Financial Crime & Regulatory Compliance: Expert Insights

March 31, 2023
By Sujay Banka, Business Analyst
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Authorities across the globe are striving to end the concealment and movement of illegal or criminally sourced funds. While the letter of the law may differ with countries, the spirit of regulatory intervention is uniform, i.e., to hold Banking, Financial Services, and Insurance (BFSI)s accountable for being willing or unwitting participants in transactions linked to unlawful activities such as Money Laundering, Financial Fraud, Unlawful Financing, etc. With instances of money laundering on the rise both in scale and sophistication, it is time for the risk and compliance teams to act.

What is a Financial Crime?

A Financial Crime is any act committed by an individual, organization, or group of people against a fiscal body or institution that can lead to regulatory, monetary, or reputational loss.

Money laundering

Money laundering is the intentional concealment of the origin of wealth obtained from unlawful activities by converting it into a legitimate source. Information and data prerequisites for identifying suspicious activity are Risk Profiling, Customer Behaviour Analysis, and Transaction Monitoring.

money laundering
Source: Adobe Stock

1. Risk Profiling helps gauge the risk level of customers or transactions and is determined based on

– Customer Risk Assessment factors enable the system to assess customer risk and identify potential money laundering activities. A customer’s KYC (Know Your Customer) parameters, such as their Nationality, Net worth, Line of Business, Sanctions Screening status, etc., help determine their risk.

– Transactions Risk Assessment helps determine the risk profile of a transaction and depends on the transaction information or metadata such as the transaction amount, currency, counterparty country, etc.

2. Customer Behavior Analysis is collecting, analyzing, and using data about the customer in a meaningful way and is categorized as

– Customer Transaction Pattern relies on the user’s historical transaction behavior consisting of transaction value, volume, periodicity, counterparties, etc.

– Customer Segmentation comes into play in cases where the customer’s historical transaction pattern or behavior is yet to be known. Customer transaction behavior depends on common characteristics such as KYC parameters.

3. Transaction Monitoring checks are performed offline to monitor certain transactions based on Risk profile, Customer behavior, etc. A financial product subscribed by the customer and the customer type (individual/corporate) may also be considered. These monitoring scenarios vary with countries or per the law/rules of local regulatory bodies. In case of any suspicious transaction, the local regulatory body is notified with all the required information for further investigation.

Common transaction monitoring check scenarios

  • Individual customers conduct outward remittances above the threshold limit (value/volume of transactions).
  • Transaction by Medium/low risk (Individual/Corporate), where transaction value/volume exceeds the expected annual activity.

Financial Fraud

Financial Fraud is the deliberate misappropriation of funds or other assets through illegal practices via identity theft, facility takeover, and application fraud. Fraud checks are applied online on live transactions, unlike Money Laundering and Transaction Monitoring. So, only financial products at high risk for Fraud qualify for these checks, with a higher preference for Credit Cards and online wallets.

financial fraud
Source: Adobe Stock

 Customer behavior analysis screens Customer transaction patterns which are crucial when performing Fraud checks

 Transaction technical details and information like transaction time, location, device ID, etc., are essential to determine fraudulent transactions

Terrorist Financing

The collection or provision of funds for radical activities is called terrorist Financing. These funds may originate from legitimate sources like donations, businesses, charitable organizations, or by unlawful means. Sanction Screening tracks all funds routed through the formal banking system to identify such Financing.

Regulatory bodies require that all payment transactions outward/inward be screened against the latest watch/sanction lists for any blocked entities. This entity could be an individual, company, vessel, country, or goods. The screening is done on live transactions and scrutinized further by compliance teams and regulatory bodies in case of any hits.

terrorist financing concept
Source: Adobe Stock

How is Fintech helping BFSIs counter financial crimes?

Fintechs are often a part of an open banking initiative and are responsible for much of space’s innovation. They are often used interchangeably with start-ups that help to disrupt old financial services. Their expertise with data gives them an advantage they can leverage to create new business models and services that might not have otherwise been possible. Their skills make them essential in this new world where data is shared openly. In 2022, BFSIs were fined almost 5BN USD for compliance issues, breaching sanctions, or failing “KYC” norms.

By leveraging Artificial Intelligence (AI), Machine Learning (ML), and Data Science (DS), FinTech offer one-stop solutions to meet payments compliance. These solutions can help the compliance team of banks, financial institutions, and regulatory bodies to quickly identify suspicious activity and take the necessary measures to prevent future incidents.

These technologies can run transactional checks and detect suspicious activity using all the Information and data prerequisites. For example, Predictive models using DS and ML help with risk profiling or analysing customer behavior patterns. With the power of AI, these intuitive models can monitor and analyze data in real-time and project scenarios offering meaningful insights to eradicate financial crimes potentially.

No-code Fraud, data-driven platforms, and AML (anti-money laundering) tools offer high visibility in addition to automated end-to-end AML monitoring. With predictive modeling and the latest technologies, financial institutions and regulatory bodies can easily verify identity and monitor data, allowing them to adapt to evolving threats and regulations quickly, generate an appropriate response against fiscal crimes, and stay ahead of criminals.

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