Reports of fraud are increasing year on year. Moody’s Analytics Grid database reported an increase in fraud risk alerts from 72,500 in the six months from October 2021 to March 2022 to more than 88,000 in the six months from April to October 2022. New digital due diligence solutions are targeting financial crime, but are they enough?
Efforts to fight financial crime are evolving all the time, but so are criminal practices - who is winning the battle? Reported fraud alerts continue to increase each year, as do fines for non-compliance with anti-money laundering (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 uncovered more often and that affects the statistics, but even so instances appear to be increasing. Moody’s Analytics Grid database reported an increase in fraud risk alerts from 72,500 in the six months from October 2021 to March 2022 to more than 88,000 in the six months from April 2022 to October 2022.
Even though large amounts of time, resources, and innovation are dedicated to preventing crimes such as fraud and money laundering, they aren’t impacting criminals as much as organizations 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.
Perhaps it’s naïve to expect the war against financial crime could ever be won. The nature of criminals is to see a chink in the financial armor 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 rapidly. Fintechs, neobanks, and crypto markets 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, with organized crime groups exploiting an increasingly borderless financial world. Grid reports an increase in organized crime alerts from +17,000 between October 2021 to March 2022 to +18,000 between April and October 2022.
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 and innovation in know your customer (KYC) can focus and change its pace.
It’s incumbent on banks to know their customers and to stop their systems being used to commit fraud or money laundering. Regulatory scrutiny has driven AML standards in this regard with the introduction of the 6th anti-money laundering directive in the EU as one example. Information sharing has also improved, in the UK for instance, law enforcement, regulators, and institutions are trying to work together to solve money laundering and counter-terrorist financing.
Technology is playing its part - making know your customer (KYC) and AML processes more efficient and effective through automation and access to risk-relevant data. If regulation, technology, and information sharing can come together to stop criminals gaining access to financial services, problems may be prevented from entering the system.
While there is no doubt automating KYC and AML processes can help 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 brought to the attention of banks some of the common failings around basic financial crime compliance. Part of the letter is centered on automation.
The gist of the letter is - 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 that goes undetected.
Again, technology is good at making KYC processes more efficient, but 100% automation is rarely optimal when it comes to understanding and identifying criminals and the nuance of how they operate.
It is optimal to automate some aspects of an AML and counter-fraud process. Automating fraud, AML, PEPs, and sanctions checks for example is more efficient using automation with integrated datasets. Having a compliance professional attempt to undertake daily checks KYC would be inefficient and prone to error.
Criminals can also employ repeat activities that they have found successful in the past. As automation is good at identifying repeat patterns of activity, these types of fraud can be spotted by machines.
But criminals tweak and evolve practices, so identifying when a new type of fraud has emerged may be harder for AI to spot, so professionals can be invaluable in these detection processes. Compliance teams can help ensure an organization identifies new types of financial crime when they emerge.
Automation helps optimize AML and KYC processes, but people and cognitive investigation are crucial to understanding the difference between customers and criminals in a nuanced way. There is a balance to strike between deployment of technology that can do the basics of KYC, integrate checks, raise alerts, and flag suspicious, and ensuring compliance professionals are available to carry out enhanced due diligence and make judgements calls or risk-based decisions based on evidence and experience.
Moody’s Analytics Know Your Customer (KYC) is transforming risk and compliance, creating a world where risk is understood so decisions can be made with confidence.
Our customers build their own unique KYC ecosystem using our flexible workflow orchestration platform, leading datasets, analytical insights, and integrations with global providers to create solutions that stop financial crime, but not good customers.
Harnessing our innovative technology and industry expertise, Moody’s Analytics automates accurate screening and swift onboarding of customers and third-parties. We continue our support throughout a relationship lifecycle by enabling perpetual monitoring of counterparty risk across global business networks in near real-time.
Get in touch any time to talk about your anti-financial crime program – we would love to hear from you.