Step into the Future of Financial Security with the Financial Crime and Fraud Report 2023!

When Did We Stop Being Courageous in Our Endeavours in Favour of Being Comfortable?

Many people who work in Financial Crime Prevention began their careers with an ambition to ‘do good’. Heck, when we were kids who didn’t enjoy playing cops and robbers…and for some of us it even became a career. But somewhere along the way, the vast majority of us lost that sense of adventure and achievement that comes from catching the ‘baddies’. The job might have even become hard work and a thankless task. That’s no fun, right? And could we go as far as saying that because the current approach is so common, some of us might have given up trying to remedy the ineffectiveness? Meagan Birch, MLRO & Head of Compliance

Step into the world of The Paypers’ Financial Crime and Fraud Report, where the brightest minds gather to explore the ever-evolving landscape of financial crime and fraud detection. Our mission is to equip you with the latest trends, developments, and insights into prevention and management, empowering you to become an active force in creating a safer financial world. Join our community of proactive, forward-thinking individuals, and let’s work together to make a real difference. Get ready for an enlightening and invigorating journey.

What’s going on in the world (of payments) that makes this topic important now?

Did you know that financial crime has spiked during the recession? Fintrail points out that customer fraud, scams, and organised crime activity have soared in the last 12 months. And more interestingly, we’ve recently seen an alarming trend in consumer fraud too — that is fraud committed by consumers who don’t otherwise consider themselves cybercriminals. According to Sift, 16% of those surveyed by the company at the beginning of 2023 admitted to having participated in payment fraud or personally knowing someone who has. Another alarming phenomenon is an increased money mule activity that supports money laundering. Money mules are accounts used to receive illicit funds, whether it’s for fraudulent or money laundering purposes. Bad actors use various means to target money mules, such as instant payments/faster payments, internet banking, and transfers. Money mules are necessary for these types of fraud because fraudsters need a way to receive the funds, they are an essential vehicle for fraud.

At the other side of the spectrum, when it comes to fighting payment fraud, compliance, and the prevention of illicit funds movement in the financial system, the last twelve months have also seen tremendous growth in the types of techs used and the effort put in by large financial institutions to fight fraud and comply. The end of 2022 and the beginning of 2023 was the birth of ChatGPT which stirred a lot of controversy around what it can and can’t do for the financial world. As in all walks of life, Artificial Intelligence (AI), machine learning (ML), and data analytics have emerged as powerful technologies, among the innovative regtech use cases, including risk assessment, regulatory change monitoring, communications security and compliance, Anti-Money Laundering (AML), Know Your Customer, and compliance reporting.

Still, as with many processes of financial systems (cross-border payments, checking the real identity of users, connecting different payment platforms, etc.), one big issue that rises is the lack of harmonisation of systems and regulations across different jurisdictions that puts a significant financial and operational burden on all market participants that are active across a specific region. For instance, diverging KYC requirements within the European Union creates fragmentation that comes with high costs and many lost opportunities, both for the bank, which cannot efficiently automate or standardise its controls and for the corporate, which is faced with additional and time-consuming KYC requirements, when it wants to expand its business activities across the EU or diversify its banking relationships internationally.

Hopefully, the launch of a European Digital Identity Wallet (EUDI) will change this situation. The EUDI Wallet can alleviate the complexity of onboarding customers or processing payments: being an electronic identification means with a high level of assurance, the EUDI Wallet can cut down the costs for KYC/AML, helping financial institutions fulfil specific regulatory requirements and build seamless online experiences.

Besides the EUDI initiative, what captured the public’s attention in the European space are the updates on EU’s AMLD6 that are impacting FIs and crypto providers. Companies operating in a transnational environment will need to take into consideration changes brought by the AMLD6 and pay close attention to the determination of the source of funds of their clients, as well as the dual criminality factor.

Most companies operating in the crypto sector have transnational activities. These activities will now need to be in line with FATF’s Recommendations and Guidance, especially with Recommendation 15 (New Technologies), Recommendation 16 (Wire Transfers, also known as the ‘Travel Rule’), and Interpretive Notes to them. Companies operating in the crypto sector will now need to have a proper licence (not just a registration for AML purposes) and collect originator and beneficiary information for all their digital assets — meaning they must know exactly where their assets are coming from and being sent to.

Going beyond facts… let’s put the cards on the table.

Some of the facts and data we covered within the report have stirred a lot of discussion points.

Take, for instance, enabling the so-called frictionless online journeys, which sometimes means removing screens and even reducing fraud design principles such as What You See Is What You Sign (WYSIWYS) on a separate trusted device, leading to poor security (in favour of great UX).

Maybe we have gone too far by blindly parroting our digital teams’ needs for fast onboarding, instant payments, and minimal user interaction while performing transactions. To protect against fraud and economic crime, a solution could be applying fraud regulations and enforcing in-journey accountability (Han Sahin, ThreatFabric’s CEO).

