Know your customer: Developing the digital tools to fight the fraudsters

Fighting fraudsters is an eternal battle in a fast-changing landscape. Standing four-square on the front line of electronic security are know your customer (KYC) and anti-money laundering (AML) initiatives. But are they enough?

“The twin pillars of know your customer and transaction monitoring are still the primary bulwarks to combat bad actors,” says Kieran Towey, managing director in management consulting at KPMG.

“However, with the sheer volume of activity and speed of transactions, organisations need to fight fire with fire and utilise intelligent automation and AI capabilities in the fight against financial crime.”

Traditional KYC processes, which typically involved risk assessment at customer onboarding, followed by periodic assessments over time – where the organisation sought to update the customer information to reassess risk – are no longer fit for purpose, he warns.

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Instead, perpetual KYC – continuous monitoring of customer activity to reassess risk in near real time – is where the industry is headed.

“Organisations are leveraging technologies that monitor internal and external customer data and activity and harvest this information to update customer profiles in real time so that they can manage risk proactively,” says Towey.

“This real-world event-based approach requires an always-on AI capability that automates the updating of the customer data and customer risk. These technologies provide an organisation with up-to-the-minute insights into the customer risks and are an invaluable tool in the fight against the bad actors.”

New transaction-monitoring solutions are increasing both efficiency and effectiveness.

“Again, technology has come to the rescue with capabilities relying on behavioural analytics and network analytics to understand the customer in context and determine what may or may not indicate suspicious transactions,” says Towey.

Money-laundering has always been a key risk for payment and e-money service providers and other fintech firms.

“This involves ‘cleaning’ the proceeds of criminal conduct through a number of stages involving ‘placing’ funds in the system, ‘layering’ them through obscure or complex transactions and ‘integrating’ them into the legitimate payment flow through acquiring assets or mingling with legitimate funds,” explain Dario Dagostino, head of regulatory investigation at A&L Goodbody, and Patrick Brandt, head of financial regulation advisory at the firm.

More recently, regulatory frameworks have focused on other fraudulent activity such as “authorised push payments”. This involves customers making legitimate payments, having been manipulated by impersonation or other confidence schemes.

“New regulatory proposals here focus not only on the payment service providers themselves but also third parties such as online platforms whose services may have been used by bad actors to impersonate and manipulate innocent customers into making authorised payments,” say Dagostino and Brandt.

“With increasing scope of financial sanctions, disguising payments to or for the benefit of sanctioned persons through complex transactions is also a developing risk.”

All of this can occur alongside more traditional financial crimes such as the theft of personal financial data through cyberattacks, which are again on the rise, they warn.

Getting it right is vital, given the scale of the issue, says Jackie King, executive director of Ibec Global.

“Financial crime is a €2-trillion-a-year problem. In the EU it is estimated that 2 per cent of GDP is illicit assets flowing through the financial system,” says King.

“It is clear money-laundering is a big issue in Europe. You need only look at the €200 billion in Russian dirty money that flowed through Danske Bank in the Baltics as an indicator of the size of the problem. That led to a €2 billion fine on Danske from the US Treasury last year.”

However, Europe is making strong headway in tackling the issue, including through the setting up of AMLA, the EU Anti-Money Laundering Authority, which will start operation next year. As well as monitoring regulatory compliance among banks, AMLA will also ensure the financial intelligence units in national police forces are co-operating and working to shared priorities.

“The problem up to now is various countries were working a la carte,” says King. “Under the new AML regulation and directive there is a single rule book which means there should be no soft spots for money-laundering in the union. AMLA will also directly supervise the 40 riskiest banks in the EU – those which carry out the most international transactions.”

The size of the problem is further evidenced by the fact that Europe is now the biggest consumer of cocaine in the world, King points out, surpassing the United States for the first time last year.

“That is a lot of dirty money that has to be laundered and banks have to be ever-vigilant, employing the latest technology and AI to prevent money-laundering,” she says.

The Republic is playing its part, producing global tech companies such as Daon and ID Pal that help detect money-laundering and fraud.

“Ireland is seen as a global player in providing professional and technological solutions in terms of KYC, customer due diligence and identity verification,” says King. “All these tools are used to raise red flags within banks about money-laundering suspicions which can be passed on to law enforcement. Moreover, the state-of-the-art ID verification solutions being used by banks and fintechs make it easier to seamlessly and remotely open accounts for customers, as well as preventing crimes such as money muling.”

The solutions being offered by providers in the State play a vital role in preventing and detecting crimes such as human trafficking, environmental crime, drug trafficking and modern slavery too, she points out.

“One thing for sure is the problem with organised crime is not going away and so there is an opportunity for Ireland to further grow its reputation as a centre of excellence for fincrime solutions – the place banks, fintechs and law enforcement turn to.”