Bank regulation has not kept pace with global financial crime

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Financial crime is a multitrillion-dollar international epidemic underpinning a global humanitarian crisis; a plague exploiting our most vulnerable citizens and an imminent threat to the safety of our communities. From the tens of millions of human trafficking victims that were exploited for nearly $350 billion in illicit profits last year to elderly consumers who were the victims in $80 billion worth of fraud losses — financial crime has a deep human impact.

The scale of this crisis is driving an urgent need for the industry to align on actions that focus on protecting the financial system and society from the devastating impacts of scams, elder abuse, human trafficking, drug trafficking, terrorist financing and other crimes.

It's time to address today's overly complex — and ultimately costly — compliance landscape, and focus on effective, outcomes-based crime fighting.

For decades, banks have been at the forefront of uncovering fraud and money laundering, and responsible for safeguarding the financial system from bad actors by providing reports of actionable intelligence to law enforcement. Yet, in parallel, regulatory obligations have continued to increase, growing more complicated and burdensome for banks' compliance programs.

Today, banks face continuously changing regulations and expectations that are intended to protect the financial system from criminal activity, but instead have led to an overly complex regulatory regime that focuses on banks' adherence to compliance requirements, instead of their efforts to effectively combat financial crime.

Meanwhile, the criminals that banks are trying to thwart are not bound by borders, privacy or regulation, allowing these bad actors to rapidly evolve their tactics to evade detection.

By exploiting technology, such as artificial intelligence and real-time payment rails, criminals are executing fraud schemes on a massive scale with devastating impacts on businesses and consumers. Organized illicit networks are taking advantage of the silos across the financial system to move billions of dollars in criminal proceeds from fraud, human trafficking and drug trafficking, and to obfuscate the flow of funds for terrorist activity.

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By Jim Dobbs

April 19

Institutions are investing significant resources and increasing headcount to maintain compliance with regulatory obligations, while also safeguarding the financial system against emerging fraud and money laundering threats. In a recent survey of institutions, 75% of respondents cited an increase in headcount last year, and when asked about current capabilities, only 53% felt they had adequate resources and technology. Most respondents further noted that the limitations of their current anti-financial crime capabilities would require significant changes to processes and systems. Banks cannot sustain the pace of hiring that is needed to offset the increasing complexity of compliance requirements and inefficiencies of current approaches — while criminals continue to rapidly evolve and further exploit the financial system.

Collective action is needed to reduce the complexity of the regulatory regime and support banks' efforts to deliver effective outcomes for anti-money-laundering and countering terrorist finance efforts as well as fraud prevention.

First, regulatory clarity is needed on priorities for bank's anti-financial crime programs. In the U.S., the National Priorities, first published in 2021, identify serious threats to the safety and security of the U.S. financial system — and yet implementing regulations on how banks are expected to incorporate typology-specific threats into their AML programs are long overdue. Clear guidance from regulators will enable banks to prioritize use of their compliance resources and effectively manage financial crime risks.

Second, it is also imperative that regulators and policymakers support banks in adopting innovative approaches. With the significant time savings and cost reduction possible by applying automation technologies, including generative AI, banks can redirect resources investment toward improving the effectiveness of anti-financial crime efforts.

Finally, encouraging greater industry collaboration will break down the silos that are barriers to truly effective financial crime prevention. Collaborative analytics, private-to-private information sharing and public-private partnerships are powerful force-multipliers in banks' efforts to combat fraud and money laundering. Moreover, ongoing feedback from the public sector on the usefulness of reports and intelligence provided to law enforcement will enable the private sector to align measures of effectiveness for anti-financial crime programs with actual outcomes.

It is critical that the public and private sectors align on a shared vision to collectively focus on financial crime priorities, seize opportunities to innovate with technology and embrace collaborative approaches. Within this new paradigm, technology can further advance the efforts of policy makers, regulators and banks as they to work together to protect our communities and the global financial system from illicit threats today and help prevent the financial crimes of tomorrow.