Chapter 1
Why is it so challenging to spot criminal finances?
Quantity and compliance are some of the key challenges for banks.
By looking for patterns and indicators among banking transactions, the hope is that law enforcement could potentially identify behavior that connects the criminals. This, in itself, is a huge task. The scale of financial crime — criminal networks laundering their ill-gotten proceeds through the international finance system — is vast.
Globally, human trafficking is estimated to be worth US$150b a year, and much of this is funneled through layers of fake accounts and fronting companies. In total, there is an estimated US$2t to US$4t of illicit funds in circulation. Only about 0.2% is ever recovered.
But while these sums sound vast, when put in context, it is not hard to see why they are so difficult to detect.
Every day, 1.2 billion transactions take place in the global financial system. Spotting which of these transactions are connected to financial crime is incredibly difficult — especially so when these transactions happen in a tiny fraction of a second and are then followed up almost instantaneously with new related transactions.
And it is not just challenging. It is also very expensive. A global bank’s average budget for financial crime operations is over US$1b a year. And yet, most of this investment historically has focused on making the bank compliant rather than on proactively targeting criminal behavior.
The compliance challenge
Since the United States introduced the Patriot Act in the wake of the terrorist attacks of 9/11, there has been an increased regulatory onus on the banking system to know who their customers are and root out the dirty money.
Banks that are unable to stay compliant face huge penalties. Since 2008, banks globally have paid more than US$320b in fines for breaching financial crime regulations.
As such, many banks’ approach to filing suspicious activity reports to the authorities is to focus on quantity over quality to remain complaint. It is a case of providing the entire haystack with the knowledge that somewhere there is a needle. Over 90% of banks’ alerts of suspicious activity are false alarms.
This trend has been exacerbated in recent years as criminals develop more advanced techniques to further exploit the system, prompting regulators to demand that banks monitor more and more activity in response.
This forces the banks to continually increase their investment just to manage the increased volume of data and stay compliant. Since the global financial crisis, bank compliance costs for financial crime have risen by 70%. And to date, this has relied heavily on hiring more people and introducing simple rules-based technology.
This is neither an efficient nor an effective solution. The laundering continues, and the criminals are not being caught. So, how could we do things differently?
Chapter 2
Why red-flag reporting is not enough
To counter the rise in financial crime, we need to move to a more intelligence-led approach.
There is an increased appetite among banks to go beyond simply flagging suspicious activity for compliance purposes. The goal is to leverage technology to more cost-effectively identify potential criminal behavior and prevent the creation of fake accounts in the first place.
Better ID verification
The first step is to build a better identification system for individuals seeking to set up an account.
If banks could use government-trusted sources of personal data, such as a biometric passport, to verify the identity of individuals, it would make it far harder for criminals to open bank accounts under an alias.
By matching different forms of identification, especially if they contain a photo or biometric information, it would be possible to create a more reliable, efficient system where it would be much more difficult to impersonate someone. Verifying personal documentation through natural language processing and handwriting recognition could further speed up and automate the process.
Better data analysis
New technologies also can be applied to improve data analysis when trying to identify suspicious behavior. Machine learning, artificial intelligence and automation tools can help filter out the “false positives,” accounts that look suspicious but are not really, and focus on the real problems — using technology-enabled investigative tools.
This process innovation approach is not only more efficient for the banks — it is more effective in addressing the challenges of modern financial crime.
But it would also require a change of mindset from regulators in terms of how they think about the process of compliance and data sharing.
Chapter 3
Collaboration is critical
We need a framework for financial crime which allows information to flow between public and private sectors.
An intelligence-led and data-driven approach to tackling the financial side of organized crime will not truly work unless there is collaboration — not just between the banks, but across governments, regulators, auditors, security agencies and banks.
This will require not just data sharing, but improving access to trusted data sources, and supporting and facilitating the adoption of new financial technologies.
The framework for identifying financial crime needs to be transformed to a cost-effective, tech-based model that aligns all stakeholders and enables information to easily flow between both the public and private sectors.
The good news is that this is increasingly the consensus across the globe.
Banking regulators are looking at how financial technology and process innovation can change the way they think about KYC (know-your-customer) protocols and tackling money laundering. They are talking about what they can do as a group to facilitate different ways of working to make the whole regime more effective.
It is in everyone’s interest to shift banks’ focus of financial crime away from compliance towards proactively preventing and disrupting it. This is why, at EY, we are helping banks and regulators use technology, data, and new ways of thinking and working across organizations to create a world where the very worst criminals can no longer use the complexity of the global financial system to hide the proceeds of some of the most horrific crimes imaginable.
With the right mindsets, technologies, and ways of working across organizations and jurisdictions, we believe we can help bankers truly disrupt financial crime and build a world that is safer and more secure for legitimate business and ordinary citizens alike.
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Summary
The framework for identifying financial crime needs to be transformed to a cost-effective, tech-based model that aligns all stakeholders and enables information to easily flow between both the public and private sectors.