AI, ML, and NLP are increasingly being used in banking fraud and anti-money laundering detection to significantly improve banks’ countermeasures and to ensure the integrity of the financial system. However, it will be essential for banks to invest in the necessary resources and expertise to implement these technologies effectively and responsibly. Several potential issues can arise when implementing AI, ML, and NLP technologies. One of the biggest challenges with AI, ML, and NLP is the risk of biases and discrimination. These technologies are only as good as the data they are trained on, and if that data is biased or incomplete, it can lead to inaccurate or unfair results. AI, ML, and NLP models can be complex and difficult to understand, which can make it hard to explain how decisions are being made. This lack of transparency can be a concern in industries like finance, where customers may want to know how decisions about their money are being made.

Also, it’s important to remember that AI, ML, and NLP are just tools, and they should not replace human judgment entirely. AI, ML, and NLP require access to large amounts of data, which can be a potential target for hackers or other bad actors. It’s important to ensure that appropriate security measures are in place to protect sensitive data. There are of course other challenges concerning the use of these techs that are addressed in an extensive article within the report by Alan Morley and Fanny Ip from Huron.

Besides questioning the bias, lack of transparency, and AI accountability, Mark Haine, Founder, considrd.consulting also ponders over some unintended consequences of the implementation of the EUDI. Increasing the convenience of carrying and presenting identity information makes it much better for citizens, and the businesses they are dealing with, when things are going well. However, making it easier to share digital identity credentials also makes it easier to over-share with a relying party that uses data in a way that the end-user has not agreed to or, much worse, easier to share digital identity information with a fraudster. Another probably unintended consequence is that a disproportionate burden falls upon people in lower socio-economic groups. Despite the likely macro benefits of digital identity, the unresolved business model for using EUDI Wallets may have unintended consequences for some market participants, resulting in some business entities losing out. As such, we need to have further conversations on how we can address these (and other) consequences and hope we get there in less than the 19 years it took payment wallets to overtake cards.

Bankers are also provoked to delve deeper into the topic of crypto.

Colin Whitmore from NatWest Group provokes bankers to delve deeper into the topic of crypto by sharing best practices in preventing money laundering through cryptocurrency exchanges and custodian services. Cryptocurrencies are in the news daily, whether it is in headline-grabbing articles such as the sudden and dramatic failure of crypto firm FTX, or the use of cryptocurrencies in ransomware and other criminal activity. However, to claim that all cryptocurrency is used for criminal purposes would be a mistake. Not only does it disregard legitimate and legal investment, but it is a statement, often made without consideration of poorer regions of the world where the national Fiat currency is unstable, or access to banking services is expensive or limited. So where does this leave FIs? How should they approach cryptocurrencies, and importantly manage the risks? Relying on the Virtual Asset Service Providers (VASPs) themselves is not enough. Yes, some VASPs will have controls in place, with established KYC/CDD undertaken on their customers, and the ongoing monitoring of customer activity. However, from a risk perspective, FIs need to understand and manage their risk, for themselves, especially where cryptocurrency is moved to and from Fiat currencies — the ‘on/off ramps’. Thankfully, there are several practical steps firms can take, which Colin explores within the report.

There are humans behind fincrime (compliance)

Financial crime is a pervasive and insidious threat that requires a multi-faceted approach to combat. While technology plays an essential role in identifying and preventing fraudulent activities, we cannot forget the humans behind the fight against financial crime. The impact of financial crime is far-reaching, leaving many victims feeling despaired and abandoned. Regulators are often hesitant and concerned, unsure of how to effectively regulate emerging technologies like crypto. Industry practitioners are frequently discouraged by the lack of skilled and motivated individuals working in compliance and strive to see compliance as more than just a box-ticking activity.

However, there are also those enthusiastic and proactive fincrime fighters who are dedicated to learning and collaborating with their peers to spread the message and combat financial crime. We must recognise and empower the human element in this fight against financial crime to create a more effective and efficient system.

The power of storytelling

Working on the Financial Crime and Fraud Report enabled me to feel the creativity and humanity springing from the Fincrime Fighters contributing to this report. Some of the electrifying stories and metaphors I learned about include the video of the turtle with a straw stuck in its nose that galvanised the compassion of millions of people worldwide, and before we knew it, plastic straws became so unacceptable that we now have several alternatives which won’t hurt turtles anymore. In the turtle example, people — just like you and I, got active in creating new solutions. We harnessed a collective will and challenged big corporations to see the unintended yet harmful impact of their products and take our demand for change seriously. We would all benefit if we led a similar charge across Financial Crime Compliance (FCC). Meagan Birch, MLRO & Head of Compliance

