FCA urges firms to use tech to fight crime

While the Financial Conduct Authority (FCA) has a neutral approach to financial firms' use of technology, one of its executive directors has implored the industry to experiment with new technology to tackle the array of financial crime.

Speaking today at the Royal United Services Institute in London, the FCA’s executive director of supervision for investment, wholesale and specialists Megan Butler said: “I’m not going to tell you whether you need to automate all your systems or question why you aren’t using AI in every part of your business.

“But we all need to experiment with new technology, and together see how we can tackle criminals who want to exploit the financial system,” she continued, adding: “We all have a public duty to explore all opportunities to combat crime; together we need to turn technology against criminals.”

It is estimated that the serious organised crime facilitated by that money laundering facilitates costs the UK £37 billion every year, while the estimated annual cost of fraud in the UK stands at £190 billion. Fraud accounts for around one third of all crimes experienced by individuals, and in the last year there has been a 17 per cent increase in fraud offences - driven by an increase in bank and credit account fraud - to 3.8 million offences.

More than five million people chose to lead an almost cashless lifestyle this year, according to UK Finance, but Butler pointed out they also give criminals sophisticated tools to bend the financial system to their own ends – the anonymity granted by virtual currencies being one well-known example.

“With debit cards now the most popular method of payment, the opportunities to exploit weaknesses in the system are evolving – and yet, these same technologies, when used to the right ends, could also be game changers in the fight against financial crime,” she commented.

Butler explained that firms do not always have the complete picture when searching for patterns amongst vast amounts of data. The 2,000 businesses involved in the FCA’s first annual Financial Crime Data Return said they collectively spent over £650 million a year on dedicated people to combat fraud, laundering and other financial crimes.

Those firms also made over 360,000 Suspicious Activity Reports to the National Crime Agency in 2017, and identified nearly 120,000 Politically Exposed Persons. “What the latest results already reveal is that the collective resourcing cost of the fight against financial crime among these firms now comes to over £1 billion each year,” added Butler.

She noted that the way firms approach this challenge varies, but what is clear is each and every firm that is part of a transaction chain has a responsibility – for example checking who their client or customer is.

“For some it’s a mixture of machine and manual processes - technology is used to flag up risks but banks still rely on thousands of staff to manually review those flags - what we might call ‘checkers checking the checkers’,” Butler stated.

She said that while some firms are automating existing processes through the use of compliance technology, others are going even further. “We are seeing an increasing number of firms applying intelligent technology to tackle financial crime – including artificial intelligence, robotics, natural language processing and machine learning.”

Butler argued that continuous innovation is vital to stop criminals, with disrupting financial crime in real time being a key frontier to stopping it before it happens. “From AI-driven impersonation checks to verify whether photos in different ID documents match, to the use of machine learning to identify high risk customers who may warrant deeper background checks – AI and machine learning could be turned to real, practical uses in the fight against financial crime.”

She continued that the regulator obviously also has its part to play in terms of exploring innovative approaches to combatting financial crime, citing the sandbox set up to support RegTech initiatives like digital identity and recent TechSprints looking at better information sharing.

Butler admitted that not all of these ideas may work, “but that can’t be a reason not to look for the ones which will”, adding that in the first half of next year the FCA will publish a report detailing the progress made since the TechSprint.

She also used the speech to hail the Global Financial Innovation Network (GFIN) the FCA helped setup, as well as the new Analytics Centre of Excellence – an internal initiative to drive the use of data science, machine learning and AI across the regulator.

“One example is the use of data to spot potential outliers,” Butler explained. “Take money laundering - we have reviewed 10,000 data points across 16 separate regulatory returns including our Financial Crime Data Return - to produce analytics that can highlight risk profiles.”

From this, the FCA can be better informed about the potential for businesses to be more susceptible to money laundering risks. “And we’re exploring the feasibility of using automated tools, as our more traditional methods of supervising systems and controls can benefit from new techniques,” she commented, adding that her team is looking at two proofs of concept to test where gaps may exist in systems and controls designed for sanctions spotting and transaction monitoring.

“As a regulator we already make use of innovative tools in other spheres - in the cyber space we use CBEST, or in plainer terms, ethical hacking - to help us test the robustness of firms’ defences against cyber-criminals,” Butler added. “Why not take this thinking into the financial crime space?”

She concluded by pointing to current experiments with new analytical techniques, including predictive analytics and web-scraping, to help discover key trends and potential outliers more quickly.

“Technology, frequently an enabler of crime, can also be a hugely potent tool in the fight against it – indeed, it may be the greatest tool we have, giving us the chance of finding that needle in the haystack,” Butler stated. “So, if I could leave industry with one message today it would be don’t be afraid to use technology and innovate to keep criminals out.”

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