Fraud is fast action. Exciting real-time detection of fraudulent attempts. If you miss something, the money is gone. Fraudsters constantly change their ways so you need to act and adapt quickly. A new fraud pattern allows the fraudsters to collect their money freely during your reaction time, but if you stop the fraud, everybody is happy, and you’ll get loads of compliments. Fast and agile: Fraud detection is exciting and dynamic.
Anti-money laundering (AML) is going through huge numbers of alerts with hardly any real money laundering hidden in between. You must sift through thousands of alerts, staying focused all the time to find that one possible suspicious case. If you miss that one, then you’ll pay heavily for it, as your team lead will make painfully clear to you, and the regulator later to your institution. You can only do it wrong. Dull and rigid: Money laundering is something to stay as far away from as possible.
Are the fraud detection and AML professions this far apart? While these depictions are a bit exaggerated, this is how some people think about the difference between fraud and money laundering detection. And done this way, there is indeed a huge difference.
You might have noticed that both descriptions have something in common; they are reactive. The saying is that to prevent is better than to cure. So how can we prevent fraud and money laundering in the first place?
Money laundering is only possible with access to accounts so blocking access to accounts means preventing money laundering. For fraud cash out is immediate in some instances, but in most cases, a mule account is needed to send the money to. From traditional identity theft to bank and law enforcement impersonation scams, a mule account is necessary to transfer money to in real-time. Denying criminals access to accounts prevents both fraud and money laundering. We fill two needs with one deed!
Preventing Malicious Account Opening Is Not Enough
All financial institutions monitor online account openings to prevent abuse, but both fraud and money laundering are still a growing problem. The reason is simple: criminals do not only open accounts using stolen and synthetic identities. They harvest about half of them by luring unwitting victims through a variety of schemes such as false job advertisements and essentially take over accounts of legitimate customers.
While identifying malicious accounts as they are opened is important, more is required for effective prevention. Criminals don’t act immediately; often, they lie in wait, preparing for the actual use of the accounts they have gotten their hands on, such as checking that they are working as desired to ensure that the money that will soon flow into them is under their control. In doing so, they exhibit specific human behaviours that can be detected, and very effectively.
How effective is this exactly? The figures are fantastic. Detecting accounts being prepared for fraud or money laundering, by monitoring the human behaviour around it has a precision of around 90% already with a 1:1 false positive rate. Adding another preventive layer of defence by monitoring the human behaviour at account opening also increases the detection rate of malicious opened accounts. A large bank just focusing on the prevention of mule accounts saw a decline of 70% in online fraud. And as if it weren't good enough: using human behaviour to recognize criminal behaviour also results in lower friction for genuine customers. If you can prevent criminals from using accounts, you deprive them of their most important means.
The Surprising State of Existing Fraud Management and AML Capabilities
Of course, there can always be holes in any approach. BioCatch recently set out to understand if unifying enterprise fraud management (EFM) and AML disciplines can help improve response to fraud, regulatory changes, and money-laundering activity. Partnering with Forrester Research, we surveyed over 150 EFM and AML decision makers across Europe, North America and Latin America to learn their pain points and the benefits of streamlining EFM and AML capabilities. The results were quite surprising.
First, the research found the struggle to keep up with the pace of criminals is very real with 78% of financial institutions responding they struggle to respond to fraud activity early; nearly 70% stated the same for money laundering.
Another startling insight was how much of an impact this is having. Nearly 70% of financial institutions reported that AML investigation time has increased in the last year adding increased financial risk with every additional day it takes.
The research also revealed that a majority of financial institutions recognized the benefits of integrating EFM and AML capabilities across people, process, and technology, yet only 8% have fully integrated all three areas. This means there is still a long way to go, and in the meantime, fraudsters and money launderers will exploit this weakness.
The good news is that technology does exist to accelerate early detection of financial crime; 76% of respondents acknowledge behavioural biometrics can strengthen EFM and AML capabilities. The bad news is the processes needed to support best practices are still lagging. Functional silos still exist. Luckily, there are effective preventive strategies that can be swiftly implemented.
Money laundering and fraud detection are best accomplished in the same way – by denying criminals access to accounts. And this starts with a multi-layered preventive approach:
- Preventive layer 1: Stop malicious accounts from being opened
- Preventive layer 2: Look for behaviour that suggest an account is being prepared for malicious use
- Detective layer 3: Detect fraud and money laundering focusing on human behaviour
And yes, becoming proactive does mean missing out on all the fun with fraud. That is unfortunate, but it is a drawback we should be able to overcome. Nobody will worry that for AML this preventive approach means that several controls that generate loads of false positives can be deactivated or their thresholds raised.
The research shows this is catching executive level attention; 80% of respondents say the priority their firm’s executives are placing on addressing financial crimes has increased at least moderately in the last 12 to 24 months Thus, it is not surprising that more banks are adapting this preventive approach and moving to merge fraud and AML departments. Fraud and AML should be on the same planet, not operating worlds apart.
Access a copy of the Forrester report, Improve Fraud and Anti-Money Laundering Operations with a Proactive and Unified Approach, to uncover the full results of the global research and the priorities that financial institutions should focus on.
Register for the webinar and hear from guest speaker, Andras Cser, VP, Principal Analyst at Forrester as he breaks down the results live and offers expert analysis.