Fraud and compliance must converge

According to Richard McCarthy, chairman of the Fiserv Fraud & Compliance Product Advisory Council, combining fraud and compliance efforts is crucial in effectively taking on the modern-day criminal.

Just a few years ago, fraud and compliance departments were two worlds apart. Each served a different purpose, and each pursued a different goal. While compliance officers were driven by the fear of large fines imposed by the regulators to improve the detection of money laundering, fraud managers were tasked with the growing problem of tackling the financial losses incurred by new types of fraud, from credit cards to the internet. All this is changing.

In some cases, banks are already consolidating financial crime efforts into a single ‘group integrity’ department that combines anti-money laundering (AML), fraud and, in certain cases, security. Additionally, they are turning to advanced multi-channel fraud and compliance detection technology to help them take on the modern-day criminal.

In part, this is due to changes in the way that criminals commit financial crimes. Criminals are increasingly organised in the way they infiltrate customer accounts. They also attack across many or all payment channels, assaulting customer accounts globally. Consequently, financial institutions are accepting the fact that, to effectively combat financial crime, they need to group fraud and money laundering prevention resources together.

Regulatory backing
Financial regulators are also adding their weight to these efforts to combine fraud and compliance. In a recent speech by the director of FinCEN, James Freis, said: ‘I want to emphasise that financial institutions can benefit by leveraging their fraud resources with their AML efforts and starting to take advantage of the significant efficiencies that I see being available through this leverage.’ Freis added that financial institutions ten to associate his agency’s mission ‘exclusively with fighting money laundering and terrorist financing. In reality, the breadth of financial crimes and, therefore, our mission, is much broader.’

The general verdict is that money laundering and fraud are often connected. Money laundering can be a malignant product of fraud, where perpetrators seek to disguise the proceeds of a financial crime by laundering it through the financial system.

Yet the challenge of modernising the way we detect and prevent fraud and money laundering will not be an easy one. Many compliance and fraud departments in banks have become entrenched in the methods they follow and in the detection tools they use. This is confirmed by Freis, who reports that ‘FinCEN is in the middle of an ongoing outreach initiative with some of the nation’s largest financial institutions in order to learn more about how their AML programs operate’. Among the lessons learnt by his agency, is that many of those programmes ‘are run separately from the bank’s fraud-detection departments’.

The need for change is apparent. In a recent user survey conducted by Fiserv of its customers who use the NetEconomy product to help them in their anti-mony laundering efforts, 68% of respondents stated that they plan to or already combine fraud and AML efforts. One of these customers includes NetSpend Corporation, a pioneer in the prepaid card industry.

Founded nine years ago, NetSpend has become a US leader, processing over $3.5 billion in card payments annually. NetSpend uses Fiserv’s NetEconomy Financial Crime Suite to detect money laundering, fraud and employee fraud.

Thomas J Firnhaber, director of compliance at NetSpend reports, ‘we are extremely pleased with the results of this implementation, as well as our ability to use one integrated solution across three crime areas’.

By implementing this platform, NetSpend has saved money and optimised processes by investing in one solution that covers both fraud and money laundering prevention. For instance, it uses the NetEconomy system to monitor transaction activity at its partners’ locations and, as a result, was able to detect instances of fraud perpetrated by employees of its partners. Through early detection of this fraud with the NetEconomy system, NetSpend was able to help its partners prevent significant losses.

Money matters
For many industry experts, this convergence will not come as a surprise. Gartner Research, a leading information technology research and advisory company, reported last year that compliance and fraud mitigation needs are driving increased interest among large banks in securing enterprise-wide financial crime management solutions. Celent, a research and consulting firm focused on information technology in the global financial services industry, also recognises this market demand and has given presentations of the subject of fraud and compliance convergence.

Celent outlines some of the reasoning behind using a general detection platform for AML and fraud. Both involve the monitoring of transactions and both share similar functional needs, including the generation of alerts and support for strong case management.

A consequence of this is that an increasing number of vendors are offering financial crime suites, and financial organisations appear to be increasingly selecting them to simplify their systems and improve their total cost of ownership. However, fraud, like AML, has its own particular needs. The demand for real-time monitoring is greater in fraud, and the volumes of data to be analysed are also often greater.

Combining fraud and compliance will therefore not be easy, and for this reason, many financial institutions are turning to the external experts, including the financial crime vendors. Fiserv, for one, has carried out an increasing number of projects of this nature. The lessons learnt indicate that, with the right skills set and complementary technology, large benefits similar to those reported by NetSpend can be derived. Financial institutions need to adapt their approach to fighting financial crime, by incorporating both fraud and AML compliance to see the real benefits and efficiencies of this convergence.

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