The current regulatory landscape is the most complex the world has ever seen, with regulatory changes in the financial services sector occuring every 7-12 minutes.
As such, the cost of compliance is growing, with banks spending over $270bn a year on regulatory obligations. However, the cost of non-compliance is even greater with significant fines affecting sanctioned entities, but the fallout from non-compliance doesn’t stop at fines. Failure to perform results in damaged reputation, lost customers, decreased revenues, and depressed stock values, with estimates showing that the reputational cost to companies is roughly 9 times greater than any resulting fine.
Earlier this year, we saw subsidiaries of Cosco Shipping added to the Specially Designated Nationals (SDN) blocked entity list for transporting Iranian crude oil after the US re-imposition of sanctions. Following this, Secretary of State Mike Pompeo claimed that the US is “telling [...]all nations: [...] we will sanction every violation of sanctionable activity”, which will set the tone for 2020.
While recent regulatory changes have created a favourable environment for RegTech solutions, they pose a significant hurdle for regulated institutions as 45 new regulatory-related documents are estimated to be issued every week.
2020 will likely hold increased complexity and a wider geographical remit, causing corporate regulatory requirements and due diligence processes to tighten even further. With this in mind, demand for more digital, joined-up regulatory compliance solutions that enable regulated institutions to manage intelligence and risk more effectively, will continue to grow exponentially.
2020 will also feature governments and regulators focussing on all associated players within the supply chain rather than only financial institutions, in order to better tackle illicit trade.
As regulators crack down on sanctions regulation breaches, we have begun to see changes within flag administrations, the insurance and P&I sectors, bunkering companies, trade financing banks, and alternative lenders, all of which are now focussed on ensuring their use of tamper-proof systems and processes to demonstrate their compliance efforts.
Meanwhile, on a practical level, partnerships have never been more important. The sheer scale of illicit trade means that no single entity can combat it alone. Solving industry issues like this requires information sharing between major players in the RegTech space, with data providers, financial institutions, and regulators joining forces. Currently, only 10% of RegTech firms report having no external partnerships in place and 2020 will see this figure shrink even further.
We are continuing to see the shipping industry and all related supply chains evolve in terms of technology and digitisation. This process has already started the revolution in a new wave of technologies for processing and financing for importers and exporters around the world.
The current drive for automation, unification, and transparency across the maritime industry will allow for greater efficiencies and cost savings, alongside a reduction in risk and sanctions related exposures, which will benefit all actors and players in the global supply chains.
The unification of regulatory processes across internationally trading companies is a topic close to the hearts of the US Treasury and the Office of Foreign Asset Control (OFAC), so new technologies working in conjunction with compliance teams will prove to be best placed in efficiently reducing risk.
Looking to 2020, we expect to see players in the RegTech space gain great traction, with distributed ledger technology (DLT) at the forefront of these advances. In our field of maritime trade compliance, processes are ripe for change. Currently, shipping logistics are rooted in archaic IT systems with large amounts of data-entry-type paperwork. Each data entry presents a potential point of failure, vulnerable to human error and illicit manipulation, so DLT will act as a catalyst for change, enabling the streamlining of maritime transactional processes and securing sensitive data.
Technology will continue to evolve and play an increasingly important role in keeping institutions on the right side of regulators, and while regulatory technologies will never replace human beings, they can and will become pivotal in supporting them in a constantly changing world.