Fraud and money laundering go hand in hand. Fraud is a predicate offence for money laundering – profits from fraud can be channelled into money laundering and terrorist financing.
Despite the close relationship between the two, there are deep rooted differences and very few crossovers in the tools and technologies required to combat them. These fundamental discrepancies have led to the widespread evolution of separate specialist teams and technology platforms to tackle the risks and challenges presented by each.
Here, Napier founder and chair Julian Dixon looks at the principal differences between fraud and money laundering, and how we at Napier are continuing to address them in an integrated manner.
What is fraud?
Fraud is an intentional deception to achieve an unlawful or unfair gain. There are numerous types of fraud, from Ponzi schemes and phishing to identity theft and romance scams, but they’re all characterised by the fraudster illegally gaining access by deceit to valuable assets which rightfully belong to an individual, a company or a state. Fraud is typically managed by a risk team analysing vast amounts of real-time transaction data for anomalies. It’s not subject to third-party regulation; instead it falls under a financial institution’s duty of care responsibilities.
What is money laundering?
Money laundering is the creation of an appearance of legitimacy for illicit gains. It’s how criminals seek to hide the source of their illegally acquired money or goods (including those arising from fraudulent activities).
Anti-money laundering, or AML, is an umbrella term referring to the actions and processes in place to identify and report on money laundering. AML is typically managed by a compliance team responsible for detecting and reporting suspicious activity. While some of the latest AML software can be run in real-time, AML is often a batch, retrospective process. Money laundering is subject to third-party regulations imposed by the jurisdiction in which an organisation is operating.
Fraud and AML: the key differences
Incentive differences
Successful fraud can directly result in financial losses for a company. As a result, the need to detect and prevent it tends to be seen as a high corporate priority. Victims can claim compensation, and there are also administrative and convenience costs associated with blocking accounts, destroying and reissuing credit cards, tracking fraudulent transactions and so on. Improving the bottom line is a strong incentive for investment in anti-fraud teams and technology.
By contrast, investment in AML technology is directly related to ensuring compliance with AML regulations. While AML is often seen as a cost, albeit one that improves both the financial system and society at large, the risks and repercussions of non-compliance with money laundering regulations, including reputational damage and substantial fines, are significant.
Because of the very different goals, timeframes and regulatory environments each operates in, fraud and AML teams work with separate, specialist technology using different algorithms. Often, the two operate in silos, and they may even compete for budget. It’s also not uncommon to see substantially greater resources allocated to fraud than to AML.
Regulatory differences
While regulators increasingly expect communication and collaboration between fraud and AML teams, the fact that fraud is not subject to stringent money laundering regulations creates barriers to cooperation.
Ultimately, this means fraud teams have a far greater scope to implement continuous improvement processes, from allowing good access to data for testing and sharing to the freedom and flexibility of liberally applying technology enhanced with artificial intelligence (AI). Perhaps most significantly, unlike AML, fraud is not subject to the regulatory requirement to demonstrate explainability when using AI.
AML teams also face strict regulatory constraints concerning the sharing of information between financial institutions, which can make the detection of suspicious activity more challenging.
From a technology perspective, although there are crossovers in datasets, regulatory differences governing the use of AI and data limit the ability for fraud and AML to use a single system effectively.
Enforcement differences
When fraudulent activity is suspected, transaction monitoring processes are usually able quickly to identify whether it took place. Success is often rewarded by a direct financial saving. Not only is this closure satisfying for those involved, but it encourages continuous improvement of systems and processes. Lessons can be learnt and applied to improve the detection of other fraudulent activity.
By contrast, the nature of AML means those involved in submitting a suspicious transaction report (STR) are never informed of the outcome. AML teams do not gain closure and cannot benefit from a valuable feedback loop. With no feedback on the usefulness of submitted STRs, it has become common practice (but by no means best practice) for AML teams to simply focus on the detection of well-known money laundering typologies using rules. Sophisticated financial criminals are quick to spot and exploit such gaps.
How to manage fraud and AML convergence
While fraud and AML have traditionally been two very distinct operations, because both use the same datasets, there has been a belief that convergence is the way forward. However, technology platforms which conflate these two very different types of crime risk doing neither job as effectively as those that take a more specialist approach.
Napier believes increasing collaboration but not integration between fraud and AML teams will create the biggest advantages. Essentially this means:
- Formalising the relationship between fraud and AML teams while maintaining separate transaction monitoring systems to ensure the deployment of specialist, highly effective technology in both areas.
- Training fraud and AML staff to think laterally, and to communicate with and assist each other in the identification of red flags relating to both fraud and AML.
Introducing Continuum from Napier
Napier’s Continuum platform, introduced last year, is the world’s most advanced, cost-effective and flexible AML solution. While it brings the specialist approach that compliance teams are looking for, it also allows the integration of third-party fraud monitoring systems to feed off the same data. It creates a single view of all customer data and intelligence across the entire customer lifecycle, starting with KYC at onboarding.
Crucially, Continuum enables specialist fraud and AML monitoring systems to be run separately but cooperatively, using customer behavioural analytics to ingest and analyse all the data from these systems in real-time. Not only is it able to identify new suspicious patterns but it can, in conjunction with a specialist third party fraud detection system, provide fraud and AML teams with a single, fully aligned 360-degree view of every customer.
And while specialism in each discipline is still essential to optimising results, Napier is examining all opportunities to be able to offer both specialisms in tandem with each other. I think this is the beginning of a beautiful friendship.
Get in touch to see how our intelligent platform can help your organisation transform its compliance; or request a demo to see it in action.
Photo by Daniel Menakhovsky on Unsplash
