Financial crime has become one of the most significant threats to financial institutions worldwide. According to Nasdaq Verafin, approximately US$3.1 trillion ($4.06 trillion) in illicit funds passed through the global financial system in 2023.
Additionally, 98% of the 1,181 financial institutions LexisNexis Risk Solutions surveyed in 2023 say they have seen an increase in financial crime compliance costs, which means that these organisations are facing “undeniable” regulatory pressures. The report adds that digital transformation and emerging technologies have given these institutions “great growth opportunities”, but it has also exposed them to new risk typologies as criminal groups may misuse digital services and emerging technologies.
The anatomy of financial crime
Financial crime encompasses a wide range of activities, from money laundering to terrorism financing. At its core, money laundering involves disguising proceeds obtained through illegitimate means to appear legitimate.
“Money laundering itself is essentially… [the] ill-gotten proceeds of criminal activity. If you’re talking about a few hundred or a few thousand dollars, it’s easy to use that money. But when you’re talking about hundreds of thousands and millions of dollars, then you have to integrate that money... into the financial system,” says Rohit Mittal, director of financial crime compliance and payments, Asia Pacific (Apac) at LexisNexis Risk Solutions. He adds that to conduct a transaction using these ill-gotten gains, such as buying real estate, one will have to show the authorities that the money is earned legitimately.
Most Singaporeans should be familiar with the concept of money laundering by now. Just a few months ago, authorities uncovered the country's biggest money laundering scandal involving the so-called “Fujian gang,” seizing $3 billion worth of cash and assets.
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Mittal outlines the three stages of money laundering. “The first step is placement, [which is] basically bringing money into the financial system. The second is layering, [where you] make the money go round and round. You create enough layers in the system that the trail of the money cannot be traced back to that original illegal activity, making it harder to trace. The third is integration. After you have layered it enough, it is basically part of your actual legitimate wealth, legitimate earnings and then you use that to do further financial transactions, like buying a real estate or a private jet or a car.”
For money laundering to happen, however, a predicate offence — such as the trafficking of drugs, people or wildlife — where money is generated from those activities has to take place first, he adds. Additionally, he warns that people need to be more aware of such activities, even if they may seem distant to some, as it can happen to anyone.
“These days, digital fraud is a key area of concern for regulators, banks and financial institutions. What ultimately leads to this is money laundering. And then that money can go into the system, or it could potentially go into some seemingly legitimate areas like real estate,” says Mittal.
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Financial crime trends
Some key financial crime trends identified within the Apac banking sector include fraud, money laundering and cybercrime, says Sanjeev Shukla, managing director and financial services security lead for Apac at Accenture. He adds: “While it’s not new, payment fraud, in particular, has become more prevalent in recent years, driven by the increased use of mobile devices and social media and accelerated by the shift to online banking during the Covid-19 pandemic.”
The rise of generative artificial intelligence (GenAI) is also contributing to the higher number of fraud incidents as it makes it much easier for criminals to undertake fraud with technology like deepfake. “We are witnessing significant trends in financial crime compliance, notably driven by the utilisation of GenAI and automation to optimise critical processes such as onboarding, transactions monitoring and investigations. This technological evolution extends to also enhancing oversight on trade-based money laundering, employing network link analysis and entity resolution and shifting towards continuous monitoring and perpetual know your customer (KYC) practices,” says Radish Singh, Asean financial services risk management leader at EY.
LexisNexis Risk Solutions’ Mittal sees three major trends in financial crime within the broader financial services space: the adoption of financial technology, global trade or trade-based money laundering and the increasingly complex nature of international sanctions.
Financial technology such as cryptocurrencies and blockchain may have helped financial customers in many ways, but they are also providing tools for criminals to conduct illicit activities. So, even if technology has made life easier as a customer in that one does not have to carry physical cards or cash to perform transactions, it also makes it easier for criminals to run their cross-border networks and collaborate across countries and jurisdictions, says Mittal.
Meanwhile, the changing nature of global trade, especially in a post-Covid-19 world with an upending of supply chains and countries looking for diversification, has caused a “significant heightened risk” of trade-based money laundering, says Mittal. Unlike globalisation that happened in the 1980s and 1990s, there were “defining patterns” with well-established supply chains, which would make it easier for a bank or financial institution to determine who the parties involved, what transactions were being conducted and whether these activities were legitimate or not, he adds.
