From ‘enabler’ to ‘game changer’: fighting financial crime with technology

David Siesage

Financial crime is big business. Serious organised crime facilitated by money laundering costs the UK £37 billion every year. The estimated annual cost of fraud is £190 billion.

This is the current scale of the problem according to Megan Butler, Executive Director of Supervision at the UK Financial Conduct Authority (FCA). And rapid advances in technology are giving would-be financial criminals new and innovative means by which to evade the clutches of regulators.

Around five million people in the UK now live largely cashless lifestyles, transacting through online platforms and, in some cases, with anonymised cryptocurrencies. As a result, financial criminals can now lie in wait principally online, where phishing attacks and identity theft are just two of the tactics available to them. These developments mean that cybercrime now accounts for almost half of all recorded crime in the UK, with credit and debit card fraud also on the rise.

But the outlook is not wholly negative. In two recent speeches, including her speech on 23 October, Butler has set out the FCA’s approach to technology and the key role it can play in tackling these offences. In her view, although developing technology can be an ‘enabler’ of financial crime, in the right hands those same systems can be harnessed as ‘game changers’ in combatting fraud and money laundering.

The challenge

It is not easy to quantify the amount of financial crime that takes places in the UK. Financial criminals don’t publish their data, leading to what Butler terms an ‘intelligence gap’. The FCA has in recent years sought to address this by commissioning the inaugural Financial Crime Data Return in 2017.

2,000 financial institutions provided the FCA with their financial crime data. The results emphasised the frontline role that UK financial services play in combatting such activity. In the 12 months in question, the respondents made over 360,000 Suspicious Activity Reports and identified nearly 120,000 Politically-Exposed Persons. And the related costs were high: British banks alone spent some £5 billion per year combating financial crime.

Technological solutions

In order to continue to detect and disrupt the criminal behaviour lurking within an ‘ocean of legitimate activity’, Butler argues that ‘continuous innovation is vital’. The FCA is therefore eager to reduce firms’ apparent reluctance to innovate for fear it will add to their regulatory risk. The systems and controls of financial institutions need to adapt as quickly as the threats themselves – and the best way to do this is by harnessing innovative new technologies.

How firms choose to approach this task will vary, but the FCA is clear that each has a responsibility to explore the options available. As Butler explained, some firms are automating existing processes to keep on top of volume and improve accuracy in their reporting, while others are going further still, incorporating intelligent technology such as natural language processing, machine learning and artificial intelligence.

The ‘key frontier’ in these efforts, according to Butler, is the ability to disrupt financial crime in real time – stopping fraud while it is happening, for example, by using AI to check instantaneously that ID documents match, or deploying machine learning to flag high risk customers who warrant further investigation.

The FCA’s role

It is not just financial institutions who have a responsibility to adapt to the changing criminal climate – the FCA has acknowledged it has a ‘public duty’ to explore the new opportunities technology creates in collaboration with firms. They have done so through three key initiatives:

  • First is the regulatory sandbox, a restricted environment in which businesses can test their new regulatory technology in a live environment, established to encourage and foster innovation among firms. The sandbox has now welcomed its fifth cohort since it was set up in 2016.
  • Second is the global financial innovation network, or GFIN. Acknowledging the cross-border nature of much financial crime, the FCA has established the GFIN as a forum for regulators and firms across 38 jurisdictions to collaborate in tackling common challenges and policy questions, ensuring a joined-up approach.
  • Third is TechSprints. These are typically two day events bringing together market participants to develop technology based ideas to address specific industry challenges. The latest, in July 2019, focused on how privacy enhancing technologies could facilitate the sharing of intelligence between firms, regulators and international law enforcement agencies.

In addition, instead of falling back on their traditional supervisory tools, the FCA has taken a similarly innovative approach to their own work. For example, in response to the large number of consumer calls they receive reporting fraud, the FCA is trialling methods of automating how they handle large volumes of unstructured information, such as with natural language processing.

The FCA has also established the Analytics Centre of Excellence, an internal initiative staffed by technology and data science experts. This aims to drive the use of data science and other intelligent technology across the FCA in order to help identify and prevent harm, while improving effectiveness.

‘Technology neutral’

Despite the expectation that financial institutions experiment with new systems, the FCA insists that it is ‘technology neutral’ when it comes to the firms it regulates. Butler emphasised that the FCA would not question why firms are not using AI in all parts of their business or tell them to automate all systems.

There is no expectation that firms should spend money simply to ‘show willing’ or even ‘virtue signal’ – what matters is effectiveness. And if something goes wrong in a firm’s financial crime monitoring, the FCA will not ‘let them off the hook’ just because they have utilised new technology.

Concluding thoughts

It is always going to be difficult for both regulators and financial institutions to keep up with the ever-changing techniques of those who seek to defraud and launder. But the FCA’s message is simple: do not be afraid to work with them on new systems that may offer genuine benefit in keeping out criminals. With initiatives such as the regulatory sandbox and the GFIN, this does not appear to be an empty offer.

Butler said that technology ‘may be the greatest tool we have’ in helping to ‘find that needle in the haystack’. It can also help to increase efficiency of systems and reduce costs. So when faced with the daunting pace of change in the financial sector, and the ingenuity of financial criminals, it would be wise not to ignore the manifest benefits new technology can offer.

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