Advances in digital identification technology can mitigate the unpleasant rise in pandemic-related financial crime. A top regulator, banker and lawyer join forces with Refinitiv to discuss how.
In early May, the FATF (Financial Action Task Force) released in short succession another stark warning about the money laundering and terrorist financing threats emerging from the Covid-19 pandemic.
The paper outlined the risks and challenges financial institutions now face, while also laying out the commendable practices and policy responses from regulators and governments across the globe.
Same patterns, but reframed
FATF was clear in one very important aspect: criminals were successfully creating “new sources of proceeds” on the back of government policies and financial institutions’ attempts to stem the impact of the pandemic.
Take Australia, for example. The federal government’s recent scheme to allow the public to tap up to AUD 10,000 from their pension pots has resulted in many individuals falling prey to theft. As of 21 May, at least 150 cases of identity fraud were being investigated by the Australian Federal Police.
Broadly speaking, these Covid-19 related crimes are very similar in nature to what authorities have seen time and time again. However, the operational capacity to tackle them effectively amid social distancing and work-from-home policies has placed a greater burden on institutions to remain alert and effective.
“We are seeing the same patterns but reframed for the pandemic,” said Nathan Newman, a regulatory operations manager at AUSTRAC, in a recent webinar hosted by Refinitiv titled, Fighting the new financial crime risks of COVID-19 with technology.
“In the past two months, for example, we have seen websites established preying on the community about Covid-19. This is not just a domestic phenomenon – it’s happening around the globe.”
A central role for technology
To mitigate these attacks, FATF is unequivocal. It believes technology must play a central role in preventing many of these crimes: “In line with the FATF Standards, [we] encourage the use of technology, including Fintech, Regtech and Suptech to the fullest extent possible,” the May paper stated.
Many on the frontline agree with this principle. Speaking during the same webinar, Milan Gigovic, head of financial crime intelligence at ANZ Bank, said it was vital financial institutions had the flexibility to use new technology to adapt to their surroundings.
“What we have found useful is the creation of a financial crime data hub,” said Gigovic. “We [store] billions of transactions, millions of KYC documents in one spot, which makes it easier to query and test a hypothesis if we think we are on to something. The central hub gives us the agility to implement new agile, tech-based detection.”
Aligned with this model is the vital need for third parties – with the same motivation to reduce financial crime – to work closer together. A perfect example is Australia’s Fintel Alliance. Formed in 2017, the public private partnership brings together a range of organisations involved in the fight against money laundering, terrorism financing and other serious crime.
“It’s a venue for us to share sensitive, sometimes classified information to help bring pieces of the puzzle together and to understand criminal behaviour,” said AUSTRAC’s Newman.
Being good can help the bad
A unique difficulty posed by Covid-19 is the tension between reducing the spread of the deadly virus and the economic impact it has on society.
Financial institutions have implemented policies to support individuals and companies during this difficult time. However, as applications for opening new accounts, additional loans and similar support shoot up, banks are both struggling to cope with huge backlogs and to ensure the risk of fraudulent activity is minimised.
FATF offered some insight: “To facilitate the smooth processing of applications, some supervisors have approved simplified due diligence measures (including for customer verification) for transactions under government assistance programmes where they are assessed to present lower risks. They include obligations for regulated entities to put in place mitigation measures, such as ongoing due diligence and to review CDD if other risks are later detected.”
Again, technology plays a vital part in this process. Voice recognition and biometric tools offer exceptional operational efficiencies, but financial institutions must understand the implications of their usage.
“It’s a balancing act,” said Gigovic. “Reducing customer friction and offering a seamless experience [are important], but on the back end you must ensure you have the right monitoring [technique] to pick up on escalating ID takeover threats.”
Receptive regulatory environment
Urszula McCormack, a financial regulatory lawyer for King & Wood Mallesons in Hong Kong, agrees, but added that internal techniques for monitoring criminal activity are just one aspect of bigger picture anxiety over data storage and usage.
“There is a degree of consumer mistrust in these technologies and a need for good disclosure and consumer optionality,” said McCormack. “[Also], when you look at it from a data protection standpoint – swiftly increasing the amount of data that is being stored and held by institutions and the protective measures around it – you are creating a honey pot for others to come and find it.”
These are valid concerns and it is yet unclear how they will be tackled. Understandably, financial institutions are looking to governments to lay out clear rules on what they can and cannot do to capture digital identities, but one thing that is clear is that the stakes are huge.
Many banks could realise significant cost savings by pushing through digital-only methods of client onboarding and transacting; it could even spell the end of traditional brick and mortar banking as we know it.
“The good news is that regulatory environment is receptive to technology as a solution to digital identification,” said James Mirfin, global head of digital identity and financial crime proposition at Refinitiv. “If you get it right, you are using a lot of data, but you can do it in a privacy-protecting way; it has to be well thought through. However, I believe we are moving in a very favourable way.”
It is also important to place these fresh concerns into context; while consumers are being pushed towards contactless payments to prevent the spread of a virus, for example, it provides a stark reminder of how antiquated and ineffective security checking a signature on the back of a card really is.
To find out more about fighting Covid-19 related financial crime risks with technology, access the full webinar here.
This article was jointly produced by Regulation Asia and Refinitiv.