Enabled by advancements in technology, and armed with ever-increasing sophistication, criminals continue to target financial institutions (FIs) and show no signs of slowing down. To effectively combat new and evolving threats, FIs must be adaptable and strategic in their approach.
If you are a compliance professional, then you’re already familiar with fraud detection measures and anti-money laundering (AML) controls. However, this historically siloed method of fighting financial crime is ineffectual and outdated. Instead, a holistic strategy that combines both fraud prevention and AML compliance, known as FRAML, better positions FIs to counter growing risks.
Fraud vs. Money Laundering
Legal definitions of fraud vary among countries and even states. However, fraud can generally be defined as an intentional deception to secure an unfair advantage or unlawful gain, or to deprive another of a legal right. Victims of fraud can be individuals or organizations. There are many different types of fraud ranging from tax fraud, mortgage fraud, healthcare fraud, insurance fraud, investment scams, and numerous others.
No industry is immune from fraud and financial institutions and their customers are among the most frequently targeted. Some of the most common types of bank fraud include account take-over fraud, which occurs when a fraudster takes ownership of an online account using stolen credentials; new account fraud, which involves the creation of a new account for fraudulent purposes using a false or stolen identity; and wire transfer fraud, which can take place either when a scammer poses as a trusted individual and requests a wire transfer or when a hacker changes wire instructions to redirect funds to a different account. These and other types of fraud present a constant challenge and Federal Trade Commission data show that fraud and losses resulting from fraud continue to increase.
Money laundering is the process of making illegally obtained funds appear to be legitimate through a three stage process. This is usually accomplished by routing the illicit funds through a series of transactions until their original source is obscured. A variety of crimes serve as predicate offenses for money laundering, including drug-related offenses, tax crimes, human trafficking, and various types of fraud. As a result, fraud often leads to money laundering because illicit gains obtained through fraud must be laundered to disguise their illegal origin.
Some potential indicators of money laundering include repetitive transactions conducted in amounts just below the Bank Secrecy Act (BSA) reporting threshold of $10,000; transactions executed by different people from the same account; large numbers of transfers that don’t appear to have a legitimate business purpose; transactions involving secrecy or high-risk jurisdictions; and other unusual transactions or those inconsistent with expected customer behavior.
What is FRAML?
Fraud and money laundering are two separate and distinct crimes. Although they can certainly occur independently of one another, the two crimes are often linked because criminals who commit fraud must inevitably launder the proceeds. As a result, in cases where fraud has been detected, money laundering has also been uncovered, and vice versa, often within the same banking system.
While institutions have historically kept their fraud and AML teams separate, this siloed approach can hinder the prevention of fraud and money laundering. Criminals exploit weaknesses in existing systems and protocols, including inefficient processes and outdated technology. With the increasing ease and speed at which fraud is committed and the growing complexity of money laundering schemes, FIs need smarter solutions.
Utilizing the interconnection between fraud and money laundering, and the overlap between fraud detection and AML measures, FRAML is a combined approach that allows FIs to address both areas more comprehensively, thus making risk management more effective and efficient. This is accomplished by integrating the best practices used in fraud mitigation with those used in anti-money laundering.
The FRAML approach works because while fraud prevention and AML are separate functions, they have several goals in common, including detecting and preventing financial crime, protecting the organization from reputational harm, and meeting regulatory requirements.
Furthermore, the anti-fraud and AML functions also require the same information and take comparable action when instances of crime have been detected. Combing resources and sharing critical information across departments in a timely manner can enhance the efforts and efficiency of both teams, thus benefiting the entire organization.
In summary, FRAML enables:
- A more complete customer profile.
- Increased customer service and stronger customer relationships.
- Overall cost reduction, as operating in siloed departments is more costly for the organization.
- Timely compliance with regulatory changes and developments.
- Better internal decision-making across teams.
- Increased overall risk management.
- Enhanced operations and efficiency for the entire organization.
How Can FIs Adopt a FRAML Approach?
To effectively combat new threats and better manage risk in a rapidly changing environment, FIs must also be open to new strategies and willing to adapt their approach.
Although AML and fraud prevention are generally housed in separate departments within an organization, criminals don’t see these distinctions when laundering proceeds derived from fraud and other crimes. In fact, maintaining siloed functions and the resulting lack of visibility into the related illicit transactions works to the criminals’ advantage and serves as an impediment in detecting illicit transactions and fighting financial crime.
Combining resources and sharing critical information between departments in a timely manner can enhance the efforts and efficiency of both departments, thus benefiting the entire organization.
This approach involves integrating resources such as people, processes, and solutions. For example, when a customer is first onboarded or initiates a transaction, the FI can look for money laundering, fraud, and other suspicious activity all at the same time.
Additionally, fraud data, which is generally kept in a completely different system, can be shared with a transaction monitoring analyst who reviews alerts, enabling the institution to have more complete customer profile information and make more informed decisions.
Making critical information accessible across departments also enables the detection of relationships and linkages which expediates alert review, case investigation and even regulatory filings. For instance, utilizing a holistic approach where information is made readily available to other areas within the organization can facilitate suspicious activity report (SAR) filing as soon as fraudulent activity is detected.
The right technological solution combines all relevant data onto a single, user-friendly platform enabling the timely identification of money laundering and fraudulent activities such as payment fraud and account takeover fraud.
As criminals take advantage of the gap between advances in online banking and institutions’ failure to adopt the most up-to-date technologies to combat financial crime, a FRAML solution is more urgent than ever.
Risk management is a serious business and it’s important to choose a knowledgeable and experienced partner. Contact a representative at Alessa today to learn how our solutions can help your institution implement a comprehensive FRAML approach.