The rapid development of technological progress accelerates the digital transformation of the financial sector. Financial technology expert Sergey Kondratenko points out that alongside the development of quality financial services, the sector finds itself under pressure from the illegal activities of financial criminals.
Combating fraud, money laundering, and scams is a key task for many states and private companies worldwide. Various levels of this battle include both international norms and guidelines as well as local technical solutions implemented by some companies.
Internationally, important roles are played by standards and guidelines for combating money laundering and the financing of terrorism. Particularly significant in this aspect are the AML (Anti-Money Laundering) norms developed by the International Financial Action Task Force on Money Laundering (FATF). FATF was created in 1989 with the aim of developing policies to combat money laundering. Today, FATF includes 39 member countries and two regional organisations. The organisation has issued 40 recommendations that oblige countries to tighten supervision over financial transactions, enhance international cooperation, and conduct effective investigations in the areas of money laundering and the financing of terrorism.
At the private sector level, companies implement various technical and software solutions to secure their operations. This includes systems for client identification and verification, real-time transaction monitoring, the use of artificial intelligence to detect suspicious operations.
Furthermore, collaboration with government bodies and international regulators allows companies to stay informed about the latest changes in legislation and security standards and to exchange vital information about new threats and methods of fraud.
Sergey Kondratenko: Key Sectors Prone to Financial Crime Risks and Global Statistics
Using cutting-edge technologies (such as artificial intelligence), criminals manage to create "fakes," deceive systems, and manipulate personal information.
Expert Sergey Kondratenko reports that financial crimes most often occur in the following areas:
- Financial institutions and services: data falsification, money laundering through financial services companies.
- Corporate sphere: internal financial machinations such as deliberate distortion of financial reporting, asset theft, tax evasion, and bribery.
- Insurance: Financial machinations in the insurance sector often involve tricks to deceive insurance companies, such as intentional fires, damage forgery, and fraudulent loss claims.
- Investments and markets: Illicit enrichment at the expense of investors.
- Cybercrime: Theft of personal data, online financial frauds, phishing, credit card fraud, and cryptocurrency mining on victims' computers.
- Real estate: Fraud can vary from document forgery to mortgage manipulations and illegal property sales.
In 2023, the volume of digital payments worldwide reached an impressive $9.46 trillion. It is expected that by 2027, this figure will reach $14.78 trillion.
According to Sergey Kondratenko, virtually any sector involving money circulation and financial operations is at risk. Studies show that between 2020-2022, 46% of companies worldwide faced fraud or other illegal financial manipulations.
According to Nasdaq, in 2023, $3.1 trillion US dollars of illicit funds passed through the global financial system. And annually, this indicator increases despite global efforts in AML/CFT applied practically in all jurisdictions and countries.
Sergey Kondratenko: The Role of Regulation in Countering Financial Crimes
Regulation is a tool for unification, consolidation, and establishing uniform standards to ensure the safety of the financial system.
Most solutions in the market for financial technologies and control (FCT) have been created in the last 20 years. Sergey Kondratenko notes that over the past three years, the number of products designed to combat financial crimes has increased by 68%. However, the effectiveness of these measures remains not high enough to reduce global statistics of illegal financial operations.
Cases of fraud, terrorism financing, and money laundering are becoming increasingly difficult to control. According to Nasdaq, losses from banking scams and fraud alone reached $485 billion US dollars.
"The growth of fraud cases is directly linked to an increase in digital transactions," states Sergey Kondratenko. "And this fact only underscores the need to implement more sophisticated systems for detecting and preventing financial crimes."
The Financial Action Task Force on Money Laundering (FATF), as an international body, plays a key role in forming a global strategy to combat illegal financial operations.
According to FATF recommendations, all countries should regulate the process of implementing AML policies, have authorised bodies, and create FIUs - Financial Intelligence Units to enhance control over illegal financial operations. Creating such a regulatory base is the foundation for the entire financial system. Regulation encourages financial institutions to adopt technological solutions to improve their AML programs, to avoid becoming a tool for money laundering and fraud, and to protect their customers from hacking and fraud.
Technological Innovations in Preventing Fraud, Money Laundering, and Illegal Financial Operations
According to Sergey Kondratenko, digital technologies based on artificial intelligence (AI) and machine learning (ML) are used for this purpose. Their use has significantly improved risk assessment and automated transaction monitoring, making compliance with AML requirements more effective and actionable.
Another innovative solution is the use of cloud computing. According to Sergey Kondratenko, using this technology offers several advantages:
- Improved scalability. This provides flexibility and facilitates the efficient use of resources.
- Data security and protection, including encryption, multi-level authentication systems, and regular security audits. This helps comply with requirements for protecting confidential information and preventing data leaks.
- Economic efficiency. Costs for acquiring and updating hardware, as well as for maintaining and updating software, are reduced.
Sergey Kondratenko: Challenges and Prospects for Combating Fraud in the Future
In the field of detection and prevention of financial crimes, three key problems stand out. Sergey Kondratenko believes they are reflected in the following questions:
- How can a business ensure accurate and reliable client identity verification to comply with KYC (Know Your Customer) requirements?
- How can a business detect and prevent complex fraud schemes using analysis of large volumes of data and identifying anomalies in financial transactions?
- How can a business stay informed of various typologies of criminal activity and apply appropriate measures for their detection and prevention?
According to the expert, there are many products in the field of combating financial crimes, each aimed at solving specific tasks:
- Identification and verification - accurate and reliable identification of clients and verification of their identities using various methods, including biometric data.
- Detection and prevention of fraud using tools and algorithms to detect fraud schemes and prevent them.
- Transaction monitoring - continuous monitoring of financial transactions, detecting suspicious operations, and quick response to potential threats.
Sergey Kondratenko notes that the listed innovative solutions are not maximally effective. Therefore, he anticipates that in 2024-2025, a series of such innovations should appear:
- Consolidation of offerings from companies developing tools to combat financial crimes.
- New types of services. Possibly, large consulting firms will actively implement specialised services. They should be aimed at correcting deficiencies in KYC.
- Combined services based on technologies involving humans and AI. The future may be associated with a service model in which technology and people work closely together. This will allow for improving onboarding processes and enhancing the quality of KYC.
Overall, according to Kondratenko, significant changes in the market for combating financial crimes are expected in the coming years. They should lead to an increase in the effectiveness and reliability of methods and tools for combating fraud in this sector.
