Double down against financial crime in the digital age

Banks and other financial institutions spend $214 billion annually on keeping financial crime in check and associated compliance costs. This spending is expected to grow in double digits, especially in areas such as anti-money laundering systems and processes, as the recognition grows that even so-called victimless crimes can help finance drug operations, illegal arms deals and the flesh trade. There’s a battle raging on several fronts. Tax evasion is a big area. For example, according to the US Inland Revenue Service, the US lost almost $1 trillion in tax revenues in 2021. India has seen a formalization of its economy following the rollout of GST, which pushed up tax compliance while revealing a breathtaking extent of evasion earlier.

As bad actors such as smugglers, terrorists and others look to exploit loopholes in international financial systems, banks keep investing to stay ahead. No respectable bank wants to unwittingly remit millions of dollars of drug money through its systems, although archaic set-ups, broken processes and the existence of secretive tax havens are only some of the impediments in this battle. A UN Office on Drugs and Crime report states that a staggering 2-5% of global GDP is laundered every year (up to $2 trillion annually). Clearly, this battle has not been won yet. Fortunately, technology is coming to the rescue.

As an example, Rzolut, a Singapore-based startup, has developed a platform that can be used by banks to instantly check whether a new customer is ‘compromised’ in any way, is politically connected or has a criminal record. MetricStream, based in Bangalore, helps its clients track regulatory compliance across multiple jurisdictions globally, thereby helping them secure their businesses. The defining feature of platforms of this ilk is their ability to provide a solution to customers as a service in real time and with measurable accuracy. They have become valuable partners for banks and corporations in the financial and cyber crime wars. No wonder this sector has attracted billions of dollars in venture investments, with Pathlock’s raise $200 million in the summer of 2022 being a prominent example.

As the finance sector struggles to contain the costs of this war, nimble startups with cutting-edge technology are going to play an increasingly critical role in defeating the bad guys. The need to Know Your Customer (KYC) is an essential starting point: proper KYC ensures that criminals and criminal activity are kept out of the banking ecosystem.

At Barclays Bank, a mix of staff shortages and outdated technology led to a pile-up of background checks, which resulted in the bank announcing in January that it will not take on board new corporate customers for a few weeks. This stunning announcement, which has a direct top-line and bottom-line impact, apart from posing a public-relations challenge, underlined the importance of investing in up-to-date technologies and appropriate staffing to meet compliance needs and fight financial crime.

The battle does not stop once KYC norms are met. Customers and their counter-parties need to be screened constantly as they conduct transactions. Especially in opaque areas such as trade payments and financing, illegal transactions are often a needle in a very large haystack. Real-time digital technology and databases are needed to instantaneously determine whether the parties at both ends of a money transfer are kosher, and to ensure that a company’s suppliers in distant lands do not have criminal cases pending against them.

Today, technology also enables an investment firm to keep an eagle’s eye on its portfolio companies by monitoring GST compliance in real time. Similarly, many manufacturing companies, especially those with complex global supply chains, are deploying systems and processes to monitor their business partners for ESG compliance, tax compliance and the like. Adverse media mentions are also closely tracked.

A combination of a strong technology platform and intelligent analysts is needed to flag, analyse and block suspicious transactions. It is clear from the data cited earlier that the surface has barely being scratched so far.

In the context of retail banking, increasingly clever phishing attacks, fake calls and even duplicated bank websites get deployed to entice people to hand over account details and one-time passwords, resulting in instant losses. It’s well known that law enforcement is struggling to keep up. For the moment, criminals seem to be winning in India.

It has been three or possibly four years since I last visited a bank branch. The joys of digital banking, mobile apps and ATMs have ensured that the classic old branch will soon go the way of the steam engine. However, we must all be cognizant of the dark side of electronic banking and take due care when interacting with financial institutions on digital platforms. The fight is not just theirs. It is also ours. After all, it’s our money at stake.