Financial has quickly become a critical concern across many industries, including FinTech companies, financial companies, eCommerce companies, and more. According to PwC, financial crimes cost surveyed firms an incredible $42 billion per year. Furthermore, 13 percent of the surveyed firms reported more than $50 million in losses due to financial crime, easily more than enough to cause even large-scale firms to go out of business.
For financial, functional, and even moral reasons, financial crime is something that all financial businesses need to take seriously.
Despite efforts by regulators and authorities to continuously evolve their strategies to fight financial crime, bad actors continue to adapt, leading to more sophisticated threats and attacks in the areas of money laundering, financing of terrorists, and general fraud.
Moreover, though regulators continue to find ways to adapt to the ever-evolving world of financial crime, criminals can typically adapt even faster, meaning that even the savviest and well-intentioned regulators generally are lagging. This fact has made it necessary for financial institutions to join the fight against financial crime by monitoring for, investigating, and reporting on suspicious activity.
As businesses rely on the financial services industry, they, in turn, become the first line of defense against financial crime. Therefore, they also need to be aware of potential threats and adopt strategies to protect their businesses and the economic infrastructure that supports them.
What Are the Most Common Types of Financial Crime?
The broad term “financial crime” is used to describe any crime committed against financial assets and typically involves the unlawful conversion or obscuring of the ownership of the assets for a single person’s or entity’s financial benefit.
Most financial crimes generally fall into the following categories:
- Financial fraud: any activity involving an effort to acquire capital at the expense of another party unethically. Financial fraud is a broad term that can include many activities, from creating inaccurate financial statements to misrepresenting oneself in a financial setting to everything in between.
- Money laundering: a process that involves taking money that has somehow been acquired illegally and trying to “clean” the money by reporting it as if it was generated through legitimate business.
- Financing of terrorists: following the September 11th terrorist attacks and subsequent passage of the USA PATRIOT Act (often just called the “Patriot Act”), the United States Federal Government considers financial crimes connected to terrorist activity to be even more severe than other types of financial crime.
- Counterfeiting: any act that involves the creation of a seemingly genuine document with the express purpose to defraud another party. Counterfeiting currency (printing fake money) and counterfeiting checks are two common types of financial crime. Counterfeiting is slightly different from forgery, as we will further explain below.
- Identity theft: a wide range of acts that generally involve pretending to be another party to gain financial benefit. These benefits can include the right to spend existing funds, access protected information, and apply for additional financing—each representing crimes that occur regularly.
- Embezzlement: any act that involves the direct theft of funds from one account into another. Embezzlement schemes, especially when executed at a larger scale, are often combined with other financial crimes, such as money laundering.
- Tax evasion: any activity involving the deliberate and illegal nonpayment or underpayment of taxes owed. In other words, you are deliberately trying to avoid paying your taxes.
- Forgery: the activity that involves the making or modification of a document with the express intent to deceive another party. Forgery is another crime that is often paired with others, such as forging a signature to pretend to be someone else.
These are a few of the broad categories of financial crime that are investigated—and subsequently prosecuted—on a regular basis. Financial crime that occurs within a company can have legal, financial, and criminal consequences.
While all forms of financial crime are cause for concern, the activities that pose the greatest threat are financial fraud, money laundering, and financing terrorist activity.
There is usually a scale for how severely a financial crime will be treated. Creating an elaborate money-laundering scheme in order to funnel to international terrorists clandestinely will be considered a much more severe financial crime than filing a business tax form a few weeks late (as you’d probably expect.)
Most countries have put in place regulatory bodies dedicated to fighting fraud, money laundering, and the financing of terrorist activity.
Among others, these organizations include:
- United States: Financial Crimes Enforcement Network (FinCEN) in the US
- United Kingdom: Financial Conduct Authority (FCA)
- Germany: Federal Financial Supervisory Authority (BaFin)
- France: Financial Markets Regulator (AMF)
Most other countries (especially those in the Western World) have corresponding financial crime-stopping organizations as well. In addition, many international organizations focus on financial crime, including the IAFCI, though jurisdiction and other issues often make it difficult to prosecute certain types of criminal activity directly.
How Do Bad Actors Commit Financial Crimes?
There are numerous methodologies that bad actors use to commit financial crimes. When these crimes are left unaddressed, they can have many damaging effects on businesses, individuals, and other relevant parties.
As detection and prevention measures become more sophisticated, so do these criminals’ strategies to stay ahead of the game. This forces governments to introduce more comprehensive regulations surrounding fraud, anti-money laundering (AML), counter-financing of terrorism (CFT), and more severe consequences for businesses unable or unwilling to maintain compliance.
