Did The Crisis Of 2020 Accelerate Financial Fraud?

How those tasked with prevention were thwarted by work-from-home protocols

Apr 08, 2021 — As cases of fraud and money laundering rose during the pandemic last year, banks in the UK faced unforeseen challenges. In a new study by global analytics software provider FICO and independent research firm OMDIA, 79 percent of respondents from UK banks said that working from home had a high or major impact on the effectiveness of their financial crime prevention.

“Just as the pandemic put huge stresses on the health care system, it put huge stresses on fraud and financial crime management teams,” explained Toby Carlin, senior director for fraud consulting at FICO. “Teams that collaborate in person and work with large software systems that have restricted access found that working from home hurt their productivity. This was compounded as the volume of fraud attacks rose.”

Challenges With Technology

The impact of having multiple software systems for fraud management and financial crime compliance was also cited by UK respondents. This was the top technology challenge for 21 percent of UK respondents, which puts it at the top of the challenges. Almost half – 49 percent – of respondents ranked it first, second or third among their technology challenges, the most of any challenge.

“Banks are feeling the pain of having fragmented software for managing fraud and financial crime,” said Carlin. “Even though some 80 percent of the functions between fraud prevention software and AML software are the same, the systems are nearly always separate, and the teams are usually separate too. In our survey, 64 percent of UK respondents said these teams don’t even report to the same person at the bank. The latest systems, such as our FICO Falcon X, provide these technologies in a single platform, which can catalyze an integrated approach at a bank.”

Excerpts From The Survey

The fight against financial crime (including both anti-money laundering [AML] compliance and fraud) very much continues in the wake of the pandemic. Regulators remain intent on enforcing AML compliance, and turbulent changes to society often present exploitation opportunities for financial criminals. With banks also forced to make dramatic changes to their operational practices with lockdown restrictions, the challenges for banks in meeting financial crime management objectives are as acute as ever.

To get a view on how COVID-19 has impacted both AML compliance and fraud strategies, Omdia conducted a study of 110 banks, interviewing senior executives from across compliance, fraud, and supporting security and technology functions. The study examined how institutions are responding to challenges in tackling both areas of financial crime in the wake of the pandemic—in particular assessing whether institutions need to take a more centralized intelligence approach across AML compliance and fraud—and whether new artificial intelligence and machine learning technologies offer genuine benefits in tackling financial crime.

Key Messages:

• The pandemic has not just driven volume impact, but challenged control effectiveness and
  driven dramatic behavior changes, impeding the effectiveness of existing models.
• Some 69% of institutions now have strategic plans to integrate functions or share resources
  between AML compliance and fraud; 50% have plans to do so within three years.
• Artificial intelligence and machine learning technologies drive fuller and more complete
  detection, but also offer rapid adaption to new threats and false positive reduction.

Protecting Customers Has Created A Major Workload Burden

Given the economic fallout from COVID-19 pandemic, some outside the compliance world may have assumed regulators would have cut banks some slack in 2020. In contrast, regulatory enforcement of AML compliance continued unabated with over $10bn in fines, a more than 25% increase on an already significant 2019 figure. While this high figure itself was heavily driven by the Malaysia Development Berhad scandal (which saw over $6.8bn in collective fines), regulatory bodies across the globe have continued to remain heavily focused on AML and sanction breaches, with substantial fines across both Europe and Asia Pacific in recent years (in addition to the historically dominant
North America region in respect to fine magnitudes). With the FinCEN leak in September intensifying media and government focus on AML, this is likely to remain the case in 2021.

This has unsurprisingly kept compliance high up on the executive agenda regardless of the ongoing challenges from the pandemic. However, the threat of regulatory enforcement is only one driver for banks in tackling financial crime. Banks also wish to protect customers and themselves. The latter including reputational damage from being associated with enabling criminal activity as well as any direct financial losses

The FICO study consisted of 110 interviews by OMDIA with senior executives driving, managing, or directly supporting financial crime, in the US, UK, Brazil, Germany, the Nordics and Canada. The survey included senior executives responsible for fraud management, financial crime compliance and security / technology. Respondents were roughly equal from medium-sized banks and large banks.

About FICO

FICO (NYSE: FICO) powers decisions that help people and businesses around the world prosper. Founded in 1956 and based in Silicon Valley, the company is a pioneer in the use of predictive analytics and data science to improve operational decisions. FICO holds more than 195 US and foreign patents on technologies that increase profitability, customer satisfaction and growth for businesses in financial services, telecommunications, health care, retail and many other industries. Using FICO solutions, businesses in more than 120 countries do everything from protecting 2.6 billion payment cards from fraud, to helping people get credit, to ensuring that millions of airplanes and rental cars are in the right place at the right time. Learn more at https://www.fico.com.