Levels of financial crime have been building for many years. The scale of that increase is open to conjecture, because there are as many answers as there are sources of statistics, but no-one disagrees that the overall levels continue to move up, year-on-year. How surprised should we be, given the measures taken by the Government and its agencies to identify and combat financial crime; and how worried should we be, as AML professionals?
The Covid-19 pandemic: 2020 Lockdown was a Stake in the Sand
The first Covid lockdown, from March 2020, was not the beginning of financial crime increases, but an accelerant in an already volatile and upward moving situation. A well-meaning, but somewhat panicky Government, hugely under pressure from Parliament and myriads of representative agencies, made financially impactful, but ultimately flawed, decisions, paving the way for professional criminals and unscrupulous chancers to make significant financial killings. And once the genie was out of the bottle, there was no simple way of retrieving the situation. Aside from the opportunities for home grown and international criminals to take advantage, previously fairly honest citizens were given the green light to borrow tens of thousands of pounds and then fold their struggling companies without the need to pay it back.
“The COVID-19 pandemic has led to unprecedented global challenges, human suffering, economic disruption and an increase in COVID-19-related crimes. Since the start of the pandemic, criminals have sought to exploit the crisis to commit scams, fraud and cybercrime.”
FInancial Action Task Force
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That aside, we entered a period where people were forced to manage a range of financial transactions remotely and online, with companies struggling with using systems that weren’t able to cope with the complexity and proliferation of transactions. It was truly a melting pot of opportunity for financial criminals to take advantage of. Given that there were already software solutions available that could have solved these issues, the answers were to hand. Companies who found themselves in this invidious position, however, were too busy ‘fighting fires’ and worrying about their future existence, to consider investing in solutions that they were probably already aware of, but decisions about which had, at best, been left on the back-burner.
It’s true to say that the government and regulators have spent the time since then ramping up their attempts to combat financial crime, but it’s not something that can be switched on overnight. Legislation is required, and regulators and regulated entities have to be given the time to take new rules on board and prepare to implement them, whilst trying to run their businesses profitably.
How is the AML Landscape Shaping Up to Tackle Financial Crime?
Financial crime hits everyone, from individual members of the public, right through to the largest financial institutions, but it’s those institutions and every other regulated entity who have to shoulder the burden of tackling financial crime head on. Perhaps many have been slow to prioritise the necessary solutions, since such solutions come with a cost. Whether that be resource costs, to increase headcount or new departments; or infrastructure costs, to deliver more up-to-date technology and hardware; or solutions costs, to bring in software platforms that can speed up and improve the accuracy of their AML efforts.
Many companies were greatly impacted by the pandemic and related fallout, with many still struggling to recover. That’s particularly the case of companies who were already slow to embrace the new technologies that were being introduced to more efficiently onboard new customers, instead continuing with non-digital KYC solutions. Whether that was for mortgages or loans, retail purchases, or maybe property leases, these methods were outdated and cruelly exposed by that initial lockdown, which precluded any face-to-face interaction between customer and company. This required them to immediately introduce counter-solutions in order to continue with business. Having established some form of baseline, the fall-out from that reactive situation produces a vicious circle – do you then invest funds that are scarce, in longer-term solutions, in order to make yourself more competitive and give a better customer experience; or do you muddle through with outdated systems and a ‘sticking-plaster solution’ and hope to catch up? The simple answer is obvious, but perhaps hard to swallow.
Subsequent legislative changes have, however, made the answer more palatable. Global AML efforts have been ramped up through 2021 and 2022, with both EU and UK legislation being introduced to force regulated entities to increase their levels of fraud detection, by investing in new systems that will deliver process efficiencies. The drive to deliver more efficient KYC/KYB Onboarding, through more thorough CDD, is reinforced by heavier and more personalised fines and sanctions, which make every company officer responsible, and culpable, for major discrepancies in data that create opportunities for financial crime.
So, regulated entities are now under increased pressure to deliver efficient AML processes and detect fraudulent activity, as are their company officers, which should be helping to slow down the growth of financial crime. That growth, however, is fuelled by huge financial investment by the criminal fraternity, who are happy to reinvest the proceeds of their activities in order to keep themselves ahead of the AML industry. Manual and traditional, spreadsheet-based solutions can no longer keep up with the volumes of data that need to be interrogated, in order to deliver the outcomes demanded. For any company dealing with anticipated volume growth, particularly where international data is involved, digital software solutions are the only sensible way forward. Whether those solutions are delivered partially or wholly in-house, or whether they are bought in, doesn’t matter – it’s the efficacy of the solution that is important.
Are Digital KYC/KYB Software Solutions Keeping up with the Criminals?
Investment in the development of more effective AML software solutions has never been higher. Some of the larger regulated entities believe that the best and most cost-effective route to achieving a robust and effective software solution, is to employ their own developers to build, maintain and upgrade bespoke solutions in-house. Many others believe that this is a risky and ultimately cumbersome way of approaching the problem, preferring, instead, to source the best solutions externally, in the belief that the investment is better spent purchasing expertise, rather than employing it.
Neither approach is right or wrong, they are just different ways of achieving the ultimate goal of handling onboarding, monitoring and remediation processes more effectively and accurately, through digital means. Digital transformation has been a buzz phrase for some time now, which means that some of the people who should have embraced it have been put off by it and pushed against it, instead. That’s inevitable, but unfortunate because digital transformation really just means using the latest, and proven, technology to ease the burden of increasingly complex data issues.
These digital advances, in recent years, have included voice and biometric facial recognition software, lip-syncing and anti-spoofing techniques, in addition to liveness detection video, using Flashmark technology. All of these have aided the introduction of Remote Verification, using smartphones or other camera-enabled smart devices, to avoid the need for face-to-face meetings. These have, in turn, driven advances in remote document verification, enabling quicker onboarding and providing verifiable audit trails to ease the compliance burden.
The use of progressive web apps and robust IDV technologies, have all been introduced in recent years, with AI and Machine Learning delivering ever more advancements to help AML professionals to keep up with, if not stay ahead of, the game. Investment will continue to be heavy, as it must be, as the bad actors will continue to pour funds into developing techniques to circumvent AML advances. Which is one reason why buying in external software support may be the most economical way to keep up to speed. It’s too easy for organisations to syphon off budget from their development teams, when there are other business priorities and squeezing budgets. AML software companies, on the other hand, have only one focus – to continually develop newer and better platforms and techniques, in order to deliver a more advanced service and keep themselves ahead of their competitors.
AML techniques and software advances cannot, and will not, slow down, because the stakes are too high in the fight against money-launderers, terrorists and people traffickers.
