A Practical Guide to AI for Financial Crime Risk Detection
Uncover how AI can enhance payment firms’ transaction monitoring systems today, including real-world results.
Download nowOn March 16, 2023, the Financial Conduct Authority (FCA) issued a “Dear CEO” letter to payments firms authorized or registered under the Payment Services Regulations 2017, and Electronic Money Regulations 2011. Spanning ten pages, the letter was authored by Matthew Long, the FCA’s Director of Payments and Digital Assets, and focused on various points of concern from the regulator over a lack of “sufficiently robust” risk management controls among payment firms.
As a result of these inadequate controls, Long noted that “some firms present an unacceptable risk of harm to their customers and to financial system integrity.” The letter also cited the cost of living crisis and tightening economic conditions as likely factors that are contributing to the growing risk of customer harm.
The letter is framed around three core outcomes payment firms must achieve:
To ensure a firm’s customers’ money is safe, the FCA highlights three main priorities:
To meet customers’ needs through high-quality products and services, the FCA recalls a letter written to payment firms in February 2023 reminding them of the regulator’s Consumer Duty expectations. Key things for firms to consider in this regard include:
The FCA letter’s second outcome relates to ensuring the integrity of the financial system. This section holds heavy implications for fraud and anti-money laundering (AML) professionals as it highlights common areas of non-compliance throughout the payments sector. Over the last two years, the FCA noted frequent issues related to control, governance, record keeping, and the risk-based approach. Specifically, these included:
To combat these inefficiencies, the FCA reminds firms of its expectations regarding AML controls and sanctions screening measures:
Following the UK government reclassifying fraud as a national security threat in February, the FCA notes it has seen “elevated fraud rates” in some payment and electronic money institutions. It notes the cost-of-living crisis as a potential driver of additional fraud. As a result, firms must “take action now to address weaknesses in their systems and controls to prevent fraud.”
Common issues identified by the FCA include:
The FCA has a clear sense of urgency around fraud, stating firms must “take immediate action” to protect customers against fraud, and ensure their firm is “not being used to receive the proceeds of fraud.” Firms are instructed to:
The letter ends with three final priorities that underpin the outcomes that came before. These include:
Commenting on the FCA’s letter, Martin Rehak, CEO and Co-Founder of Resistant AI, said: “The core injunctions from the FCA to maintain and evolve control frameworks to manage both evolving risks and business growth can significantly impact payment institutions, challenger banks, and other EMI fintechs — removing their focus from customers and squeezing their growth opportunities in a down market. Unless that is, they leverage AI to multiply compliance productivity and provide adaptive risk controls for new offerings & markets. Those that do so will transform compliance departments into competitive advantages for safer scalable growth. Preventing fraud and tackling money laundering from a single, explainable AI engine such as the ComplyAdvantage Transaction Monitoring system is key to unlocking that kind of transformation.”
When it comes to complying with the FCA’s priorities related to money laundering and sanctions, compliance teams should ensure that the customer names submitted to any screening solution are derived using automated checks against official/state-issued identity documentation, as opposed to user-inputted. When implemented correctly, this can have a significant positive impact on the number of false positives emitted from name screening tools. Once these steps have been taken, compliance teams should devise tests for their screening solution by running name sets through the solution in a test environment, as part of their broader risk and control assessments.
Payment firms should also ask vendors about the speed at which they can update their sanctions lists. In a tense, fragile geopolitical environment, new sanctions will likely continue to be issued at pace and unpredictably, meaning that receiving updates as close to real-time as possible will be critical to ensure continued compliance with regulatory requirements.
Regarding the FCA’s fraud priorities, compliance staff should consider leveraging AI to identify links between accounts – whether related to an individual(s) or an organization(s) – to help determine the true scale of the fraudulent activity. Sharing information and knowledge is also critical. This could be through participation in data-sharing initiatives like CIFAS, working with technology and data vendors who monitor and respond to emerging criminal typologies, or participating in regulator consultations.
To read more about what the FCA’s letter might mean for your firm, read our full coverage here.
Uncover how AI can enhance payment firms’ transaction monitoring systems today, including real-world results.
Download nowOriginally published 23 March 2023, updated 10 June 2024
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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