As digital payments and online transactions increase, the risk of bad actors fraudulently using these channels is growing as well. The United Nations estimates that 3% to 5% of the global GDP — around $5 trillion — is laundered each year across the world. Fraudsters steal billions of dollars annually from organizations and individuals in the U.S. alone.

But losing money is not the only risk that financial crime poses to organizations. If a bank falls victim to illicit activity, it risks reputational damage. That danger is compounded by regulatory risk. In an ever-evolving digital space, protecting against cyber criminals is a must. That’s why many financial institutions are merging their monitoring efforts into a comprehensive fraud and anti-money laundering approach, known collectively as FRAML.

FRAML: Bringing Together Fraud and Anti-Money Laundering

Fraud and money laundering are distinct financial crimes, but there is a reason the two are often connected. Financial fraud results in ill-gotten gains for a bad actor, and money laundering provides a way to place illegally obtained money into the global financial system without arousing suspicion. Understanding each crime individually is critical to comprehending the intersection where fraud and anti-money laundering meet.

FRAML brings together the fraud and AML operations of an institution, helping to automate data sharing and better identify the lifecycle of customer risk that is created through both components. Using FRAML technologies allows your institution to analyze a vast amount of data transactions and consumer behaviors, providing a holistic risk profile.

By creating these high-level, holistic risk profiles, your institution can better predict and prevent both fraud and money laundering components where they intersect. The combination of these functions often leads to stronger risk management and increased operational efficiencies.

Fighting Financial Fraud

Financial fraud is a broad term, describing any activity that deprives another person of money or other assets through deception or crime. It is one of the most common financial crimes in the world, with nearly $6 billion in consumer financial fraud losses reported to the U.S. Federal Trade Commission in 2020 alone.

Fraud can be conducted in dozens of ways, from check fraud to phishing to identity theft, but all types of fraud involve access to a victim’s assets by a bad actor through unauthorized or illicit means.

Criminals in the financial fraud space are taking advantage of new technologies to commit crimes more quickly and make them more difficult to prosecute. P2P fraud incidents are rising as fraudsters target payment apps such as Venmo and Cash App, with another $440 million in consumer losses reported in 2021, according to a Senate report.

Understanding Money Laundering

Money laundering is the conversion of profit from illicit activity into money that appears to be the product of normal business. Financial criminals use various methods to conceal the origin of their funds from businesses and law enforcement, but most launderers follow three common steps:

• Placement is the insertion of illicit funds into the legitimate financial system. This can be accomplished several ways, including blending the illicit income into income from a legitimate source or falsifying documents indicating a business transaction that never took place.
• Layering is separating the proceeds of criminal activity from its source — often through a series of complex transactions through multiple people, corporations and trusts. Illicit cash may be converted to money orders, bonds, wire transfers or even tangible goods like jewelry or art to further disguise the trail.
• Integration is the return of the now legitimate-appearing money to the criminal as profit. Now that the proceeds of criminal activity are integrated into the legitimate financial system, the money can be used normally for any number of transactions. At this point, laundering becomes significantly harder to detect and prosecute, as the money appears to be stemming from standard sources of business.

Due to its complexity, money laundering presents an incredible challenge for entities involved in the U.S. financial system. Every onboarded customer could potentially be involved in money laundering. Likewise, every new transaction processed could represent the flow of laundered money. Picking out which customers and transactions fall into these categories is like finding the proverbial needle in a haystack. That’s why it’s critical to have an effective AML solution to detect suspicious activity, stop the flow of laundered money and avoid costly regulatory fines — especially as BSA/AML scrutiny grows.

Moving Forward with FRAML

The fight against fraud and money laundering is never ending, and banks of all sizes can be overwhelmed by the sheer volume of criminal attempts and the complex regulations surrounding them. Failure to live up to this expectation to protect your customers’ data can lead to regulatory fines and reputational damage that causes further financial harm beyond the costs associated with fraud itself.

But criminals are not the only ones evolving. New technologies are replacing outdated methods of monitoring, giving organizations an edge in stopping financial crime before it can cause financial, reputational or legal liability. And implementing a cohesive FRAML strategy is the most efficient and effective way to tackle fraud and AML compliance.

Go to https://www.csiweb.com/what-to-know/content-hub/whitepapers/fraud-hits-keep-coming/ to read our white paper on incorporating the use of both AI and machine learning in your bank’s approach to FRAML. 

Ankur Shah is a Strategic Product Manager at CSI.