“Trade-based money laundering is very complex to track because it involves multiple jurisdictions,” says Mittal. For instance, goods originating from China would have made several stops in several countries before reaching their final destination, which means there are multiple jurisdictions and a long chain of different parties involved.
The increasing complexity of global sanctions is another trend. In today’s geopolitical climate, a number of sanctions have been applied to different countries and they are taking place at a rapid pace. As a result, these sanctions are making it “very complex” for financial institutions to remain broadly abreast of the economic landscape, he adds.
Prevention a challenge
Preventing financial crime remains a challenge, especially in Apac, due to the “rapid evolution of typologies” and the sophistication of criminal tactics, says EY’s Singh. “Criminals are adept at adopting smarter approaches and leveraging profile-building techniques to infiltrate financial systems and conceal illicit funds.”
“Data-related challenges remain significant hurdles and despite efforts to streamline onboarding processes, there is a lack of widespread use of analytics and new approaches for detection of anomalies at the point of onboarding,” she adds. “Achieving a balance between customer experience, compliance and competitiveness is essential; hence, onboarding of customers cannot be undertaken forensically.”
Besides that, the nature of real-time payments and the speed at which money transfers take place leave little time for banks and financial institutions to screen and ensure that the transaction is legitimate, adds Mittal. This problem will be amplified as Apac’s transaction volumes will “dramatically increase” due to the accelerated digitalisation of the region’s unbanked population. “The region accounts for 52% of global paperless transactions in 2023, increasing vulnerabilities to illicit activities. For example, mobile banking adoption is particularly high in Southeast Asia and India, making these regions more susceptible to fraud and their large population means that the actual volume is higher,” says Shukla.
He continues: “Southeast Asia may also be susceptible to sophisticated frauds using deepfakes. In countries like Singapore, which has an ageing population, the elderly could be more susceptible to social engineering scams involving fake calls, especially if they lack awareness about digital fraud.”
Best practices for banks
Mittal believes financial institutions should ensure they have effective compliance programmes, but this has to be balanced with providing a smooth customer experience. They should also conduct constant due diligence throughout the lifecycle of their customers instead of simply looking out for sanctions and politically exposed persons. Using specialised data that is accurate, complete and timely, as well as technology such as cloud, analytics and automation, will also help, he adds.
Accenture’s Shukla echoes this. “Numerous technological solutions can significantly enhance security. These include implementing multi-factor authentication, facial recognition for high-value transactions and payment validation services. While these measures introduce friction to transactions, they provide customers with an additional layer of security and crucial time and opportunity to identify and halt suspicious activities.”
While technology is key, financial institutions will also need to collaborate within the broader ecosystem, such as with telecommunication providers and regulators. “There are several great examples already in place and they should be bolstered further,” says Shukla, referring to the “kill switch” feature introduced by Singapore’s major banks in 2022. The feature immediately blocks access to customers’ current and savings accounts and all Internet banking facilities through an automated phone banking system in the event of a scam.
EY’s Singh believes banks have to adopt innovative practices and move towards an “intelligence-led” approach.
“This includes taking a strategic perspective on enhancing monitoring and detection capabilities through a holistic surveillance approach,” she says. “By focusing on the interoperability of technology stacks and data quality across the organisation, banks can visualise risks more effectively and respond proactively.”
Moreover, the financial industry should reallocate its resources to high-value activities and embrace resources for data pooling and network assessment, which allows for faster action and improved visualisation of fund flows and potential bad actors. “However, sustaining optimisation and enhancement demands sharp models and a robust governance framework for continuous management,” says Singh.
As the battle against financial crime in the Apac region continues to evolve, financial institutions must stay vigilant and adaptable in their approaches. However, enhancing consumer awareness is equally vital, particularly among vulnerable groups, says Shukla from Accenture. “[In addition,] regulatory clarity and collaboration are necessary to address the multi-dimensional nature of financial crime, where responsibility may fall between banking, telecommunications and payment service providers.”
