5 financial crime trends to watch in 2023

As financial crime continues to rise, keeping track of the trends in this volatile area is both important and challenging. To help you keep pace, this blog covers five of the top trends to watch in the coming months based on numerous financial crime outlooks that have been published in recent weeks. Although each trend is pressing, we prioritized them based on the level of effort we expect each to require, starting from the highest.

1. Enhancing the effectiveness of sanctions, both old and new

New sanctions will continue to challenge existing compliance processes and demand innovative technology solutions. Last year, we saw the adoption of complex sanction schemes and a focus on sanctioning the widest possible spectrum of entities and individuals. The big focus this year will be, presumably and hopefully, on enhancing the effectiveness of these sanction schemes.

For financial institutions, the rise in new sanctions has created the challenge of correctly identifying the type of countermeasure issued against an entity or a person in any given jurisdiction and how this affects a particular transaction at hand. Even more daunting perhaps is the need to understand complex beneficial ownership and related control structures, which can transfer risk to an entity not otherwise sanctioned. Beneficial ownership is a key part of effective sanctions implementation and requires data, globally unified definitions and thresholds, systems interconnectivity, and access to beneficial ownership registers.

While there is ongoing concern about handling complex corporate structures, a large number of screening solutions still struggle with handling simple date-of-birth formats, name matching, and transliterations, even in the case of structured messages. As a result, many financial institutions will seek to enhance their screening capabilities, and many will resort to changing their solution providers. This is one of those big market moments, which has the potential to disrupt the usual incumbent solution providers.

2. Real-time everything, all at once

Another key trend is the continued global rise in consumer demand for instant services-from onboarding, to purchasing financial products (e.g., insurance, mutual funds, loans), to domestic and international payments. This requires parallel developments in anti-financial crime (AFC) solutions. Know your customer (KYC) systems, sanctions and embargo screening engines, and anti-fraud programs are now expected to assess the risk of a potential customer or a transaction before any actions take place.

In other words, AFC solutions must operate in real time or, at a minimum, predict outcomes with a reasonable degree of reliability, as well as learn from their mistakes. Add this "real-time everything" requirement to the unprecedented complexity of sanctions discussed above, and it makes for an interesting challenge for compliance teams and technology providers.

Even more challenging is that many financial service providers (e.g., Revolut) facilitate instant money transfers across borders and currencies. For example, you can quickly transfer money to your friend who paid for your lunch. That, alone, is not an issue. The challenge comes when you consider screening messages a sender shares with a recipient. These messages can provide valuable insights into the purpose of potentially suspicious transactions. Further, they're delivered in various formats, including GIF (animated picture). Which anti-money laundering (AML) program is ready to manage this degree of screening?

Many financial regulators across European and North American markets are evaluating the levels of screening required for domestic and/or instant payments for exactly this reason. We recommend that banks and payment providers participate in industry consultations and working groups whenever possible to identify new ways for screening payments that are both effective and realistic.

3. The rise of artificial intelligence (AI)

Related to the trends above are ever-expanding pools of complex data, which increase the demand for more resources. Extensive and expensive compliance teams can't spend the majority of their time dealing with false positives. AI is a solution. As AI models improve the delivery of effective alert prioritization and regulators accept and become more comfortable with this process, banks will rush to implement AI layers on top of rules-based models to their existing systems, at least for the foreseeable future.

Regulatory acceptance of proven AI models, however, is crucial. The mass adoption of AI will be rapid once regulators concede to the fact that dedicating more resources to higher-risk alerts requires that lessattention and resources is dedicated to lower-risk alerts. In other words, something has to give, and AI can tell us what that should be.

AI also will continue to expand its already meaningful footprint in customer onboarding, document validation, and fraud detection, especially in light of the continued real-time revolution. During a time of great economic uncertainty, fraud and other financial crime typically rises. We need to prepare not just for higher volumes, but also for new and unexpected ways in which criminals seek to defraud individuals and entities.

