How to Navigate the Threat of Increased Fraud and Criminal Activity in an Economic Downturn

Amid mounting layoffs in the tech industry and persistent inflation, an uncertain economic outlook has many preparing for a recession.

Difficult financial times introduce a host of challenges for any business. But the financial sector must be particularly vigilant about mitigating the risks of criminal activity that accompanies any economic downturn. The fallout from the pandemic introduced economic pressures driving people to pursue fraud in banking, insurance, and healthcare.

Factor in the impact of a global recession, and your institution faces an even greater level of risk. During the last major economic downturn in the wake of the 2008 financial crisis, incidents of online fraud jumped more than 87% in a single year.

To protect your institution and its reputation, you need AML and fraud-prevention processes capable of navigating whatever turbulence lies ahead.

AML and Fraud Prevention Remains an Uphill Battle for Financial Institutions

Like so many aspects of the financial services sector, your AML solution has come a long way from analyzing spreadsheets to detect fraudulent transactions. However, in the face of evolving technologies and increased illegal activity worldwide, AML programs rapidly lose effectiveness without consistent updates and care.

Phishing scams and other fraudulent activity have grown more sophisticated over time. Just as modern AML solutions incorporate advancements like AI to analyze financial records, criminals apply the same technology to circumvent those tools.

Plus, many institutions remain short-staffed as they recover from the pandemic. Criminal activity has increased and stands to expand further in the face of a recession. And banks simply don’t have the resources to maintain their AML solution or properly investigate all of their data.

At the same time, regulations enacted in response to the rising threat of fraud struggle to keep pace. Factor in the challenge of monitoring watchlists tracking criminals and politically exposed persons (PEPs) around the world, and small- to midsize institutions face a constant struggle to remain in compliance.

Why ‘If It Isn’t Broke, Don’t Fix It’ Isn’t Enough for AML Solutions

If your institution is responsible for managing transaction records, you may be comfortable with your current, out-of-date AML tool. It may still be an on-prem solution, or its technology may not be scalable enough to weather periods of high demand. But it’s functioning well enough to allow your institution to get by.

Whatever the case, you’re ultimately playing a dangerous game. One recent UN report found that money laundering activity constituted between 2% and 5% of global GDP. Factor in the increased illegal activity that comes with a recession, and your institution’s risk level only increases with “good enough” solutions.

The Risks Associated with Compliance Violations Are Too Great

A robust AML tool requires resources, which favors multinational banks with pockets deep enough to create a custom in-house solution. And yet even the largest banks aren’t immune to the steep fines and legal consequences of compliance violations.

In 2022, penalties levied on financial institutions for failures to prevent fraud and AML crimes approached $5 billion, which was a 50% increase from the previous year. Deutsche Bank has been repeatedly fined millions of dollars for incidents of money laundering, and Capital One was fined $390 million in 2021.

More costly than the fines levied against institutions for neglecting their AML efforts are the damages to an institution’s reputation. As the threat of fraudulent behavior continues to grow, you need to evaluate your AML technology and address any weaknesses in your solution. Otherwise, bad actors will find and exploit vulnerabilities in your organization.

Insights into Data Analytics Are Essential to Effective AML

Finding and maintaining an AML solution specific to your needs constitutes only part of your effort to improve your institution’s fraud detection. You also need a solution that flags potentially suspicious transaction records without overwhelming your investigators with false positives. 

Reducing false positives doesn’t just come down to testing and tuning your AML rules. The effort also comes down to data quality. Incomplete information and errors are among the core contributors to the problem of false positives in fraud detection. But you also need to ensure your data sources are valid to secure regulatory compliance.

The right partner for your institution will offer more than the expertise to create a modern AML solution. Ultimately, you can massage any data model to ensure it generates outcomes that reflect well on your institution. But true specialists will establish a solution that incorporates the transparency and explainability to present back to the regulators in your industry. Plus, they will break down the silos of data within your organization to improve your data lineage.

Are your models explainable? How is your AML solution generating insights? You need transparency in your data and how it’s used both for regulators and customers in order to be successful.

Institutions Need an IT Arm to Navigate the Complexity of Fraud Prevention

Financial fraud is constantly evolving, as are the tools and technologies working to detect it. Securing a flexible AML solution is the only way to prepare for an economic climate of heightened criminal activity. Without it, you risk damaging your institution and its reputation with costly fines and legal action.

But bringing your internal resources and transaction data into alignment to support a new solution is no easy task. Your IT team is already short-staffed, and introducing new processes is complex and time-consuming.

The good news? You don’t have to navigate these transformative shifts alone. At Zencos, we have a wealth of experience designing custom AML solutions that are flexible, agile, and explainable to regulators. By leveraging advances in storage, analytics, and automation, you can have a solution that balances technology with expert human oversight.

Plus, we act as an IT arm for your institution so your team can focus on what it does best. Meanwhile, we manage all the details required to keep your solution functioning at a high level. Does this sound like a way of working that will work for your institution? We should talk about it.