Many financial institutions (FIs) are now at the very cutting edge of digitalization. In the past several years, banks, insurers, brokers, credit unions, and other FIs have often been the first to digitize all kinds of processes, from payments and transactions to customer service and security. This is in large part due to the high demands on speed and accuracy placed on FIs. However, this same technology has also made FIs vulnerable to an ever-growing number of sophisticated criminals.
While many of these bad actors do try to directly abscond with funds held by FIs, most of them use FIs for activities that are harder to detect. It’s a good thing that using the right financial crime and compliance management (FCCM) solution can help FIs detect these and other irregular activities more easily than would be possible through manual methods. Additionally, the right FCCM software can help FIs easily comply with customer due diligence (CDD) and know your customer (KYC) regulations across millions of different accounts and their associated transaction histories.
Here are 6 kinds of financial crimes FIs can detect and report with a modern and robust FCCM software:
1. Money Laundering
Money laundering is the concealment of illegally obtained funds by “cleaning” them. When done at scale, this is most often accomplished through multiple transnational bank transfers and “front businesses.” The circuitous nature of these transfers is meant to stymie financial crime investigators and introduce reasonable doubt about the illegal origins of funds.
FCCM systems with robust anti money laundering functions can quickly and accurately trace the movements of cash through different FIs, businesses, and even individuals, helping establish the true origins of such funds.
FIs often get entangled in various criminal schemes involving some kind of deception. This type of financial crime often involves the theft of property, money, identities, and other valuable assets. Unfortunately, it’s also not unheard of for individual FI employees to defraud their institutions and other stakeholders for individual gain.
FCCM software can detect transaction patterns consistent with fraud. Newer systems employing machine learning and AI can even detect novel fraud patterns that would be difficult to find manually.
3. Terrorist/Rogue State Financing
Terrorist groups and rogue states require steady sources of funding to meet their goals. Allowing these groups to get funding unimpeded can seriously degrade global political stability, causing economic and security domino effects that negatively impact not just financial institutions, but the world at large. FIs that knowingly facilitate the finances of rogue states and terror groups may also be subjected to sanctions.
These malicious actors often employ similar methods as criminal gangs, but often with more sophistication and at a much larger scale. However, current FCCM software makes it easier to detect transactions by these parties, slowing down their disruptive activities and allowing FIs to comply with various sanctions regimes.
4. Market Abuse/Insider Trading
Market abuse and insider trading refer to the misuse of information to either gain an advantage as an investor or to severely disadvantage other investors. These activities are generally illegal and are widely held to be antithetical to free markets. FCCM systems can be used to quickly detect and halt transactions that may be related to insider trading and similar practices.
Public officials and corporate leaders who are engaged in corrupt practices may need to use FIs to facilitate the handling of large amounts of illicit money. However, these financial institutions that are found to be involved in such practices can become subject to loss of public trust.
Thankfully, FCCM software can help banks and financial crime investigators easily trace financial activities going back years, allowing them to uncover even low-key transactions from some timeago that involve illicit money.
Cybercriminals are now involved in an ever-growing variety of illicit activities, from white slavery and data theft to the transshipment of drugs and exotic wildlife. The reduced risks for cybercriminals compared to their real-world counterparts also tend to make them more prolific. However, to profit from their crimes, most cybercriminals need to use FIs at some point.
Whether it’s for regular transfers and transactions or for converting cryptocurrency to regular cash, a cybercriminal will often need to do these through a bank or similar institution. If they evade detection successfully, this may allow their crimes to continue and can also put the involved FI at serious risk. Using an updated FCCM makes it easier for experts to spot potential cybercrimes, putting a stop to these activities and keeping the FI safe from potential risks.
How Does FCCM Software Work?
FCCM solutions from different vendors broadly work on the same principles. Typically, the financial institution deploying the software will configure it to look at relevant criteria, such as customer name, date of birth, country, transaction amounts, time since the account was last used, and so forth. Thresholds for these criteria will be set to trigger an alert when they are reached. The financial institution’s team can then further investigate the accounts involved in the flagged activity.
While the principles are broadly similar, there are significant differences between FCCM systems. These can include the following:
- User interface
- Processing efficiency
- Ease and depth of customization
- Quality of machine learning and AI assistance
- Vendor and developer support
- Platform stability
- Deployment type (cloud, on-premise, hybrid, etc.)
- Error handling
- User training requirements
- Integration with existing systems
Any of these areas can influence the utility of an FCCM solution for a financial institution. This makes it important for FIs to choose their FCCM software carefully to maximize their utility.
Benefits of FCCM Software for Financial Institutions
Using properly matched and customized FCCM software offers financial institutions a variety of important benefits:
1. Reduced Legal, Financial, Compliance, and Reputational Risk
Deploying properly configured FCCM software allows FIs to reduce their exposure to money laundering and other criminal activities, thus avoiding or reducing liabilities for any such incidents. These systems may also enable these institutions to effectively exercise customer due diligence, know your customer, and other important risk-reduction protocols without undue strain on their service levels.
2. Reduced Compliance Costs
Deploying a proper FCCM system will always cost significantly lower than constantly paying out regulatory fines due to non-compliance. This software will also allow FIs to avoid customer attrition and other financial opportunity costs that come with having a poor reputation.
3. Continuous Legal and Regulatory Compliance
SaaS FCCM systems maintained by reputable developers should be able to provide needed compliance fixes as new laws and regulations become effective. This removes a huge burden away from FIs and allows them to focus on growing the business and maintaining good service.
Clamp Down on Financial Crimes with FCCM Software
While financial crimes may seem abstract, they create some very serious real-world effects. They can deprive struggling communities and individuals of their hard-earned money or perpetuate violence and instability in many parts of the world. Thankfully, financial institutions can help minimize the impact of such crimes by choosing the right financial crime and compliance management solution.Using better FCCM software allows financial institutions to not only reduce the risks posed by financial criminals but also keep their stakeholders and surrounding communities safe from their activities. It will also save FIs time in complying with different customer due diligence and know your customer regulations, allowing them to focus on delivering better services and more elevated client experiences.