For example, here are a few of the most common methods used by criminals to launder money:
Identity fraud: Bad actors may present a false identity to thwart AML protections. Any company that conducts business online and therefore supports online financial transactions is particularly at risk. The speed and complexity of online transactions makes it easier for criminals to remain anonymous as they move money across financial vehicles.
Geographic regulatory differences: Bad actors may look for weaknesses in AML regulations in different countries in order to avoid detection, adjusting how they move money across borders to take advantage of regulatory weaknesses and fly under the AML radar.
Political influence: Government officials participating in criminal activities may be able to leverage their political power to avoid being scrutinized for financial crimes, including money laundering. Furthermore, those in their inner circle may also benefit from their influence, creating a broader network for money laundering.
Pattern avoidance: Bad actors can quickly learn the amounts and types of transactions that trigger AML flagging. They respond by transacting in smaller denominations across multiple financial vehicles, avoiding the patterns that would lead to AML scrutiny.
Insiders: Employees of financial institutions may be enlisted — either by offering compensation or by threatening violence — to overlook suspicious activity, allowing criminals to launder money undetected.
Third-party participants: Innocent people — often poor or vulnerable — can also be enlisted through reward or threat to conduct money laundering transactions on behalf of criminals.
To evade prosecution, many financial crime schemes will involve a complex combination of many strategies, often utilizing many of the criminal avenues mentioned above (among others). Moreover, their approach will often change as prosecuting authorities begin to catch on to their broader schemes.
In the business world, this is what often makes prosecuting crime so tricky—by the time it becomes evident a large-scale financial crime is occurring, the criminals will have had plenty of time to adapt.
How Can Businesses Prevent Financial Crime?
Today, many criminals who commit financial fraud, launder money, and engage in terrorist financing are incredibly sophisticated and agile, allowing them to continue their criminal activity without detection.
For businesses to avoid exposure to these sorts of illegal actions, they must take preemptive actions, including investing in the infrastructure and systems needed to prevent and identify any kind of criminal activity.
Many of these financial crimes require cross-border transactions. Unfortunately, the current international financial network makes sophisticated criminal activity even more challenging to trace and prosecute. Money launderers leverage differences in regulations to move money between countries, clouding the trail.
And those financing terrorist activities need to transfer money in and out of countries to execute their attacks. To complicate matters further, in-country connections such as government officials, bank employees, accountants, and others make it easier for these illegal cross-border transactions to go undetected.
Most countries have deployed comprehensive regulations to enable financial institutions to help detect, investigate, and report suspicious activity.
Banks and financial institutions must comply with the Bank Secrecy Act (BSA) in the US. In addition, the UK has instituted the Proceeds of Crime Act (POCA), while the EU has put in place the Anti-Money Laundering Directives (AMLD). All of these regulations are consistent with the guidance provided by the intergovernmental organization, the Financial Action Task Force (FATF).
By complying with these regulations, financial institutions can help prevent financial crimes such as fraud, money laundering, and the financing of terrorist activity. On top of this, teams can optimize operations and reduce false positives. Compliance generally falls into detecting suspicious activity, investigation, and reporting to the appropriate government entity.
Solutions for Fighting Financial Crime
As threats become increasingly sophisticated, these financial institutions require advanced solutions and modern infrastructure to manage their risk and compliance operations.
These are not one-size-fits-all solutions to fight financial crime. Instead, financial institutions must deploy solutions that address their organizations’ specific use cases and risks. These solutions require, at a minimum, three critical services:
Identity Verification / Know Your Customer (KYC) - Companies are required to verify the identity of their customers’ identity and the beneficial ownership of customer entities. In addition, Higher-risk customers need to be flagged and put forward for enhanced due diligence.
Transaction Monitoring - Companies need to track customer transactions, activities, and events to detect suspicious activity.
Case Management - Companies need a sophisticated system of record for risk and reviews to manage investigations and facilitate Suspicious Activity Report (SAR) filings with FinCEN. An auditable trail is required to document actions within the system.
While these resources are all incredibly valuable, they are only just the beginning—businesses that hope to remain protected against widespread sources of crime will need to adapt and change their crime-stopping infrastructure accordingly.
Unit21 is a one-stop-shop for risk and compliance operations, incorporating Identity Verification, Transaction Monitoring and Case Management — along with operations management, analytics, and reporting — in a single platform.
Unit21’s fully customizable no-code platform provides a simple API and dashboard for detecting, investigating and reporting on fraud, money laundering, and other sophisticated risks across multiple industries. To learn more, schedule a meeting today.