Combatting financial crime is an expensive business. 

In the UK alone, it’s estimated more than $800 million is spent each year by the financial services industry, employing more than 11,000 members of staff committed to fighting fraud, money laundering and other crimes, according to the Financial Conduct Authority (FCA).

Globally, the 14 largest banks spend $2.6 billion a year fighting financial crime, according to the Bank Policy Institute.

“Monitoring and addressing the risk that criminals abuse the financial system consumes a significant amount of firms’ time and resources,” reported the FCA in November.

So-called “bad actors” are exploiting banks’ systems for illicit money flows from crimes such as theft, money laundering, bribery, corruption, terrorist financing and human trafficking.  

And with improvements in technology meaning money can be moved around faster, the problem of financial crime is becoming ever more sophisticated.

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A high price to pay

Part of the challenge banks are facing is the sheer volume of customers and relationships they have to monitor. Over the years, this has increased to the point where it has become impossible to screen everyone and every transaction. And that creates loopholes in the system that criminals can exploit.  

In the decade since the global financial crisis, banks have been upping their game against financial crime, as regulations have tightened. But between 2012 and 2015, nine banks in the US paid a total of $20 billion in fines for having lax controls against money laundering, helping clients evade taxes or violating US sanctions.

Not only does financial crime cost money – it can also cost banks, and the systems they use, their reputation. 

Recent media reports on the financial crime penalties against Europe’s biggest banks raise questions on how bad actors have managed to bypass the banks’ “know your customer” (KYC) processes so their money-laundering transactions go undetected. 

The problems facing banks

When a new customer joins a bank, they go through the KYC process, which assesses their risk in terms of tendency to carry out money laundering or other financial crimes. The customer profile is then monitored at regular intervals to see if anything has changed since the last assessment. 

So far, so good, but the KYC process comes with its own challenges: part of it is done manually, resulting in a high operational cost for the bank. 

As the number of new relationships increase and new compliance checks are included, the costs keep getting higher. 

Not only this, but while the criminals are getting smarter and using technology to their advantage, sadly the banks’ screening and monitoring systems have not always kept up. 

With digitalization, banks now have a lot of data, but are not yet leveraging it effectively to identify and prevent crime.

An automated solution

At TCS, we see a predominantly manual KYC processes evolving into automated Customer Knowledge Centres (CKC), that provide banks with a deeper understanding of the customer. 

Not only can this highlight new revenue opportunities and improve customer engagement strategies, but, most importantly, it can also prevent financial crime.

CKC platform automates the data collection from a both internal and external data sources and creates customer knowledge graphs that expresses the semantics between the data elements This deeper understanding of the customer is vital to identifying the bad actors in the system.

The advanced machine learning algorithms in CKC continuously learn from historical data and can predict the bad actors and suspicious transactions in the system. This cuts down the time required to handle a KYC case and assists the KYC operators in making informed data driven decisions.

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Money launderers adopt sophisticated techniques to hide the crime trail. They create rings of accounts that appear to be unrelated and move assets between these accounts. They also hide their true identities by creating different customer profiles with variations in personal information. 

AI-based deep-learning models can uncover hidden relationships between the data sets to decode the obfuscations created by money launderers. This is a key capability of the CKC platform, the strength of these algorithms lies in establishing the co-relations between the data that get missed out in standard analysis techniques. 

The models flag suspicious relationships between customer profiles, transactions and accounts.

Golden source of truth

Banks face a further challenge in that multiple versions of the same customer can exist in different lines of business or legal entities, resulting in different risk scores for the same customer, and operational inefficiencies in performing KYC.

These create loopholes that bad actors can misuse. The answer lies in having a single source of truth with a secure and seamless information exchange within the entities or lines of business of a bank.

Powered by blockchain technology, CKC can provide secure access to customer information across the bank LOBs and legal entities, with the ability to update and trace every change to the information so that, at any point, there is only one golden source of truth for all stakeholders.

In future, it would be a natural progression to extend CKC blockchain to external banks, government authorities, regulators and other stakeholders.

What next?

While customers are beginning to realize the benefits of the CKC approach, most of the big banks are in the early stages of implementation, partly due to the complexity of their existing IT landscape. 

They’re currently implementing smaller solutions to address specific problem areas in money laundering and other financial crimes.

While these pin-pointed solutions help address certain challenges, banks need to build a comprehensive knowledge of customers that is current and generate insights that enable data-driven decisions. 

In the meantime, regulators are developing new policies and controls to identify and prevent financial crime and levying heavy fines in areas of non-compliance to policy. 

With money and reputations at stake, we’ll start to see more investment in advanced technologies, as banks, regulators and financial companies join forces in the fight against financial crime.