Combatting financial crime in a digital age

There’s little doubt that the continued proliferation of digital technologies, the emergence of fintechs, and a growing reliance on cryptocurrencies and other alternative forms of payment present businesses with unprecedented opportunity. At the same time, however, they herald a new age of financial crime, one characterized by complex interconnectivity and undefined geographies. Given this shifting landscape, it’s no surprise that global regulators are struggling to keep up.

This has created a challenging environment for financial institutions that must comply with a global web of legal and regulatory frameworks, anti-money laundering (AML) directives, and sanctions. In the digital currency space alone, international bodies ranging from the World Bank, the International Monetary Fund, the Financial Action Task Force, the European Central Bank, and the Committee on Payments and Market Infrastructures have all weighed in with guidance on how to mitigate the risks posed by digital currency transactions. And those risks can be significant.

“When you consider the anonymity of blockchain transactions, the poorly defined regulatory regimes, and the difficulties law enforcement faces to seize illicit proceeds that are in form of digital currencies, the money laundering and terrorist financing risks become clear,” says Jitesh Patel, Senior Manager, Risk ＆ Financial Advisory, Deloitte.

To address these concerns, Canadian regulators are asking financial entities to more carefully consider the risks posed by new technologies, such as e-wallets, digital currencies, prepaid cards, and apps that enable individual money transfers over mobile services.

“To keep pace with the rapid evolution of technological innovation, financial entities must tailor their risk-based approach to consider the money laundering and terrorist financing implications raised by new technologies and new ways of doing business,” said Carrie Hagerman, a compliance manager at Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), at a recent ACAMS Toronto conference. “This could be as simple as asking what threats and vulnerabilities these technologies present, and what controls and measures they can put in place to mitigate them.”

In light of these realities, compliance professionals in the financial crimes space must now start operating under an innovation imperative. For instance, investigators of suspicious activity currently spend most of their time hunting for information and gathering documents. By automating those tasks—through robotic process automation, for instance—investigators could focus more of their time on risk management. Similarly, by applying advanced analytics to transaction monitoring, organizations could automatically resolve false positives without human intervention, freeing up analysts to concentrate on higher-level risks.

Notably, these kinds of automated solutions barely scratch the surface of what is possible. Although most organizations excel at data collection, they struggle to turn that data into insight that can drive business decisions.

“We’re entering an age of hyper-personalization where technology can be used to understand the behaviours and motivations of individual consumers,” said Paul Zikoplous, Vice President, Competitive & Product Strategy, Big Data and Analytics at IBM Canada. “Imagine using this kind of model to detect criminal activity or enhance know-your-customer protocols. We could literally change the face of AML compliance.”

With this kind of technology at their disposal, compliance professionals can do more than enhance their efficiency. They can also advance their collective capacity to fight—and repel—financial crime.