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The Way forward for Anti-Fraud Expertise

The rise of cutting edge internet technology within an increasingly globalized financial world has seen a parallel rise in financial fraud. Investors have lost millions of dollars in recent years to securities fraud, negligence, and mismanagement.

How can companies stay ahead of the curve on beating back fraud with technology? The good news is we’re already there.

SupTech and RegTech: Innovation to support regulation and oversight

SupTech and RegTech are two terms that one comes across a lot these days under the umbrella of FinTech writ large.

Supervisory Technology (SupTech) is essentially the use of artificial intelligence and machine learning technologies to support the supervisory missions of a department within a financial institution charged with maintaining company oversight, such as due diligence or cybersecurity.

The same general principles can be seen in Regulatory Technology (RegTech), which focuses more on using similar AI and machine learning tools and other forms of innovation in computer systems to support regulatory compliance, again, on the part of a due diligence team within a bank or across multiple sectors and departments of a given financial institution.

Increasingly, we are seeing both RegTech and SupTech promoted and used by the regulators themselves. This came up in the October 2020 G20 meeting of finance ministers, with a big 2020 drive continuing from the Financial Action Task Force (FATF) to push for the inclusion of innovative technologies as a booster to compliance and security standards in the financial world.

From major banks and corporate lenders like the Federal Reserve to government watchdogs like the Securities and Exchange Commission (SEC), expect to see a lot more SupTech and RegTech in financial news over the next few years, especially when it comes to combating fraud.

How Does Innovation Support Anti-Fraud Efforts?

Fraudsters often employ complex and multi-layered strategies to launder the criminal proceeds of illicit activity through a combination of shell companies or offshore accounts, labeling transactions with such vague and hard-to-pin-down descriptions as “consulting fees”.

The recent WestPac disclosures of anti-money laundering legal breaches in Australia (number in the tens of millions of accounts) and subsequent settlement of a whopping $1.3 billion underscores that when it comes to fraud taking place in a bank’s backyard (and on their own books), regulators are going to hold the banks directly accountable. This really drives home the critical role that due diligence departments play in ensuring their bank does not get hit with multi-billion dollar fines for regulatory failures.

Technology allows financial institutions to screen for suspicious and possibly fraudulent behavior. According to Deloitte, what RegTech can offer in this field is transaction monitoring, automatically screening every single transaction with a set of parameters that can rapidly identify red flags.

The main indicators that regulatory agencies ask financial institutions to look out for as signs of possible fraud include:

  • Repeated transactions of the same amount;
  • Foreign transactions involving jurisdictions considered to be lax in regulatory oversight;
  • High volume or repeated cash withdrawals;
  • Multiple addresses or changing addresses associated with a single account;
  • Multiple transactions of different accounts on the same IP address;
  • Attempting to make similar transactions with smaller amounts after a purchase or transaction was flagged and rejected;
  • Repeated and inconsistent foreign shipping transactions.

The Future of Anti-Fraud Innovation is Already Here

While by no means an exhaustive list of red flags, the previous examples used to take visual scanning by due diligence agents in banks, even when using computers, up until just a few years ago.

Despite advancements in software innovation, FinTech has still been slow in catching on in the financial institutions of some developing countries and high-risk jurisdictions. That’s why it’s not a coincidence that a quarter of the world’s ships fly a Panamanian flag. There are no regulations! However, that is changing. The technology and innovation that we may imagine to be regulatory and supervisory tech from the future is already here. Furthermore, it is being pushed into the regulatory and legal frameworks of financial institutions the world over, from the G20 and down the track.

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