Preventing Financial Fraud
CUs need advanced technologies with real-time monitoring capabilities designed to detect and prevent fraud.
Credit unions and other financial institutions are facing increasing financial fraud. A TransUnion report found that since the start of 2021, attempted fraud targeting the financial services industry had spiked considerably. This fraud runs the gamut from money laundering and counter terrorist fraud to mule scheme-related synthetic identity thefts and peer-to-peer payment fraud. Current market conditions are only intensifying this fraud climate. The pandemic; the Ukraine War; growing tensions between the U.S., Russia and China; the greater use of cryptocurrencies; the growth of online platforms and mobile apps to make instant payments, declining economic conditions and reliance on third parties are all contributing to the uptick in financial fraud.
While research from PYMNTS.com found that 93% of credit unions had started funding security, authentication or digital identity initiatives in 2021, they still lag behind other financial institutions in their application of advanced technologies for fighting financial fraud. They do, however, recognize that traditional methods can no longer stand up to today’s onslaught of fraudulent transactions, especially given how rapidly fraudsters are introducing new schemes. What is needed are advanced technologies with real-time monitoring capabilities designed to detect and prevent financial fraud. Understanding the current threat landscape, and how these technologies work to reduce fraud and support regulatory compliance, is a good first step toward keeping fraud at bay.
Current Financial Fraud Landscape
The U.S. Securities and Exchange Commission, Federal Trade Commission and Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury, are all working on the front line of financial fraud defense. They have identified key frauds that credit unions need to be aware of, including:
- New account fraud, particularly related to accounts opened online or by phone;
- Imposter schemes in which criminals impersonate government agencies or other entities and offer fake services in order to steal money or information;
- Small Business Administration loan fraud, such as schemes related to the government’s pandemic-prompted Paycheck Protection Program and Economic Injury Disaster Loans; and
- Business tax credits fraud.
These and other financial frauds have financial institutions placing a greater focus on key areas of risk mitigation. For its report titled “Payments 2025 & beyond – Navigating the payments matrix,” PricewaterhouseCoopers (Pwc) asked financial institutions which areas they believed could be impacted by regulatory changes over the next five years. Their responses were as follows:
- 57% of survey respondents noted concern for data privacy and cybersecurity;
- 32% for the use of new technology;
- 31% noted digital identity authentication;
- 27% cited Anti Money Laundering (AML);
- 27% cited Know Your Customer; and
- 26% cited local regulatory pressures.
Also reported in the PwC report were trends of relevance to credit unions that affect the future of payments. They included financial fraud, cross-border payments (note: The Global Credit Union Statistical Report data stated that 86,000 credit unions operate in 118 countries worldwide) and digital wallets/payments.
Enhancing the Credit Union Business Model
Regardless of the type of fraud and trends impacting financial transactions, credit unions have to reconsider their business models. One of the most valued features of a credit union is its member-centricity and personalized, face-to-face relationships. Now, it is necessary that credit unions complement this model with a heightened focus on digital tools that can help them prevent account takeovers and financial fraud. To date, many credit unions are deficient in their authentication measures and have made minimal investments in fraud prevention technology. These deficiencies have rendered them on a path of least resistance and turned them into prime targets for criminals.
Existing Regulations and the FedNow Service
Taking prudent and comprehensive risk mitigation measures are key cornerstones of fraud regulations imposed by the U.S. Department of Treasury; Financial Industry Regulatory Authority; Office of Foreign Assets Control; USA Patriot Act, which expanded requirements for money laundering detection and reporting; Anti-Money Laundering Act of 2020, the National Illicit Finance Strategy and certain provisions of the Dodd-Frank Act. There are also state-level regulations such as the New York Department of Financial Services Cybersecurity Regulation and the New York 504 “Final Rule,” which added greater detail and more stringent risk control expectations. Additionally, there is the FedNow service, which is expected to launch in July and will be covered under the Electronic Fund Transfers Act. A direct response to instant payment-related fraud, FedNow will require credit unions and other financial institutions of all sizes to complete a certification process ensuring that they are prepared to address instant payment related fraud with the right operational and communications tools in place. It will provide protection against unauthorized charges and errors. If discrepancies are found between the payee’s name and unique identifier, the payer will have to be notified and warned before authorizing the transfer.
Considering the financial risk environment and regulatory compliance demands for AML sanction monitoring, and watchlists of fraudsters being updated regularly, credit unions need technologies that can deliver strategic fraud and AML sanction compliance reliably, seamlessly and with added value.
Technologies Tackling Financial Fraud
Right now, there are software programs available that are capable of performing key functions relating to fraud detection and prevention. These include member onboarding and screening, corporate onboarding and screening, transaction monitoring and screening, transaction fraud detection, and sanctions and watchlists screening. Many rely on artificial intelligence and machine learning to deliver real-time monitoring and accurate data. ML, for instance, when combined with advanced algorithms, supports enhanced transaction monitoring, which serves to uncover financial fraudsters, identify hidden relationships among criminals, reduce false positives in identifying criminals versus honest customers, and support improved risk-response red flags and alerts.
Hybrid-AI: The Next Frontier in the Financial Fraud Fight
Perhaps most significant in the fight against financial fraud are new hybrid-AI solutions that take real-time monitoring to the next level. These solutions offer super-fast, real-time performance and stop targeted transactions. Leveraging an advanced hybrid-AI approach along with ML and fuzzy logic, they enable credit unions to achieve the optimum screening results and avoid false positives. With their strong matching capabilities, they block the names of individuals, groups and companies that should not be going through a credit union’s system.
Robust case management capabilities provided by hybrid-AI solutions provide all of the historical data needed to make the optimum decisions. A comprehensive case management tool supports thorough case investigations across a fraud scheme’s complete life cycle. They provide the right framework for defining processes for researching and resolving cases, including investigation resources, time frames, escalation paths and alerts. In effect, they serve as a central repository for case activities by providing a complete history and fully-centralized audit trail.
Solutions incorporating this advanced hybrid-AI approach have been designed for easy implementation and use. Their flexible designs facilitate connection with any of an institution’s information technology systems and can easily accommodate system upgrades. With a centralized platform, they can accommodate branches involved in transaction monitoring in multiple locations across a credit union’s entire network.
The most sophisticated of these holistic solutions are easy to learn, enabling credit unions to avoid extensive training and support, as well as the associated high costs, which, in some cases, can approach seven figures. Additionally, they can support multiple languages and alphabets, enabling, for example, Chinese or Cyrillic characters.
As for their role in regulatory compliance, in addition to their fast, real-time fraud prevention and AML compliance monitoring, they provide the transparency that regulators and auditors seek.
By applying today’s most advanced fraud and AML compliance solutions, credit unions can achieve better fraud detection rates, uncover and gain insights into new fraud patterns, and achieve a lower false-positive ratio. These fraud and compliance management solutions give them maximum control over impending fraud attacks and their potential repercussions.
Justin Newell CEO INFORM North America Atlanta, Ga.