Compliance. The final tick box before a new product, service, or announcement goes live. Right? For a long time, this has been the case, but this approach of bringing compliance on board at the end of the process has stunted innovation. An inexperienced baker would be foolish to glance briefly at a list of ingredients and attempt to bake a cake without following a recipe step-by-step. In the same way, those who are not experts in compliance should rely on the experienced compliance officer during product development to ensure the end product is compliant and ready for launch — like the best Mary Berry Victoria sponge. Mitch Trehan, UK Head of Compliance and MLRO at Banking Circle

Putting the wheels on the AML suitcase — there are lots of wonderful, smart, enthusiastic, and talented young people in this industry. They have a very important role to play in the development of AML. Here’s the context: many years ago, when I was but a small boy, my dad would often carry two big suitcases when we went on holiday. Upon arriving at our destination, dad would be a little fatigued, sometimes irritable, and commonly sweaty. Why so? You ask. Well, it was because he carried the suitcases, as back then suitcases had no wheels. Imagine, if you will, the lunacy of suitcases without wheels. It references the simplicity of some wonderful solutions and innovations. Back to 2023 and the modern-day world of AML, it’s not working, it is all too often, ineffective, and inefficient. Thus, it is the role of these smart young people to put the wheels on the AML suitcase and I am looking forward to seeing it in action, one day. Martin Woods, Cashplus and Global Compliance Institute (GCI) Chair

Industry practitioners such as Meagan Birch, Dawn Fisher, Ray Blake, Dr. Ruth Wandhöfer, and Dr. Mario Menz have even a collective joke/metaphor for money laundering. They were joking about cake and half-eaten hash browns as an illustration of our Financial Crime Compliance programmes and controls. We joked that our Transaction Monitoring systems were like half-eaten hash-browns and not very nourishing, that our compliance programmes were rarely as welcome as a cake when shared in the office, and that the office caterers (MLRO) had just resigned because anything they served was never good enough. We laughed but it got us thinking, critically, about how we have ended up in such a mess in FCC.

Instead of a conclusion

But maybe the powerful message that resonated and stuck with me was this one:

It’s time for our industry to choose: do we just keep following a vision that does not resonate with our goals or can we focus on what inspired our career choice and collectively identify and try new approaches to make a difference? Let’s find the straws in our Financial Crime PREVENTION approaches and create new ways to be effective against the ‘baddies’ who rob us all of peaceful communities. Let’s turn the tide against complacency and illicit financial flows.

Again Meagan 😊

It has been a long, exciting, filled with learning and networking opportunities, and a worthy journey to make this report happen! I hope I stirred your curiosity to continue reading it.

I want to take this opportunity to thank all our contributors that joined forces and delivered such educational, insightful, and powerful content. These are Victoria Sztanek — FINTRAIL, Esther Phillips and Rebecca Craig — Tenet Compliance & Litigation, Han Sahin — ThreatFabric, Alejandro Leal — KuppingerCole Analysts, Theresia Mallia — Kindred Group, Steve Pannifer — Consult Hyperion, Intesi Group, Mark Haine — considrd.consulting, Travis Jarae — Liminal, Maya Ogranovitch Scott — Ping Identity, Michael Ramsbacker — Trulioo, Thomas Egner — Euro Banking Association, Deborah Young and Alex Ford — The RegTech Association, Abhishek Chatterjee — Tookitaki, Ted Sausen — NICE Actimize, Mike Nathan — Feedzai, Sandy Lavorel — NetGuardians, Alan Morley and Fanny Ip — Huron, Colin Whitmore — NatWest Group, Ruben Menke, Robert Norvill, Christian Karsten, and Mitch Trehan — Banking Circle, Antonia Michail — Nuvei, Dan Aiello — IDVerse, an OCR Labs Company, Micheal Pettibone — Ekata, a Mastercard company, Jason Howard — Caf, Meagan Birch, Dawn Fisher, Ray Blake, Dr. Ruth Wandhöfer, and Dr. Mario Menz, Martin Woods — The Global Compliance Institute.

Of course, I would like to extend our gratitude to our esteemed collaborators (FinTech FinCrime Exchange, KuppingerCole, Consult Hyperion, Liminal) and media partners (QUBE Events) that will help us spread the message. If there is someone that I forgot to mention, do let me know, because in this fight against crime, all effort matters!

Enjoy your reading,

Mirela.

About Mirela Ciobanu

Mirela Ciobanu is Lead Editor at The Paypers, specialising in the Banking and Fintech domain. With a keen eye for industry trends, she is constantly on the lookout for the latest developments in digital assets, regtech, payment innovation, and fraud prevention. Mirela is particularly passionate about crypto, blockchain, DeFi, and fincrime investigations, and is a strong advocate for online data privacy and protection. As a skilled writer, Mirela strives to deliver accurate and informative insights to her readers, always in pursuit of the most compelling version of the truth. Connect with Mirela on LinkedIn or reach out via email at mirelac@thepaypers.com.