Why Financial Crime Compliance Is Evolving
Financial crime has developed into one of the most significant risks to the financial industry. As the nature of financial transactions has developed into a more digital and cross-border environment, criminals have become more creative about finding ways to exploit financial systems. As a result, regulators and financial institutions have had to develop new methods of investigating, preventing, and detacting financial crime.
Modern compliance departments use artificial intelligence (AI) and machine learning to investigate and prevent financial crime more efficiently while reducing the costs of compliance.
As the nature of financial industries continues to rely more upon digital technology, preventing financial crime has become a more important investment for these organizations.
What Is Financial Crime Compliance?
Financial crime compliance is the suite of technologies and regulations that financial institutions use to prevent illegal activity in their financial systems.
Examples of the types of financial crimes that institutions prevent include money laundering, terrorist financing, identity theft, bribery, and financial scams.
The purpose of financial crime compliance is to protect the financial systems and customers from damage caused by financial crime.
Why Compliance Is Becoming More Complex
Financial regulatory compliance within the financial industry has undergone dramatic changes over the past decade.
Many financial industries have moved towards digital transactions that occur in areas such as mobile banking, digital wallets, cryptocurrency exchanges, cross-border payments, and embedded finance applications.
These digital transactions must be continuously monitored for financial crime, with volumes of transactions amounting to millions of transactions per day.
Manual monitoring of financial transactions for financial crime is no longer sufficient by itself.
Artificial Intelligence Is Improving Detection
Artificial intelligence technology allows financial institutions to detect suspicious activity and financial crime through the analysis of digital transaction data.
The suspicious activity that is detected with AI includes account takeovers, payment fraud, identity theft, suspicious accounts, and financial crime trends.
The ability of AI to learn from digital transaction data leads to the improvement of the AI’s detection of suspicious activity and financial crime.
Real-Time Monitoring Is Replacing Batch Reviews
Historically, the compliance departments of financial institutions reviewed financial transactions after they were processed by the institution.
Compliance departments in modern financial institutions implement artificial intelligence systems to monitor financial transactions in real time to review payments for fraudulent activity, unusual account activity, and high-risk transactions.
Real time monitoring enables financial institutions to deter fraudulent financial transactions before they are processed.
Know Your Customer Remains Essential
Financial institutions are required to establish a system known as “know your customer” (KYC) to prevent financial crime.
KYC involves the digital verification of an individual’s identity, authentication of documents, biometric verification, address verification, and monitoring of the customer’s financial activity.
Financial institutions perform this process when the individual establishes an account with the company, but the compliance departments perform monitoring of the customer’s activity to continually update their risk profiles.
Cross-Border Cooperation Is Increasing
Financial crime often crosses borders and does not remain within a single financial system.
To combat financial crime, the regulators and financial institutions of different countries cooperate with one another to review cases of financial crime, share information, and develop regulatory partnerships.
Increased international financial regulation and cooperation has become increasingly important in the global financial industry as the number of international financial transactions continues to grow.
Technology Supports Regulatory Reporting
Financial institutions are required to report certain information to the regulators regarding financial crime investigations and results.
Many financial institutions have implemented technology to automate these reports, manage regulatory cases, create audit trails, manage documentation, implement regulatory analytics, and create compliance dashboards.
Automating the regulatory report ensures that financial institutions can dedicate more resources towards investigating high-risk financial crimes.
Challenges Facing Compliance Teams
Despite the implementation of digital solutions to investigate financial crime, there are still many challenges for the compliance teams of financial institutions.
Many of these challenges include the need to combat financial crime in the digital world, global regulation, data privacy issues, and outdated information technology systems within financial industries.
Financial institutions must continually update their compliance frameworks in the face of these challenges.
The Future of Financial Crime Compliance
There are several trends in financial crime compliance that will likely develop in the near future.
Many of these trends include AI investigations into financial crime, risk analytics for financial crime, digital identity for financial systems, blockchain technology investigations of financial crimes, automated regulatory reports, and the increased collaboration between regulators and financial industries.
These developments will increase the efficiency and effectiveness of financial industries’ compliance departments while reducing the costs of investigating financial crime.
Key Takeaways
Financial crime compliance is shifting to be increasingly reliant upon technology to investigate financial crime.
Artificial intelligence allows financial institutions to review transactions for fraud and money laundering.
Financial institutions continue to monitor customers and update their risk profiles.
Increased international cooperation helps to control the spread of financial crime.
Technology automation of regulatory reports reduces the compliance departments’ workload and increases their efficiency.
Modern compliance frameworks are essential for maintaining the stability and safety of the financial system and its customers.
Conclusion
Financial crime compliance departments have evolved into technology-driven departments that use artificial intelligence and digital technology to investigate the causes of financial crime.
As the financial industry continues to grow in its digitalization, financial crime compliance departments must continue to evolve and increase in their capabilities to protect both the customers and the financial systems in which they operate.