Is automated KYC enough to stop fraud?

Reports of fraud increase year on year. Fines for non-compliance with AML regulations are growing. What does this teach the industry about how it is dealing with financial crime? Are new approaches that rely on automation enough?

Efforts to fight financial crime are improving all the time, but the industry is arguably still losing the battle. Reports of fraud continue to increase each year, as do fines for non-compliance with AML regulation. More than $937 million in fines were issued in the first half of 2021.

Criminals tend to use repeat tactics, which means certain types of fraud are being uncovered more often and that affects the statistics, but there’s no escaping - instances are increasing.

Even though huge amounts of time, resources, and money are dedicated to preventing fraud and money laundering, they aren’t impacting criminals as much as the industry would like. Banks and other financial institutions continue to make progress, but this is a war not a battle and it’s being fought on many fronts.

Has growth of the digital economy led to growth in crime?

Perhaps it’s naïve to expect the war against financial crime could ever be won. The nature of criminals is to spot a chink in the financial armour and adapt their plan of attack. It doesn't seem feasible that financial crime could be eradicated.

Even so, when it comes to fraud prevention, institutions have faced headwinds as the digital economy continues to expand at an explosive rate. Fintechs and Neobanks have boomed over a relatively short period of time. This has meant there are simply more ways to launder money and more way to commit fraud.

Similarly, there has been more cross-border criminal activity, particularly with organised crime groups exploiting an increasingly borderless financial world. This has left financial services and regulators playing catch-up.

Solving AML challenges

From a money laundering perspective, the hardest task criminals face is getting their money into the banking system. This is where the evolution of the industry, as a whole, can focus and change its pace to win the day.

It’s incumbent on banks to know their customers and to stop their systems being used to launder funds. Regulatory scrutiny has improved AML standards in this regard. Information sharing has also improved, with law enforcement, regulators and institutions working together to solve problems. And technology is playing its part too - making know your customer (KYC)and AML processes more efficient and effective. If regulation, technology and information sharing can come together to stop criminals gaining access to financial services, problems can be nipped in the bud.

Automated KYC – pros and cons

While there is no doubt automating KYC and AML processes helps prevent criminals gaining access to financial services, is it enough? Or, indeed, can automation be taken too far?

In the summer of 2021, the UK Financial Conduct Authority (FCA) issued a Dear CEO letter, which was critical of how banks were failing on some of the basics of financial crime compliance. Part of their frustration seems to have been about automation.

The thrust of the letter was - yes, it’s fine to have AI and data analytics, but it’s still important to do the basics. Know your customer; understand your client, otherwise automation simply introduces more risk because people sit outside an algorithm or suspicious activity goes undetected.

Again, technology is great at making KYC processes more efficient, but 100% automation is rarely optimal when it comes to understanding the nuance of criminals and how they operate.

Optimising KYC

It's salient and optimal to automate some aspects of AML and counter-fraud. Automating AML checks for PEPs and sanctions for example is definitely best left to the risk engines as they do the heavy-lifting rather than having a compliance professional attempt to undertake daily checks.

Plus, criminals tend to employ repeat activities that they have found successful in the past, and as automation is good at seeing repeated activity, these types of fraud can be spotted by machines.

But criminals tweak and evolve practices, so identifying when a new type of fraud emerges may be harder to automate. Professionals can be invaluable in the detection process and in making sure an institution spots new types of financial crime emerging. Automation helps optimise processes, but people and cognitive investigation are crucial to understanding the difference between customers and criminals in a nuanced way.

AI models definitely aren’t able to predict behaviour yet. There is a balance to strike between making progress through deployment of technology and ensuring people are available to make risk-based decisions and identify risk and new types of fraud.

Get in touch

 To find out more about how automated KYC is supporting the fight against financial crime, listen to this on-demand webinar, which features experts from Revolut, Standard Chartered Bank, and Moody’s Analytics.

And if you have any questions, please get in touch, we’d love to hear from you.