AI can help with all of the above in two main ways. It can alert banks to new anomalies in customer behavior faster, including in areas such as social engineering fraud, which is often difficult to detect through traditional anti-fraud systems. It also can help manage large percentages of false positives, an industry-wide challenge, through effective prioritization.

Institutions that are interested in exploring the potential of machine learning in this area should try to define their objectives as clearly as possible and conduct initial proof-of-concept pilots with an AI provider. Correct design of the data sample and research questions is crucial and will help banks make a business case for AI with their regulators.

4. Information sharing, greater cooperation, and joint actions

Initiatives to advance data, information and knowledge sharing are gaining momentum quickly as we realize that our collective success rate in detecting organized crime and stopping illicit financial flows needs a big boost. During 2022, major international organizations and AFC standard-setters published reports and recommendations on how to implement such initiatives, as well as on how to navigate privacy concerns while allowing for greater transparency. One of their key recommendations is to clearly define specific use cases and deploy advanced privacy-enhancing technology through collaboration.

Collaborative initiatives can range from thematic public-private partnerships, such as Canada's Project Anton (an anti-wildlife trafficking initiative led by Scotiabank and FINTRAC), TMNL (a Dutch transaction monitoring consortium of five private banks), or the Singaporean COSMIC FI-FI (an information-sharing platform mandating financial institutions to alert others to suspicious behavior).

However, this collaboration trend goes beyond just sharing. It also involves aligning interests, expectations, and legal and regulatory frameworks. This year, the European Union (EU) is operationalizing its planned Anti-Money Laundering Authority (AMLA), which will consolidate regulatory approaches and oversee AML across the EU. This should make doing business across the EU smoother for banks, as well as their customers. Banks with operations across multiple EU states can start taking advantage of this by ensuring interoperability of their systems, data formats, and processes.

5. Increased focus on non-banking areas

Policymakers and regulators increasingly are aware of how some professional services enable sanctioned or otherwise illicit assets to flow to and from our financial systems. These include legal advisory, accounting, real estate brokerage, or strategy consulting services. Professional services will continue to gain increased attention from policymakers, as well as supervisory bodies. A practical example are the sectoral sanctions imposed against the export of professional services to Russia last year.

Gambling and gaming, in a similar vein, will receive plenty of attention from regulators in an effort to curb the flow of dirty money through related activities. A case in point is the UK's Gambling Commission, which imposed a heavy fine in January 2023 for a gaming company's "social responsibility and money laundering failings."

Increased attention to non-banking areas will be one of the main driving forces behind the growth of the AML outsourcing market, which is predicted to double in the next five years. AFC technology providers will need to develop risk and business models to cater to these customers. In addition, banks, asset managers, insurers, and others will want to evaluate their KYC/KYB and transaction monitoring systems to ensure they adequately monitor customers and activities with higher potential risks and align risk models with slight shifts in regulatory scrutiny.

The bottom line is that our collective success in preventing, detecting, freezing and/or seizing illicit financial flows and fraudulent activities is fairly low, and something will have to give. We need to continue making progress at all levels-at the policy table, as part of regulatory enforcement, with technological advancement, and through greater collaboration.

¹According to The State of Financial Crime 2023 Report, 99% of surveyed compliance respondents are planning to "re-evaluate their risk profile" this year, and more than a half are planning to hire and/or go through technological and organizational transformations.

CGI has worked with financial institutions for the past four decades to build, implement and manage AFC solutions that not only prevent and reduce crime but also improve the bottom line. To learn more about our experience and capabilities, or to further discuss these trends, feel free to contact me.

¹ "This report is based on a survey of 800 C-suite and senior compliance decision-makers across the U.S., Canada, UK, France, Germany, Netherlands, Singapore, Hong Kong, and Australia". The ComplyAdvantage report can be downloaded here: https://complyadvantage.com/press-media/complyadvantage-releases-2022-state-of-financial-crime-report/

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Lucie Reháková

Financial Crime Specialist, North-West and Central-East Europe

Lucie Reháková is a certified anti-money laundering expert and a subject matter expert for CGI HotScan360's financial crime prevention and regulatory compliance evolution.