The advent of the Coronavirus is putting conventional banks under pressure to act like their more agile FinTech counterparts and to adopt IT to allow more activities to be carried out remotely rather than face-to-face.

If banks want to avoid facilitating financial crime, now is the time for them to adopt the software to do it.
 
Increasing criminal exploitation

As new and more innovative technology enters the compliance market, it is the criminals, rather than law-abiding citizens or companies, who are often the first to exploit it for their own ends. Criminals and fraudsters will exploit any gaps in the systems used by banks and FinTechs so that criminals can conceal the origin of their funds. They often use the latest technology and take advantage of privacy and data protection laws. These are just a couple of ways in which they can hide their murky pasts.

It is therefore essential for regulated entities to act. Banks and financial institutions are the organisations on the front line of money laundering and fraud and they often bear the brunt of both the financial and reputational damage from these crimes.
 
Additionally, the regulators ought to be challenging companies by posing the right questions to proactively encourage the right results.

Regulators have to realise that it is the criminals, not the banks, who are exploiting technology well. Criminals know their way round the system and know where the loopholes are. It is possible that criminals might be so far ahead of the game that regulators will be forced to step in and mandate the use of certain IT tools to combat them. For example, the FCA could encourage more financial institutions to use innovative technology. The United Nations estimates the cost of financial crime to be between US$800 billion and $2 trillion each year, so one has to ask - what level do losses have to reach before banks develope new technology to fight crime?

Nick Cook, the FCA's director of innovation, recognised this when he said: “I think in an era where the advancement in criminality is driven by the use of fundamentally exponential technologies, the idea that you’re going to address that by moving forward in a very cautious linear fashion doesn’t seem to stack up, you know? We’re in a world where actually standing still is moving backwards.”

Noise and confusion

Another thing to realise is the fact that the RegTech marketplace is so crowded that regulated entities are not sure what the regulators require of them. This uncertainly should be viewed as an opportunity for debate about where technology should be used to combat financial crime.

Cost-effectiveness

Compliance is costly and almost impossible to achieve comprehensively if an organisation relies upon manual processes alone. Technology enables their highly skilled human compliance staff to devote more time and expertise to customer-focused activity.

Availability

Regulatory technology is already available that provides access in real time to data from all over the world to help human compliance analysts make better, more effective judgments about the risks that customers pose. Technology which uncovers and analyses this data is ideal for countering financial crime and makes human judgment significantly better.

Harnessing the latest available technology

Many modern systems have been developed as APIs (Application Programming Interfaces) first. They allow technology and data-intelligence to integrate and enhance old systems rather than requiring firms to replace and rebuild things.

This is particularly useful to regulated entities as criminals are becoming more expert at finding loopholes in existing systems. They are now very good at making sure that their agents do not fail know-your-customer (KYC) checks because they know what 'onboarding' teams are looking for.

Similarly, fraudsters also know how risk profiling works and employ ‘sleeper strategies’ before laundering the proceeds of their frauds. However, IT can help to defeat this strategy by incorporating a unique range of other checks that are essential to a comprehensive KYC onboarding process.

By using more than 500 search terms in multiple languages, human compliance managers can perform searches of the Web, Deep Web and many governmental, regulatory and institutional databases to spot adverse information about new and existing customers that could link them with financial crime.

The added benefit is that the technology that helps them is able to perform automatically throughout the day, alerting human compliance managers whenever it finds any new and relevant information.

Criminals also exploit the fact that Companies House carries out no validation of the data that companies send it, but by incorporating ‘connected’ company registries which analyse millions of corporate records and accompanying data on persons of significant control automatically, RegTech can now instantly spot links between individuals with other corporate entities, as well as persons of interest.

As a result, it is able to find out whether a customer – new or long-standing – might be connected with any individual or company linked to known evildoers. It also highlights indications of risk so that compliance managers can assess those risks.
 
All these functions help regulated financial firms to be more confident about keeping criminals out and avoiding fines for non-compliance. RegTech vendors constantly refine, improved and update their software to keep pace with new sources of information.

Fighting financial crime in an increasingly digital world

The globalisation of the financial system and the expansion of the global communications is forcing up the amount of information available on individuals and businesses exponentially. Similarly, the global pandemic is affecting the way in which consumers can transact and are able to access financial services. Only IT can enable these businesses to respond to those customers’ needs and wants.

In particular, real time services, which access and monitor all new information as and when it is published, can help banks and FinTechs to close gaps in their defences which criminals would otherwise exploit. Companies that are able to use technology well can turn it against criminals and reduce financial crime.

* Jane Jee can be reached at jane.jee@kompli-global.com