% from 2018 to 2021. With the growing number of fintech, it is expected that there will be a significant rise in the demand for AML software and services.
Anti Money Laundering Industry Major Opportunities
Need for Inhibiting Cryptocurrency Money Laundering
Cybercriminals who trade in cryptocurrencies all have an aim to transfer their stolen monies to a site where they can be kept safe from authorities and eventually converted to cash. As a result, money laundering serves as the foundation for all other sorts of cryptocurrency-based criminality.
Further, cryptocurrencies, such as Bitcoin, can make it simpler for criminals to conceal the source of criminal gains and transport them across borders undetected. According to recent studies, the use of cryptocurrency for money laundering is fast gaining acceptability throughout the world.
Exhibit-3: Total Cryptocurrency Value Laundered by Year, 2017-2021 ($billion)
Source: Chainalysis, Inc., nForming analysis
Since 2017, cybercriminals have laundered nearly $33 billion in cryptocurrencies, with the majority of the total flowing through controlled exchanges. Money laundering accounted for around 0.05 percent of total cryptocurrency transaction volume in 2021. In 2021, cybercriminals laundered $8.6 billion in cryptocurrencies by sending it from unlawful addresses to addresses hosted by services.
More, money laundering activity is best seen at the deposit address level rather than at the service level. The reason for this is that many of the money laundering services used by cybercriminals are nested services, which means they employ addresses hosted by bigger services to access the liquidity and trading pairs of those larger services. OTC brokers, for example, frequently operate as nested services with addresses maintained by big exchanges.
Additionally, future cryptocurrency developments will make it more difficult for law enforcement and compliance experts to detect and combat illicit activities. Thus, both organizations, together with institutional investors, are expected to work together to address the challenge and, in the end, establish a safer cryptocurrency environment for all users.
Rising Demand and Adoption of AI/ ML for AML Compliance boosted by COVID-19
In today’s complex regulatory context, a traditional approach to KYC and AML compliance stifles the company’s growth. AI and machine learning have emerged as a critical technological solutions for professionals looking to streamline their AML compliance processes to combat financial crime and money laundering. These technologies are helping organizations to save expenses and cut down on the number of resources that are generally spent due to compliant processes.
Owing to these, there has been a significant increase in the demand for AI/ ML solutions in AML. According to the Association of Certified Anti-Money Laundering Specialists (ACAMS) AML technology survey, 40% of the respondents confirmed that AI helped them to improvements in the quality of investigations and regulatory filings. Further, reduced false positives and resulting operational expenses were also cited as reasons for AI and ML adoption by 38% of respondents.
In addition, the report by ACAMS SAS, and KPMG also states that one-third of financial institutions are speeding their AI and machine learning (ML) adoption for anti-money laundering (AML) technology in response to COVID-19. Further, 57% of respondents have either deployed AI/ML into their AML compliance processes, are piloting AI solutions, or plan to implement them in the next 12-18 months. These results indicate there will be significant opportunities for the AML vendors in near future.
