It has taken a decade for global governments’ support of RegTech solutions to elevate them to their current prominent position. However, there is also some skepticism about their true benefits.

Recently, Innovate Finance, representing the UK financial technology sector, proposed that UK regulators conduct a “RegTech test” whenever new regulations are introduced. The aim of such a test is to assess if RegTech solutions could effectively enable and support compliance by regulated firms.

The report is couched in language that stresses the unfulfilled potential of RegTech. As such it is aligned with the UK governments’ messaging that RegTechs can potentially reduce AML costs, improve AML outcomes, and enhance international competitiveness and medium to long-term growth.

But under the surface the very existence of the report points to a possible existential crisis for the sector, with concerns over cost, practical outcomes, reliability, skepticism about marketing claims, or simply unease about a decade of limited progress being made in the fight against financial crime all coming to the surface. At the very least it suggests that some uncertainties about the sector’s utility persist despite continuing investor enthusiasm.

A nurturing investment landscape

Encouraged by government support globally, existing and new RegTech firms continue to attract investment and it seems there is no shortage of money when it comes to funding.

In 2023 for example, the UK unicorn Quantexa was successful in a $129m Series E funding round that elevated the company’s valuation to $1.8 billion. Founded in 2016, the company initially concentrated on assisting HSBC in investigating money laundering networks by enriching the bank’s own customer information with other publicly available data. Today, Quantexa is marketed as a one-stop shop that will “protect, optimize, and grow your organization with the power of Quantexa’s Decision Intelligence Platform and outcome-driven solutions.”

Because many RegTech firms are chasing the same dream of rapid scalability and capturing a larger market share, a wave of RegTech rebranding has ensued. Compliance tools that were once marketed for specific areas like AML are now presented as broadly applicable to adjacent areas such as fraud, cybercrime, corruption, and other forms of financial crime.

ComplyAdvantage is a prime example of a company that initially specialized in one area but has since branched out to capitalize on perceived opportunities for its solutions, driving further growth. Having attracted £113m ($145m) across five funding rounds, it now describes itself as “an industry-leading and trusted SaaS-based risk intelligence platform that unites global intelligence to combat financial crime.

Another example is SymphonyAI, which, in 2022, acquired NetReveal; BAE’s financial crimes software business. Today it describes its role as one “providing predictive and generative AI for the future of financial crime prevention.” Investors, including billionaire founder Romesh Wadhwani, have poured money in with ambitious plans to take the company public because of expectations of its potential revenue growth.

Where is the ROI?

To justify their investments, RegTech companies typically promise to combat and prevent money laundering and other types of financial crime, both now and in the future.

Despite being touted as world-class decision intelligence, there is a notable lack of empirical and verifiable evidence proving the effectiveness of these solutions. While RegTech adoption is widespread, it appears to have had little impact on the levels of money laundering, particularly involving trade transactions. The staggering $40 billion in venture capital invested in new RegTech ventures between 2015 and 2021 has failed to yield any credible and notable results in the fight against dirty money.

What really should shock many onlookers is that the estimated $2.9 trillion in global annual money laundered has remained unchanged since 1999. Moreover, criminals continue to openly utilize bin bags of dirty cash as banking deposits and use decades old methods to circumvent the rules, processes and systems intended to stop them.

Investments in people, training, and technology have seemingly had little impact on reducing the persistence of dirty money flows and the underlying criminality. This continued high level of money laundering is not simply due to certain countries having less mature AML controls. The UK and the USA, both mature economies and members of the Organisation for Economic Cooperation and Development (OECD), account for 40% of all money laundered globally.

Automation is not crime fighting

Many RegTech professionals privately acknowledge that much of the technology development in this field focuses on reducing false positives and automating basic compliance processes. While these advancements aim to support the fight against financial crime, they do not directly address it. The core purpose of RegTech is to make compliance processes faster, more cost-effective, and less burdensome, rather than to combat financial crime itself. In other words, Regulatory Technology (RegTech) is not the same as Fighting Financial Crime Technology (FFCtech).

There is a notable gap between the promises of RegTech and its actual impact. Comments like “It’s primarily the RPA aspect – robotic process automation – that drives the adoption of this technology” and “The way we’re spending that money isn’t really curbing money laundering. We might report some issues, but it’s not meaningful. In fact, it may even be counterproductive” offer a more accurate picture of the current situation.

While the funding, investment, claims, and media coverage continue, RegTech firms remain out of the limelight when it comes to negative compliance outcomes. While banks face fines, regulatory scrutiny, and public criticism, RegTech firms remain in the background, unscathed – escaping closer scrutiny. Proponents of RegTech might argue that this is appropriate, as they provide tools rather than directly managing compliance. However, if this is the case, RegTech marketing should accurately reflect this position by emphasizing that their solutions are designed solely to assist with compliance, rather than combat money laundering.

The current marketing, which implies a more direct impact on reducing financial crime, is misleading and raises questions about the actual effectiveness of these technologies. Investors should carefully consider whether the promises being made are realistic as they assess their investments in the next funding round –unless they are indifferent to the problem they are investing in solving.

The taxpayers continue to pay

The UK’s legislative approach to anti money laundering (AML) has led to some modest successes, including a few prosecutions and the confiscation of illicit funds. However, these publicly promoted achievements are insignificant compared to the trillions of dollars tied to such criminal activities.

Economic crimes take a back-seat because they are not something that galvanizes the general public. Perhaps this is why a mere 0.6% of police officers in England and Wales are now dedicated to investigating fraud, money laundering, and other economic crimes. Many recognise this as a low commitment rate – which it is. Given the enormous economic impact, costing UK taxpayers an estimated £380 billion ($487 billion) annually, which is 23 times greater than the cost of traditional crime, this low allocation of resources seems disproportionate.

While the UK’s FCA is active in AML enforcement actions, efforts tend to be directed toward the regulated sector and not the criminals themselves. As one interviewee said when they participated in a research study undertaken in 2023, “that’s the thing, it’s about the depth of pockets, not about level of criminal endeavour” … and … “I don’t expect anyone to feel sorry for international banks, we make a lot of money, but it’s a lot easier to fine a bank with a lot of money than it is to capture a criminal”.

Meanwhile, to appease regulators and reduce the risk of regulatory action, banks continue to invest in and implement RegTech solutions.

RegTech investor beware

So where does this leave the RegTech ecosystem?

As with anything, if it seems too good to be true, it probably is. There is no doubt that technology plays a role in achieving good compliance outcomes. However, promises of high returns with negligible risk exposure are at odds with the lack of demonstrable results and the ongoing failure to address illicit money flows.

Focusing on effectiveness and return on investment is essential, yet few banks, regulators, commentators, or critics scrutinize the often exaggerated claims and clever marketing. Eventually, both clients and the market will demand empirical data, and at that point, some investors may find themselves exposed.

Currently, it is the taxpayers and victims of crime who bear the cost of RegTech solutions failing to deliver on their promises, as well as the failure of regulators and law enforcement agencies to effectively deter criminals.

The views are the authors’ own and based on their own research. For a fully annotated version of the article see Vortex Risk website.