A Modern Approach to Financial Crime

March 5, 2024

Reducing and preventing financial crime

On 8th February 2024, the FCA released an update on the progress that has been made within the last 18 months with regard to ‘financial crime’ prevention. Under this umbrella definition, fraud, money laundering, sanctions evasions, and terrorist financing are encompassed.

The article presents summaries on the achievements that have been made in the financial crime compliance landscape from 2022-23, and explores 4 focus areas for 2024.

The stated FCA progress of financial crime prevention in 2022-23:

In 2022, strategic focus was placed on combating fraud and recognising its growing complexity and urgency. Employing a comprehensive ‘regulatory toolkit’, initiatives targeted investment and APP fraud due to their significant consumer harm potential;
By 2023, efforts showed progress, with a notable slowdown in investment fraud growth. Losses decreased by 40%, and victim numbers rose slightly by 4.3%, contrasting with the 28% victim increase and 53% loss rise in 2022. This positive trend aligns with Crime Survey for England and Wales figures, citing their collaborative work with regulated firms and online platforms as pivotal;
2,286 warnings were made about possible scams – compared with 1,882 in 2022 signalling a 21% increase;
New Financial Promotions Guidance specifically for social media was published in July 2023;
ScamSmart campaign in 2022 resulted in 11% more consumers being guided to the FCA Warning List, compared to 2021 stats;
Work has been done with the Payment Systems Regulator (‘PSR’) and Treasury surrounding APP fraud to necessitate new legislative and regulatory improvements;
The development of a synthetic data sanctions testing tool tested at least 90 firms producing positive results;
88% of crypto registrations under the MLRs were rejected or refused by the end of 2023 as they did not have sufficient AML controls.

This data, approach and detail feels somewhat lite. By way of example, The FCA positions that the success rate of Crypto Asset Firms is at 12%, due (seemingly) solely to having insufficient AML systems and controls. As part of my role we have seen some of the requests from the FCA – and oftentimes it appears that they ask for more than the standard they are meant to be judging Firms against. Therefore, it is not surprising that we see this result.

In a blog post, Mark Francis, Director of Wholesale and Unauthorised Business Investigations at the FCA has said, “While the financial services sector must lead the charge, other partners and sectors have a vital role too.“; identifying four areas where ‘collaborative effort can help shift the dial decisively on reducing and preventing financial crime”:

Next steps & our overall thoughts on this

Whilst there has been some progress in addressing the increase in financial crime, there is still a need for more innovative and ambitious solutions to make a significant impact.

The FCA’s recent collaboration with multiple firms highlighted the potential for stronger fraud prevention measures. Financial services firms are at the forefront of defence and must adopt new systems, processes, and approaches to stay ahead of emerging risks.

Other stakeholders also have a role to play. UK Finance data indicates that a significant portion of APP frauds and losses originate online, emphasising the need for collective action and modern technology. Noting the recent FCA National Audit office results, the FCA still has lots to do to embrace and understand technology.

A modern approach to financial crime

As can be deduced from the FCA’s recent publication, modern technologies are required to reduce modern financial crime.

Outdated technology primarily relies on individual countermeasures like basic network analysis, and long-standing models. These scenarios provide an ideal environment for modern criminals to exploit.

Institutions that lack modernisation, data science, machine learning and or AI technology are targeted by modern criminals. With many financial institutions lacking maturity and key resources in these areas, it is increasingly challenging to implement the necessary rigor and development to detect, report, and ultimately prevent modern criminal activities.

By integrating human intellect and subject matter expertise with focused AI and data analysis tailored to operations, organisations can cultivate a forward-thinking, proactive, and pragmatic compliance culture.

Special thanks to Mark Winters, Operating Partner, and Rebecca Cooper, Compliance Associate, of Gunnercooke LLP.

Summary of FCA Points to note:

Data and technology

Advancements in technology are reshaping the landscape of financial crime detection, yet cyber fraud, cyber-attacks, and identity fraud are escalating in both size and complexity as artificial intelligence (AI) becomes more prevalent and used by commercial enterprises. For example, Money Mule activity has undergone a significant shift focused automation.

Criminals are leveraging technology, including AI, to target both consumers and firms. They have increasingly evaded banking controls through sophisticated social engineering techniques, posing significant challenges for detection. It is imperative for firms to ensure that their systems and controls evolve in tandem with the growing sophistication of criminal activities and leverage technological advancements to prevent financial crime effectively.

The importance of behavioural biometrics

Outlined within the FCA article is a case study on a firm that uses behavioural biometric technology within its fraud prevention line of defence. The firm utilises behavioural biometrics tools across its internet and mobile banking platforms to understand customer digital behaviour better. It captures data on device interactions to detect unusual activity. Additionally, it considers analysing account access frequency and has implemented biometric tagging on its mobile banking app’s payment pages.

We have worked and continued to work with such institutions in the space, including ThreatMark.

Collaboration

The FCA emphasised collaboration and data sharing as pivotal in combating financial crime. While this has been a longstanding topic in the industry, implementation has been hindered by privacy considerations. Nonetheless, the FCA outlined several initiatives aimed at fostering collaboration domestically, internationally, and across sectors. Examples include the Pay UK and UK Finance Enhanced Fraud Data system and the Synthetic Data Expert Group. The FCA suggests that firms explore participation in such initiatives to bolster their financial crime compliance efforts.

The importance of cross-sector collaboration against unauthorised adverts

Collaboration with major platforms like Google, Bing, Meta, X/Twitter, and TikTok led to a policy change allowing only approved financial service ads. Since Google’s implementation, illegal ads decreased by almost 100%. While this is a significant step in curbing scams, more work is needed, especially by social media platforms, to address other illicit financial promotions.

Consumer awareness

Enhancing consumer awareness plays a pivotal role in combating financial crime. Investments in fraud detection technology by banks significantly curbed unauthorised fraud in 2022 – with 61.5p of every £1 of attempted fraud prevented from occurring. Yet, with fraudsters increasingly directly targeting consumers, the surge in APP cases in 2023 underscores the urgency of consumer education. Initiatives like ScamSmart and InvestSmart strive to inform consumers, complemented by collaborations such as Stop Scams and Take Five. Despite these endeavours, APP fraud persists. The liability of banks in the APP Fraud process has resulted in more banks being much more risk averse and refusing more and more client transactions.

‘Finfluencers’

In April 2023, the FCA and Advertising Standards Agency (‘ASA’) collaborated on a campaign aimed at engaging influencers and their representatives. The objective was to provide them with comprehensive information regarding what constitutes unlawful financial promotion. This effort was geared towards ensuring their awareness of regulations and legal requirements, thus preventing the unauthorised promotion of financial products. The campaign received substantial media coverage, with 36 pieces featured across various platforms, including six national titles. It also generated over 45,000 views on social media platforms and elicited approximately 1,500 interactions.

Metrics – measuring effectiveness

Assessing the efficacy of financial crime prevention measures enables firms to gauge the impact of their interventions. We commend the PSR for publishing APP fraud performance data, fostering transparency and encouraging firms to pursue outcome-based, measurable solutions to combat the threat. Enhanced transparency and tangible outcomes bolster consumer confidence in the financial services industry’s financial crime risk control efforts.

As stated, when the PSR’s reimbursement mandate takes effect in 2024, it will require both sending and receiving firms to take responsibility for compensating victims. This serves as an additional motivation for firms to create new and effective strategies to combat APP fraud. Setting clear goals and metrics for these strategies will help firms showcase the advantages of their solutions, proving their effectiveness and enhancing trust among consumers and stakeholders in the financial industry.