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Combating cyber and financial crime with technology

February 2020 by James Leeke, General Manager, Financial Services (Europe), BAE Systems Applied Intelligence

In recent years, the threat posed to the global financial industry by cyber and financial crime has changed significantly. Cyber and financial criminals have increased their knowledge and understand better and better where they can strike most easily with a chance of success. They use increasingly sophisticated means to evade controls and carry out well planned and closely coordinated attacks. In some cases, they have used smaller banks to carry out very complex attacks on larger banks.

Staying one step ahead of the criminals

Fraud, money laundering and cyberattacks are big business for organised crime. Organised crime gangs are always up to date and exchange information to escape detection. To stay one step ahead of the criminals, a new approach is needed. Companies must use the latest technologies, using machine learning, artificial intelligence and network analysis to make connections, detect criminal behaviour and prevent financial crime.

Gateway: Trade-based money laundering

Money launderers are increasingly ignoring traditional private or small business accounts and are now using investment banking, commercial banking and especially trade-based money laundering instruments to disguise the global flow of illicit funds.

Over the last 20 years, regulators around the world have put pressure on the banking sector to curb money laundering and terrorist financing and have led financial institutions to devote increasing resources to identifying and reporting suspicious activities. There is no doubt that this has helped to curb criminal activity. But it does not solve the real problem, since only about 20 per cent of world trade is financed by banks. The remaining 80 percent is largely free of controls. It would be naive to assume that this is not exploited by criminals, terrorist groups and others to circumvent official controls.

In trade-based money laundering, illegally acquired assets are laundered through trading activities - and this trade can be either actual or merely fictitious. Party A may order a shipment of smartphones from Party B. Party B then has a payment for goods - regardless of whether the phones were ever shipped or even existed. The same shipment can be sent back and forth between many different merchants, further obscuring the true origin of the money. Other practices - such as the unlawful recovery of VAT on sales or the transfer of assets between criminal groups - increase complexity and can provide criminals with large profits.

Risk factors real estate and art

Real estate or art sales can also be used for trade-based money laundering, as the value of real estate and art objects is highly subjective. For example, buying a mansion for 10 million euros and selling it a few years later for 20 million euros could be a sign of a healthy real estate market - or a transfer of assets between fraudsters. This applies equally to the trade in works of art.

How might financial crime evolve?

We cannot yet foresee what tricks the financial fraudsters will come up with in the next few years. The only certainty is that the methods of the criminals will develop in step with those of the investigating authorities. Banks and governments must therefore maintain their investments in identifying and combating money laundering and terrorist financing. It is obvious that open banking is shifting customer interaction from the core service provider - the banks - to the app. The challenge for banks is changing as a result.

Balancing business objectives and compliance requirements

For financial institutions, the shift of banking operations to the app and in particular new regulations such as the Payment Services Directive PSD2, which could threaten their business model, is a challenge. But these developments also offer them the opportunity to stand out from the crowd. It will be crucial for them to offer customers a smoothly functioning service when initiating new business relationships and introducing new products, while at the same time managing the associated risk of fraud.

Without advanced technologies, it is not possible to make real-time decisions about customer risk. Compliance departments must be business-driven, growth-oriented and customer-focused. Although the benefits of a good user experience are obvious from a customer perspective, most financial institutions overlook this in their compliance and fraud departments. There, workflows are often fragmented and inefficient, resulting in a high number of analysts. With the right solutions, customers can be provided with better information while criminals are kept out. This improves the customer experience and enables more intense interaction, reduces customer churn and increases profits.

Equally, a number of major banks are moving away from seeing compliance as a tick-box exercise fuelled by volume driven transactions towards a value-based model aimed at detecting financial fraud. In this way, banks can combine their fraud and compliance activities to ultimately reduce costs and increase effectiveness. This requires the use of increasingly advanced technologies to analyse large amounts of data and the transfer of fraud prevention techniques and approaches to anti-money laundering and extended compliance.

More data exchange between banks and authorities

Banks and state institutions must cooperate more closely than before. The data they store separately can be combined and evaluated with greater benefit. In a world in which law enforcement agencies and banks exchange data to a greater extent, criminals have fewer opportunities to hide.

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