How technologies can help meet AML requirements

Increasingly strict regulatory and compliance requirements for financial institutions in the area of anti-money laundering (AML) and sanctions management, the rising costs associated with meeting these requirements and a greater focus on data, along with advances in technology, have driven the digital transformation of the financial sector. One area of development is RegTech, a regulatory technology that helps to meet the requirements of the risk management and compliance control regulatory framework.

This article discusses the purposes RegTech solutions are used for, the benefits financial market participants gain from using RegTech, and the barriers to RegTech adoption.

The term and concept of RegTech first emerged in the aftermath of the global financial crisis in 2008, when gaps in regulation and supervision were exposed, leading to the introduction of a series of new and more complex regulatory requirements. Additional regulatory requirements mean that financial market participants need more resources to comply with them. This is where RegTech comes in – by using the technology, financial market participants can meet regulatory and compliance requirements, as well as control and manage compliance risks more efficiently.

RegTech solutions can be deployed in a wide range of applications, from customer identification to suspicious transaction reporting. However, when considering the implementation of RegTech solutions, financial market participants should select, implement and use them according to the size and nature of their business and in compliance with AML and counter terrorism financing legislation. Otherwise, the improper implementation and use of such solutions may also create significant risks.

However, the use of RegTech solutions by Latvian financial market participants is still relatively rare.1

Processes in which RegTech solutions are used most commonly

RegTech solutions help to manage money laundering, terrorism financing and sanctions risks more efficiently and provide financial market participants with better quality data. RegTech helps to improve supervisory capabilities and allows a focus on decision-making processes and risk assessment.

RegTech offers diverse and sophisticated directions, but the main areas where RegTech solutions are possible in the areas of anti-money laundering and sanctions are as follows:

  • identification and verification – provides remote customer identification; may include video identification, biometrics or other technological solutions;
  • customer risk assessment and risk management – helps to determine the level of customer risk;
  • transaction and customer behaviour monitoring – provides transaction and customer behaviour monitoring using the current and historical customer and transaction information in the possession of the financial company;
  • screening of sanctions and politically exposed persons – provides screening of customers and the related parties, counterparty and transaction (payment) details against data of politically exposed persons and those of sanctions lists;
  • negative information search – helps to search for and identify publicly available negative information about potential and existing customers or counterparties.

Benefits of using RegTech solutions

According to a study by the European Banking Authority2, improving risk management and supervision and reducing human error are among the most important aspects of implementing RegTech solutions. Financial market participants want to use RegTech solutions to improve integration of systems and data and facilitate forecasting, while reducing routine tasks, which in turn would encourage industry professionals to focus on higher value-added tasks.

Financial market participants point out that the costs of implementing RegTech is less important as it is not really possible to predict whether the use of new solutions will deliver the desired cost efficiencies before implementation. Benefits can only be assessed after the implementation of a RegTech solution.

Overall, RegTech solutions can help financial market participants to manage money laundering, terrorism financing and sanctions risks more effectively, while at the same time they contribute to managing and combating financial crime risks, making the overall financial system safer.

However, these benefits can only be successfully effected if RegTech solutions are properly implemented and operated, as well as periodically evaluated and reviewed.

Challenges related to the implementation of RegTech

The implementation of RegTech solutions  involves challenges. The European Banking Authority's analysisidentifies six main challenges that financial market participants face when deciding to implement RegTech solutions.

Challenges related to the acquisition of quality data and cybersecurity threats

Financial market participants indicate data quality, data privacy and data protection as key challenges, along with data integration and accessibility difficulties, and a lack of data standardisation and harmonisation. Cyber threats are also a key barrier. These risks may be decisive enough to discourage financial market participants from implementing RegTech solutions.

Interoperability and integration with existing legacy systems

Financial institutions have too many data repositories, existing systems and processes make RegTech implementation difficult, and financial market participants lack confidence in the ability of existing infrastructure to support RegTech solutions.

Changes to regulation

Changes to national or international laws and regulations, as well as minimum information system security requirements for financial market participants, may represent additional barriers to RegTech implementation. At the same time, financial market participants are concerned that the lack of a common position among regulators may hinder decisions on RegTech solutions.

Costs and the procurement process

RegTech solutions refer to the area of compliance and are generally seen as a back-office function. Consequently, there is a risk that insufficient investment is allocated for the implementation of these solutions. If RegTech services are outsourced, there is a risk of lengthy and complex procurement processes.

Lack of necessary skills and training

Irrespective of whether financial market participants use outsourced RegTech solutions or in-house developed solutions, they need specialists to manage these solutions, such as data scientists or engineers.

Lack of RegTech service providers

RegTech is a relatively new field and the experience of RegTech service providers is limited. As a result, even those financial market participants that see potential in implementing RegTech are not confident in the ability of RegTech providers to tailor individual solutions to the needs of financial market participants and deliver the expected returns.

There are hundreds of RegTech companies operating in various RegTech areas4, around the world, and Latvia also has a track record in this area – the first company in the Regulatory Sandbox of Latvijas Banka (back then – the Financial and Capital Market Commission) was a financial technology company that tested its RegTech solution for anti-money laundering and countering the financing of terrorism and proliferation.

The evolution of technologies and the needs of financial market participants arising from the regulatory requirements of the financial sector show that entrepreneurial technology companies are well placed to design and develop RegTech solutions to help financial sector companies work more efficiently.

Companies assessing opportunities to develop and market RegTech solutions are welcome to consult with Latvijas Banka's Innovation Hub. Experts from Latvijas Banka will help to understand the nuances of the regulatory framework and answer questions related to the compliance of the proposed technological solution with laws and regulations. You can apply for a consultation by filling in the application form on the website or by sending an e-mail to

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