Overcoming the Barriers to Combat Fraud and Money Laundering
Jane Jee, CEO at Kompli Global
Global Banking & Finance Review
January 28, 2021
As a top-of-mind issue for global policymakers, law enforcement authorities and industry stakeholders, the scale of financial crime is vast and continues to grow, affecting everyone.
The complexity of the international financial system, as well as variations in legislation at a country level have created a suitable environment for money launderers, fraudsters and financial terrorists to hide and move funds between jurisdictions without drawing attention.
Although investment in financial crime prevention solutions for Anti-Money Laundering (AML) and fraud have been mandated by regulators for decades, penalties continue to plague regulated entities, while fraudsters continue to find more creative and ingenious ways to get around the system. Clearly more can and should be done to defeat financial crime. Not only do regulated entities need to use more effective systems, but also regulators need to encourage regulated entities to incorporate new solutions without fear of punishment.
Furthermore, rapid globalisation and innovation in payment services have set off a technology explosion, spawning new strains of financial crime and fraud that financial institutions now must grapple with. At the same time, through all the turmoil caused by the COVID-19 crisis, money launderers and fraudsters have adapted their modus operandi to gain additional profits and create new opportunities for fraudulent activity.
To address these issues, governments around the world have implemented strict, multi-layered local and global AML legislation, alongside regulations stipulating Know Your Customer (KYC) verification. To continue operating in regulated markets, financial services companies must take all measures to comply with these standards, as well as looking to the market at the latest technology that can help them achieve this.
As industry expectations increase in today’s increasingly complex global regulatory landscape, how can organisations still ensure they have the required procedures in place, save time, money and drive a new era of automated compliance?
The AI powered approach: a competitive differentiator in driving compliance
A new wave of Regulatory Technology (RegTech) that harnesses artificial intelligence (AI) and human expertise is playing a major role in assisting compliance teams in upholding AML and counter-terrorist financing (CTF) legislation around the world.
Such AI powered technology has moved beyond experimentation to become a competitive differentiator in financial services, as it can ‘learn’, interpret and comply with all applicable laws, from KYC and AML to asset management regulation. This sophisticated analytical technology is a powerful ally, boosting operational efficiency, delivering a hyper-personalised customer experience, detecting potential instances of fraud and misconduct – among many other applications – thus, raising and reporting these instances to ensure regulatory compliance is easier for compliance teams.
Just like any other tool, AI can be (and is) exploited by criminals, which makes regulation a pressing necessity. The more criminals use the technology to exploit the weakest links, the more law enforcement is hampered without it. However, discussions on AI – or Augmented Intelligence as we prefer to call it – must focus on the technology’s effects and benefits instead of fears about the technology itself. The beneficial uses of AI often get overlooked due to a general lack of understanding. When combined with Machine Learning (ML), those regulated entities can be put off by the difficulty of understanding core concepts, such as algorithms and built-in bias, to a non-tech audience. However, this is where the value of partnering with the right provider of such solutions is vital as they take on the heavy lifting and use their expertise to communicate the information required efficiently and effectively. This ensures that compliance experts have more time to focus on those cases that are flagged.
It is also essential to confirm that compliance teams continue to have a significant role to play in most organisations, and the deployment of AI should be used to enhance these teams and provide better productivity and job satisfaction, not replace them. Working together, AI and human managers can enhance each other’s complementary strengths to deliver frictionless, accurate and comprehensive intelligence on organisations and their people.
Barriers to technology adoption
While excitement about the impact of AI in financial services is mounting across the industry, there are several barriers to AI uptake that we see time and time again.
Historically, banks have struggled to make sense of the data they collect and house in silos with limited visibility across the entire organisation. They are conservative entities, do not naturally embrace new, not very well understood technologies. The barriers can reside in compliance departments, legacy systems and even a certain degree of legacy thinking and lack of training to keep up with compliance and regulatory changes, but also with evolutions in criminal tactics.
Banks are under pressure from fintechs and challenger banks and their margins are getting squeezed, as they look to reduce costs. Compliance is increasing as a share of bank costs, so there is a need to control and – if possible – reduce these costs. However, compliance needs to be seen as an investment, not just a burden. Investment in technology is the only way for things to improve but this may mean investing properly and adding more headcount (particularly in the IT sector) in the short term, to get value in the long term.
The time to act is now
The pandemic has led to an increase in fraud, as well as an exploitation of government funds, which is creating new sources of proceeds for illicit actors. Additionally, the pandemic has to some extent also impacted the government’s July 2019 Economic Crime Plan. The Royal United Services Institute (RUSI) reports that currently, 38% of actions in the plan had been completed, 44% were in progress, 9% were overdue, 6% of actions either had no due date or had been paused. The missed opportunity here is that there are few opportunities for technology companies to input into the government’s thinking.
However, COVID-19 has also accelerated digital transformation and the burden brought about by the crisis determined regulators to acknowledge that regtech provides significant opportunities to manage some of the issues presented by the pandemic, thus encouraging the use of technology to improve “the security, privacy and convenience of identifying people remotely for both onboarding and conducting transactions while also mitigating ML/TF risks”
Policy makers, regulators and shareholders are increasingly looking for firms and the right technology to not only meet new regulatory requirements, but also ensure the effectiveness of what has already been built across the sector. However, there is still a certain degree of reluctance because people do not fully understand the value of AI in business, but we are breaking through in a number of significant ways. Until the industry is ready to embrace this fast-moving technology, we can only demonstrate its potential and we need to allow the market to catch up and that is the process we are witnessing right now.
Financial crime is a broad term covering modern slavery, trafficking, drugs use and other types of crime which are used to generate money for criminals, which is then laundered through the financial system. The damaging effects of these crimes are critical, with potentially devastating impact on a country’s economy, government and social well-being. But if we as an industry can make a difference, then we will have done our whole society a lot of good.