Divergence and demonstration: why AML/KYC in 2025 changed the rules for financial institutions

If I had to define AML 2025 in a single phrase, it would be: divergence and demonstration.

Globally, regulators sent a consistent message. They no longer want comfort from the existence of controls. In 2026 they want evidence those controls work. Simultaneously, regulatory philosophy split sharply between the EU and UK’s drive for harmonization and the United States’ rollback of frameworks in the name of economic competitiveness.

For financial institutions, this is not just regulatory. It is strategic. Compliance has become a visible test of operational maturity, governance credibility, and trust.

The EU: AML 2026 from policy ambition to supervisory reality

Europe’s AML reforms crossed an important threshold in 2025. What was once an abstract vision of harmonization is now moving rapidly into execution.

The Anti-Money Laundering Authority (AMLA) is now operational in Frankfurt. Preparing to exercise supervision over approximately 40 high-risk financial institutions while coordinating enforcement across all 27 national Financial Intelligence Units. This is structural shift, not incremental change.

Key developments included the European Banking Authority’s technical advice shaping AMLA’s risk assessment approach. Also, the near-completion of technical standards for the EU’s single AML rulebook, advancement of beneficial ownership transparency with lower UBO thresholds and expanded cross-border access through BORIS. As well as the modernization of FIU.net with responsibility transferring to AMLA by 2027.

The impact is clear for AML 2026: multi-jurisdictional inconsistency will no longer be tolerated. Fragmented onboarding and monitoring processes, divergent entity data models, and jurisdiction-specific workarounds will be exposed under centralized supervision. Firms must demonstrate consistency, data lineage, and risk logic at a pan-European level.

The UK: consolidation, transparency, and selective restraint

The UK followed a parallel but distinct path, doubling down on transparency and supervisory consolidation.

Appointing the Financial Conduct Authority (FCA) as a single AML supervisor for professional services marks a significant escalation. Bringing legal and accountancy sectors firmly under regulatory scrutiny and raising expectations across the entire onboarding chain.

Transparency reforms accelerated through Companies House’s expanded verification powers under the Economic Crime and Corporate Transparency Act. Additionally, enhancement of the Register of Overseas Entities to surface trust structures and strengthened whistleblower protections around sanctions breaches. Yet the FCA showed pragmatism by abandoning its “name and shame” proposal following industry consultation. There is also a greater focus from the FCA, concentrating on fewer AML investigations than prior years, with the aim of successful prosecutions going forward.

The message to financial institutions is nuanced but firm for AML 2026: transparency is non-negotiable. However, enforcement must be proportionate and credible. Banks should expect tougher scrutiny of entity data quality, director verification, and beneficial ownership, without the political theatre.

The United States: rollback at the top, precision at the edges

No jurisdiction illustrated divergence more starkly than the US. Under a pro-business administration, the headline was deregulation: enforcement of the Corporate Transparency Act was curtailed with domestic companies effectively carved out, Foreign Corrupt Practices Act enforcement halted, and the Kleptocracy Asset Recovery Initiative closed. Additionally, there is the delay of the Investment Advisor Rule until 2028.

Yet this is not wholesale regulatory retreat. FinCEN sharpened its expectations around risk realism, clarifying that near-threshold transactions don’t automatically trigger SARs. Rejecting routine SAR refiling in favour of genuine risk assessment, tightening focus on cross-border correspondent risk including proposed Section 311 actions linked to cartel-associated flows, and confirming pre-populated customer data can be used in identification.

Most significantly, the US took aim at de-risking. The Executive Order on “Guaranteeing Fair Banking for All Americans” removed “reputational risk” from supervisory guidance. It also required account exits to be supported by objective, risk-based evidence, aligning with the proposed FIRM Act and FATF principles on financial inclusion.

For financial institutions, the implication is uncomfortable but unavoidable. Exits, refusals, and exclusions now require stronger justification, clearer documentation, and defensible risk logic. Blanket policies are becoming liabilities.

The global direction for AML 2026: proportionality, transparency, and technology

Despite regional divergence, global standard-setters aligned remarkably. FATF reinforced proportionality, warning that excessive, uniform KYC weakens controls by driving legitimate actors from the system. The IMF escalated warnings on shell companies, particularly in real estate. Australia pressed ahead with Tranche-2 reforms to bring non-financial gatekeepers into scope by mid-2026, explicitly to avoid FATF grey-listing. Throughout, beneficial ownership transparency remained central. With international bodies converging on verifiable, individual-level ownership data as prerequisite for effective corporate onboarding.

Critically, regulators made one thing unmistakable: technology is no longer optional. Singapore’s MAS set the tone. Demanding institutions differentiate material red flags from generic checklists, benchmark controls, and substantiate source-of-wealth assessments. The era of box-ticking compliance is over.

What this means for financial institutions heading into 2026

The regulatory landscape now resembles a split highway. On one side, the EU and UK invest heavily in centralized infrastructure, expanded supervisory reach, and harmonized expectations. On the other, the US removes speed limits in certain areas while installing highly sensitive, risk-based detection systems. Multinational institutions must navigate both simultaneously.

At Encompass, we see this as clear mandate. Corporate Digital Identity, underpinned by automated, reusable, and verifiable entity profiles, is no longer future concept. It is becoming foundational to how financial institutions demonstrate effectiveness, proportionality, and fairness at scale.

AML 2025 confirmed a hard truth: compliance is no longer about having controls but proving they work. In 2026 it will be about identifying weaknesses, evidencing improvement, and ensuring financial crime frameworks don’t undermine access to the financial system itself.

The regulatory ecosystem is evolving into a sophisticated immune system. Highly targeted, adaptive, and precise. It aims to neutralize genuine threats without attacking healthy participants. That requires surgical instruments, not blunt force.

For banks, that means process automation, high-quality entity data, and intelligent use of technology including AI. Those relying on fragmented workflows and manual remediation will struggle. Those investing in digital identity and demonstrable control effectiveness will be best positioned to thrive in the complex landscape of 2026 and beyond.