At the start of this new year, the financial industry faces a pivotal moment in combating financial crime, which has soared in recent years in response to inflation and the cost-of-living crisis. It is estimated the global cost of fincrime ranges from US $1.4 trillion to US $3.5 trillion. It is hugely detrimental to consumers and businesses alike, with recent fraud scandals and compliance failures resulting in costly remediation efforts and fines.
There is a clear imperative for financial institutions to try and get ahead of the curve in regulatory, operational and tech developments in fincrime prevention. Of course, the industry is putting measures in place, but faces significant challenges. For example, last year we saw the EU trying to enhance data sharing among financial institutions to strengthen gatekeeper functions, but there have been accusations of violating privacy laws – the tussle between data sharing and privacy won’t be solved easily.
Valcon’s 2024 financial crime outlook defines four key trends:
The rise of AI in fincrime
Criminals are now adopting AI to mimic banking professionals to lure unsuspecting victims into scams. They are also using deep fakes to assume the identities of customers, sometimes even dead ones, in a bid to set up fake accounts or make claims on their behalf. AI developments include Microsoft’s VALL-E, a text-to-speech AI model that copies voices after using a three-second audio sample. And the ubiquitous ChatGPT which designs scripts and creates content in any language in seconds. But financial institutions need to adopt their own AI technologies to improve the efficacy of their AML processes – AI helps detect and prevent fincrime by using advanced algorithms that learn from data, adapt to new trends and reduce false positives. A key objective for firms this year will be to upskill fincrime teams to use these new technologies.
Unmasking UBOs will get easier this year
Eradicating money laundering and terrorist financing are key goals for governments, regulators and financial institutions, so identifying the individuals responsible is vital. A key element of this is identifying UBOs (ultimate beneficiary owners), the individuals or entities who benefit when a firm makes a transaction. Nefarious UBOs are well known for trying to hide their identity using shell companies and offshore accounts. UBO regulation, like KYC (Know Your Customer), aims to crack down on money laundering and help financial institutions uncover the true identity of their clients and this year, we will see a move to use data analytics and automation to gather customer data to help identify UBOs faster and more efficiently. Plus, we’ll see an uplift in the use of biometric information for customer screening and verification, plus being a reliable way to authenticate customers.
Continuation of rise in sanctioned/high-risk countries and individuals
In the wake of the Russian and Ukraine war, the European Union currently has sanctions against 1900 individuals and entities which has resulted in freezing over 24 billion EUR of assets. Sanctions can be difficult for financial institutions to adhere to because the complexity of the inter-relationships between these individuals and banking makes it difficult to monitor. Increased vigilance is crucial given the expanding list of sanctions, which is expected to soar further in 2024 due to escalating global conflicts.
Efficiency and cost reduction in fincrime models
If financial criminals are to be beaten, then it needs to happen in the most cost-effective way possible. With continued inflation and higher interest rates, financial institutions are engaged in exercises to minimise operational spend whilst preserving the efficacy of their anti-financial crime functions. The need for a cohesive operating model knitting together compliance, technology and operations is more vital than ever. In 2024, the focus will be on creating value through improved operational controls and effective management of resources.
The battle against fincrime is a tough one and one that’s getting more difficult with every year that passes. Against the backdrop of poor economic performance and an unstable geopolitical environment, the use of technologies like AI will continue to boost the incidence and efficacy of financial crime. But they will also help financial institutions in their bid to crack down on criminals and identify perpetrators. It’s about identifying the right approaches and tools that will help financial institutions need to do what they can to protect their businesses and customers.
Want to learn more? If you want to speak to a Valcon consultant about how to improve financial crime prevention processes and systems at your organisation, how AI and new technologies could boost your AML operations, or about how to adhere to financial crime regulation, please reach out to Sam Deelen, Fincrime Expert Valcon NL & Stefan Schaper, head of Fincrime Practice, Valcon Nordics.
