Identifying and addressing emerging financial crime risks

Emerging financial crime risks, such as AI and deep fake technology, are changing the landscape of risk management across the board, raising the key question: how can these risks be identified and addressed?

Whilst the benefits accruing to society at large as a result of innovation and technological development are indisputable, emerging technologies are giving rise to new risks which are making the detection and prevention of financial crimes an ever more complex task. Accordingly, it is fundamental for anti-money laundering (AML) subject persons to be aware of, and familiarise themselves with, emerging financial crime risks and trends to avoid becoming unknowingly involved in any criminal activity involving illicit funds.

Blockchain technology

The rapidly evolving blockchain and distributed ledger technologies are capable of positively changing the financial landscape in a drastic manner. Ever since the introduction of blockchain technology, virtual assets have become highly accessible and are increasingly being utilised as payment products. However, by their very nature, such technologies are also susceptible to being misused by wrongdoers who maliciously exploit their inherent characteristics, namely high transaction speeds, global reach and, principally, anonymity, with the intention of bypassing the centralised regulators and enforcement authorities. Consequently, the absence of effective legislation, regulation and enforcement in this regard to date has the potential to deal a devastating blow to the cross-border financial crime prevention framework.

There are also certain virtual assets, often referred to as privacy coins, which can further increase the level of anonymity associated with blockchain technology by obfuscating the details surrounding a particular transaction on the blockchain. Therefore, since such anonymous cryptocurrencies are specifically designed to facilitate privacy, they would arguably be more likely to be used for the purposes of money laundering, terrorist financing and financial crimes by perpetrators with the aim of shielding themselves from the scrutiny and/or detection by law enforcement authorities.

Non-fungible tokens (NFTs)

NFTs are a form of emerging technology which have significantly increased in popularity in the last few years, with its proponents arguing that these blockchain-based assets may change the landscape of digital ownership as we know it. Moreover, NFTs may also constitute a very useful tool in the development of the metaverse and Web3. Nonetheless, the rise in popularity of NFTs has also brought with it detrimental effects, with this technology being also misused for the purposes of money laundering, terrorist financing and financial crime. One of the main risks presented by NFTs is the fact that their value is highly subjective and easily manipulated, making such technology more conducive to money laundering and terrorist financing.

Beyond providing a new means for the obfuscation of funds and facilitation of ML/TF activities, NFTs also provide a new technological means for the perpetration of known crimes. In June 2022, a former employee of one of the largest online marketplaces for the purchase and sale of NFTs, was charged with insider trading, in the first ever digital asset insider trading case.

Fake news

With the internet becoming increasingly bombarded with news, the spreading of fake news and online disinformation intended to deceive users, is becoming more prevalent. Therefore, in so far as news published on the internet is concerned, the focus seems to be shifting from that of providing accurate news to spreading sensational news which is merely intended as clickbait, to capture the readers’ attention. These concerns are now exacerbated by the rise of language-model AI systems like ChatGPT, which rely on publicly available information and which may therefore be exploited to continue legitimising and disseminating fake news.

It is evident that the identification of reliable online news sources has become a more challenging task, especially in the context of the collection of due diligence on clients by AML subject persons.

Deepfake technology

Deepfake technology enables the production of content that convincingly shows people saying or doing things which in reality, they have never stated or done, by replicating an individual’s human appearance and voice. By means of such technology, one may also create personas that never existed. In light of the fact that many interactions have shifted to online mediums since the onset of the COVID-19 pandemic, the risks posed by deepfake technology to society are arguably even more alarming. In fact, deepfake technology has been described as the most serious artificial intelligence crime threat to society at present given that it is frequently being used as a means of spreading disinformation. The fact that to date, there is little awareness about the risks posed by deepfake technology, coupled with the difficulty involved in detecting content produced by deepfake technology, emphasise the importance of understanding, detecting and mitigating the risks arising from the misuse of this technology.

Deepfake technology may be used to facilitate the commission of various crimes, including fraud, extortion, falsifying online identities, disrupting financial markets and deceiving ‘know-your-customer’ mechanisms.

Mitigating the risks posed by emerging financial crime risks

Broadly speaking, subject persons should seek to identify and understand the risks posed by emerging financial crime risks, and consider designing mitigating controls to address the corresponding risks. While emerging technologies have the potential to generate significant benefits to society at large, the same technology presents new opportunities to bad actors to circumvent existing controls designed to identify money laundering and terrorist financing. In this regard, AML subject persons should familiarise themselves with emerging technologies to ensure that their respective AML/CTF framework keep up with emerging risks.

By way of example, deepfake technology presents particular risk to the process of identification and verification. Fake news poses different challenges, especially in connection with screening for sanctions and adverse media on potential or existing clients. It is generally critical that subject persons refer to accurate, reliable and relevant sources, even more so given that the standards expected from regulators in this regard are becoming increasingly higher, with the fines imposed in case of non-compliance also becoming heftier.

Critically, subject persons should also ensure that their employees are adequately trained to identify and mitigate, on the basis of a risk-based approach, the risk posed by emerging financial crime risks.

How can Deloitte help?

Deloitte has significant experience in the spheres of financial crime risk management and compliance and is well equipped to assist subject persons with the setting up of frameworks intended to mitigate the risk of their services being misused for the purposes of money laundering, terrorist financing or financial crime. Should you wish to learn more about emerging risks and how these could be managed, reach out to our team.

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