September 7, 2021
Financial crime is fast becoming a critical concern worldwide. For fintechs and other financial entities, compliance with regulations costs an estimated $180 billion each year.
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. 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 a 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 financial infrastructure that supports them.
Financial crime is 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.
Financial crime generally falls into the following categories:
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.
Financial fraud: Fraud is intentional deception to secure unfair or unlawful financial gain, or to deprive a victim of a legal right. Financial fraud takes many forms including check fraud, credit card fraud, mortgage fraud, corporate fraud, securities fraud (including insider trading), bank fraud, insurance fraud, payment (point of sale) fraud.
Money laundering: Money laundering is the process of changing the origination of large amounts of money obtained from crimes to a legitimate source. Criminals often use banks and businesses to obscure the origin of illegal funds in order to re-introduce those funds into legitimate financial vehicles.
Financing of terrorist activity: Terrorism financing is the provision of funds or providing financial support to individual terrorists or non-state actors. Terrorists also seek to obscure the movement of money using tactics similar to those of money laundering.
Most countries have put in place regulatory bodies dedicated to fighting fraud, money laundering, and the financing of terrorist activity. These organizations include:
There are numerous methodologies that bad actors use to commit financial crime. As detection and prevention measures become more sophisticated, so do the strategies these criminals employ to stay ahead of the game. This forces governments to introduce more comprehensive regulations surrounding fraud, anti-money laundering (AML) and counter-financing of terrorism (CFT), and more severe consequences for businesses who are 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 in order 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 in order 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 influence 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 are able to 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 offer of compensation or by threat of 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.
Today, many criminals who commit financial fraud, launder money, and engage in terrorist financing are extremely sophisticated and nimble, allowing them to continue their criminal activity without detection.
Many of these financial crimes require cross-border transactions. Money launderers leverage differences in regulations to move money between countries, clouding the trail. And those financing terrorist activities need to move money in and out of countries in order 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 on suspicious activity. In the US, banks and financial institutions must comply with the Bank Secrecy Act (BSA). 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 are able to help prevent financial crimes such as fraud, money laundering, and the financing of terrorist activity. Compliance generally falls into the areas of detection of suspicious activity, investigation, and reporting to the appropriate government entity. 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. Financial institutions must deploy solutions that address the specific use cases and risks their organizations face. These solutions require, at a minimum, three key services:
Identity Verification / Know Your Customer (KYC) - Companies are required to verify the identity of their customers, as well as the beneficial ownership of customer entities. 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 in order to detect suspicious activity.
Case Management - Companies need a sophisticated system of record for risk and reviews in order to manage investigations and facilitate Suspicious Activity Report (SAR) filings with FinCEN. An auditable trail is required to document actions within the system.
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.