Financial Crime Prevention in 2023: What You Need to Know

Financial crime prevention is at the forefront of today’s financial services industry.

Technological advancements and digital innovation have created infinite new opportunities for financial service (FS) providers and financial institutions to significantly increase growth.

Yet, these advancements come with new risks as well.

When it comes to who is affected most by financial crime, the answer is varied. Financial crime poses substantial risks to both customers and businesses, with the latter having to also consider the regulatory consequences of not establishing sufficient fortifications against major crimes, such as fraud.

Join me today as I explore the challenge of financial crime prevention, and how financial institutions and FS providers can better protect both their customers and themselves from the risk of financial crime.

Financial Crime Cases in Numbers: The Scope of the Problem in 2023

From a consumer perspective, it’s becoming more difficult to identify fraud in digital spaces. A 2022 report from the U.S. Federal Trade Commission reveals that the three types of fraud that consumers fell victim to most in 2021 were online shopping fraud, business imposters, and investment scams.

Across the pond, the UK’s Financial Conduct Authority issued more than 1,800 warnings about potential scam firms and returned roughly £30 million to customers in 2022.

Meanwhile, from a business perspective, financial crime is an equally prevalent issue. A 2023 CFO Magazine article covering the findings of the recent State of Fraud Benchmark Report survey reveals that 70% of financial institutions participating in the survey lost more than $500K to fraud in 2022. Additional survey findings uncovered that first-party fraud was the most common type, with the industry sectors hit the hardest being online lending groups (75%), community banks and credit unions (69%), fintechs (58%), crypto organizations (58%), and national banks (51%).

This wide range of organizations across multiple financial sectors proves that financial crime cases are not specific to any one niche but rather a challenge for the industry as a whole to tackle together.

Other recent financial crime prevention regulations include:

• The EU’s Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Policy, which sets key regulations and directives for combatting these financial crimes in the EU.
• The UK’s Economic Crime and Corporate Transparency Bill, which strives to increase corporate transparency surrounding company provisions, partnerships, and overseas entities.
• The ongoing updating of the Payment Services Directive 2 (PSD2), which currently stands to make instant payments a mandatory requirement for FS providers.

At the heart of both the challenge and solution to financial crime prevention is technology.

On the one hand, the lightning-fast development and release of new technologies have made it difficult for both businesses and regulators to keep up with changes in the digital financial environment. On the other hand, regulators are adapting and getting up to speed, while FS providers and financial institutions are learning to leverage IT and digital talent outside their four walls.

By embracing a collaborative approach to financial technologies, it is far easier to overcome the hurdles brought on by financial crime — and to develop a long-term strategy for preventing it along the way.

With this in mind, here are five technologies that are poised to significantly impact financial crime prevention and the financial industry at large in the coming years:

1. Blockchain

Some organizations within the blockchain space have chosen to focus on the immutability of blockchain technology and its potential benefits for the financial industry.

Immutability is the capability to create an unchangeable record that offers full transparency and traceability for any information stored on-chain. This can not only simplify reporting requirements for an organization, but can also allow organizations to optimize their data and information in a way that provides meaningful operational insights.

Despite the challenges blockchain has faced in its meteoric rise, the banking and financial services industry has taken note of its advantages. New research reveals that the blockchain in the banking and financial services market grew from $1.89 billion (USD) in 2022 to $3.07 billion in 2023.

2. Instant Payments

The European Commission recently introduced a new PSD2 proposal focused on enabling instant payments across the EU payment area.

With many financial institutions and FS providers relying on suppliers and other partners within Europe, the potential impact of this regulatory change is massive. Instant payments offer speed and convenience that can help organizations realize a quicker time to market and a steadier revenue stream. However, they also require robust fraud detection and financial crime prevention mechanisms to keep them secure.

As a result, instant payments almost inherently have to operate hand-in-hand with other technologies, such as artificial intelligence (AI) and machine learning (ML), which can automatically analyze patterns in real-time. This not only reduces the operational overhead of manual processes, but also helps to keep an ever-watchful eye on suspicious activity to identify potentially fraudulent transactions.

3. Artificial Intelligence & Machine Learning

AI and ML are not necessarily “new” to the financial crime space. Rather, these financial crime prevention technologies are long-time digital veterans that have been continuously developed and improved along the way.

Today, AI and ML have the capabilities to analyze vast amounts of data to enhance fraud detection and financial crime prevention. Where manual tracking processes may fail, AI and ML can keep up with massive influxes of data, constantly monitoring key elements such as customer behavior, transaction patterns, AML, and other risk indicators.

Not only that, but these financial crime prevention technologies can then take that information and transform it into valuable insights that can be used to identify future risks and improve an overall risk modeling strategy.

4. Data Analytics

Advanced data analytics provide several essential capabilities for making sense of large volumes of data.

By leveraging advanced data analytics, an FS provider or financial institution can feel empowered to make informed decisions based on reliable, accurate data. This data can be employed for identifying potential risks, patterns of suspicious behavior, and emerging financial crime trends.

In Deloitte’s 2023 Banking and Capital Markets Outlook report, it is noted that fintech partnerships can be of particular benefit when dealing with data analytics and AI without institutions or providers having to be worried about those fintechs going up against them as competition.

Instead, Deloitte states that collaborations with fintechs can be the key to “open up opportunities in markets that have been difficult to penetrate.”

Both AI and data analytics involve complexities that are best solved through a strategic partnership with tech experts. Fintech partnerships offer this expertise tailored to the specific needs of the financial industry, ensuring that your technologies are not just efficient but also compliant.

5. RegTech Solutions

Regulatory change has become a centerpiece within the financial crime prevention discussion.

As regulators have become more involved in the technology landscape of finance, regulatory technology solutions (or RegTech for short) have quickly climbed the ladder of popularity in the industry.

RegTech offers FS providers easy access to many of the technologies discussed above, including AI, ML, and advanced data analytics. With heightened accessibility to these technologies, an organization can enhance its financial crime prevention strategy by streamlining the compliance process, automating reporting and monitoring requirements, and improving overall risk management.

The Role of Regulatory Change in Shaping Financial Crime Prevention

Regulators are not blind to the new financial crime risks the industry is currently facing.

Regulators worldwide have begun to introduce stricter regulatory requirements for preventing financial crime in several key areas, like anti-money laundering (AML) and countering financial terrorism.

Just this week, the U.S. Department of the Treasury announced its new 2023 De-Risking Strategy which examines de-risking activities at financial institutions, as well as offering policy recommendations.

Find out everything you need to know about RegTech in Exadel’s recent report: RegTech for Banking and Financial Services in 2023.

Tackle Financial Crime Prevention Head-On with Exadel

For an FS partnership you can trust, we’re your team.

We offer a wide range of services for the banking and financial services industry, including:

• Transformational services, such as robotic process automation and predictive technology
• Managed services, such as platform management and regulatory change management
• Sector-specific services, including insurance, wealth management, private banking, asset management, hedge funds, and pension fund technology services
• Banking-specific services, including retail banking, commercial banking, capital markets, corporate treasury, and wholesale banking technology services

Plus, Exadel offers strategic resourcing and staff augmentation solutions to ensure you have access to all the tools and talent you need for an exceptional financial crime prevention strategy.

Contact our team today.

Find out how Exadel can enhance your financial crime prevention model by contacting our experts today.