Britain’s home secretary recently introduced an ambitious plan to combat fraud, calling for multiple stakeholders, including financial institutions (FIs), to actively join the fight against financial crime in the UK. The industry is facing an increasing frequency of cyber attacks. In 2016, more than 75 cyber attacks were reported to the Financial Conduct Authority (FCA) in the UK compared to just five reports in 2014. It is not only the frequency of attacks that is growing, the amount of money lost to financial crime has also grown, with statistics showing that fines from failing to prevent and detect financial crime have grown by 55,000 percent over the past 10 years.
The fourth EU Directive on Money Laundering, which recently came into force, outlines stricter compliance regulations and highlights the critical need for teams within FIs to collaborate. They need to be sharing data, especially customer data – both from their own organisations and across the industry – to help tackle financial crime and stop fraudulent attacks. When it comes to money laundering, in order to assess a customer’s risk, anti-money laundering (AML), know-your-customer (KYC) and fraud prevention solutions should be implemented to enable FIs to gather the most complete picture of a customer.
The unpredictability of financial crime means that comprehensive sharing of data and robust strategies are necessary to ensure that more risky customers are identified and closely monitored. Behaviours indicative of money laundering, tax evasion, human trafficking and instances of fraud can raise red flags that comprehensive KYC and AML strategy can detect early on. The benefits of robust implementation of these strategies can assist FIs in reducing the amount of overall investment required to manage financial crime risk, whilst also enabling more accurate detection of fraud.
The focus on data
In addition to the importance of collaboration, the EU AML Directive heightens the attention that FIs must pay to reputational risk and moral imperative. If a company is identified as being a vehicle for money laundering activity, the reputational damage to that organisation is substantial and can have long-term impact; customers could take their money elsewhere. Therefore, organisations must get to know their customers in order to identify fraudulent activity straight away. Research from CEB Tower Group found that only 14 percent of fraud departments amongst FIs have a complete customer-centric view. This indicates that much more needs to be done to ensure that valuable KYC and AML data is shared across an organisation, activity which can ultimately reduce the risk of financial crime.
Customer-centric approaches not only increase the likelihood of FIs retaining customers, they also enable organisations to stay ahead of their competition. With comprehensive customer profiles, FIs can fully understand their customers and the consequent risk. Adding data collected from various organisations strengthens this customer-centric approach. Collaboration like this across the industry means that FIs achieve a better view of each customer, making it easier to identify differentiation between criminal and slightly unusual behaviour. The greater the accuracy of detection from the data collected, the greater the operational efficiency.
Keeping customers at the centre
The way that customers interact with their institutions and manage their money is constantly changing. Multichannel and multiple device access are paramount for consumers, as they want to have access to their financial assets whenever and wherever it suits them. No matter how a customer chooses to interact with their institution, it is crucial for an FI to know how best to manage them and what to expect their behaviour to be. By working across divisions and collaborating internally, thorough customer profiles can be compiled with threats identified more quickly and acted upon more efficiently.
The traditional model of siloed AML and fraud prevention teams is no longer sufficient. With research showing there is an 80% overlap in data gathered by AML and fraud detection technology, the effectiveness of leveraging these assets together can make financial crime risk management and fraud prevention more accessible, effective and reliable. With combined efforts and integration across teams, fraudulent behaviour is more likely to be recognised in time to prevent it, resulting in reduced losses and less negative impact on customers. By automatically collecting and analysing data, companies are able to gather a full spectrum of information, evaluating a scorecard system, and quantifying the risk each customer brings.
The richer the pool of data that FIs have access to, the more informed and valuable the data analysis becomes. As customers are on-boarded with an FI, checks on AML and fraud risk occur in order to identify their risk level from the outset, and due diligence continues throughout their time as a customer. By joining-up data gathered by fraud and AML teams through technology, FIs are able to compare customer data relative to other customers, and consequently leverage best practices to accurately detect fraudulent activity. This combined effort within an organisation also provides a high level of operational efficiency within an FI, allowing man-hours to be distributed more effectively.
Adding data from external bodies allows institutions to build a detailed picture of customer behaviour across entire industry segments. By comprehensively understanding their customers, not only from within the FI, organisations can recognise and flag unusual behaviour almost instantly. Similarly, it is also important for FIs to be able to identify when a transaction, while unusual, follows typical customer behaviour. Transactions that are frozen, but are genuine, can consequently lead to a negative customer experience. This highlights the need for a collaborative and collective view of customer behaviour.
When managing a fraud prevention strategy, it is important to keep in mind that there is no ‘one-size fits all.’ Strong management is essential to make sure that integrating assets and data positively impact anomaly detection systems that enable AML and fraud teams to see issues in their entirety. Adopting a united approach across an organisation allows compliance teams to better focus on genuinely suspicious activity and as a consequence disruption to legitimate customers’ activity across all channels can be reduced.
By knowing customers better, and working with both regulators and competitors, FIs are more likely to be able to adhere to the new regulations outlined in the EU AML Directive. Being able to recognise and reduce money-laundering is essential to not only be compliant, but also to ensure that FIs are able to retain customers in an increasingly competitive market. The data that is available both internally, as well as in the industry, means that fraudulent behaviours can be tackled more easily by regulators and FIs. Strategies focused on integration and collaboration between fraud and AML teams will result in real-time analysis of suspicious activities, consequently reducing the likelihood of financial crime and maintaining a positive customer experience.