How Information Sharing Optimizes the Fight Against Financial Crime
Sharing intelligence and data between financial institutions is transformational to the way we detect and investigate financial crime.
Technology plays a pivotal role in fighting financial crime and getting actionable intelligence to law enforcement quickly. But it can be a blessing and a curse. I challenge you to name one financial crime team you have worked for, or engaged with, that has not dealt with ineffective and inefficient processes further exasperated by technology. Such issues underpin the dozens of enforcement actions over the past 20+ years.
These issues explain why so many financial crime technologies continue to be developed. Over my career, and more so in the past three years, I have had an opportunity to engage with dozens of technology companies and individuals dedicated to “doing it better.” The available technology to fight financial crimes has come a long way, and is, frankly, amazing. Unfortunately, much of the new technology is viewed by practitioners as too similar to existing processes and not transformational. They aren’t entirely wrong.
However, there is one technology that, if developed and embedded into our financial crime processes, would be transformational — intelligence and data sharing (information sharing).
Isolated efforts aren't keeping up with savvy criminals
Our largely isolated efforts to combat financial crimes are not keeping up with evolving criminal techniques and the exploitation of a connected but siloed financial system. Savvy criminals know this and keep their exposure low by maintaining accounts and layering transactions across multiple financial institutions.
Information sharing across financial institutions, or within a single institution located across multiple jurisdictions, would unlock a whole new dimension of financial crime detection, and help close these gaps.
Regulatory changes to support data sharing
Global governments, non-governmental agencies, and regulators are increasingly supporting (and expecting) information sharing between the private and public sectors through changes to existing regulations and/or supporting collaborative initiatives.
The Financial Action Task Force (FATF)
The FATF issued two reports in 2021 and 2022 focused on data pooling, collaborative analytics, technology, and private sector information sharing. These documents provide a clear roadmap of how to be successful in information sharing.
In the U.S., there have been existing regulations in place for more than 20 years (e.g., 314(a)(b)) that support information sharing and private-public sector initiatives, such as FinCEN Exchange.
Recently, the AML Act of 2020 did many things to modernize the AML/CFT regime, but the foremost purpose was to prioritize and codify information sharing into law. In fact, 10 sections of the Act focus on this topic. For example, under Section 5311, one "Declaration of Purpose" is to establish frameworks for information sharing among stakeholders to identify, stop, and apprehend money launderers and terrorist financiers.
The Economic Crime and Corporate Transparency Bill aims to strengthen the UK’s fight against economic crime and support efforts to tackle terrorist financing by creating new provisions in the Proceeds of Crime Act 2002 to enable the sharing of information between certain businesses to prevent, detect, and investigate economic crime.
Information sharing initiatives
Information sharing initiatives have had mixed success, with fraud being more successful than AML/CFT.
Why is this?
Fraud is largely black and white — it's fraud or it isn't — and everyone can easily get behind not losing money. Whereas AML/CFT can fall into a grey area, slip-ups can lead to significant regulatory issues and fines, and regulations haven't fully supported the version of information sharing the industry needs. Add in the human aspect of self-preservation, risk aversion, and a lack of the right technology...and what should be successful initiatives have not moved forward.
So why is it different now?
The recent regulatory changes and guidance from FATF have helped, but there's more to it than that. Governments are getting involved, the right technologies are becoming available, and the financial crimes community is more actively engaging with information sharing. These are all signs that the needle is finally moving in the right direction.
Several private-public sector consortium initiatives have been made public, showcasing the power of collaborative efforts between the government, financial institutions, and technology providers.
In the private-private sector, there are several public and private (i.e., secret) information sharing consortium initiatives showcasing the power of sharing intelligence and data to detect and investigate financial crimes.
Public: The Global Sanctions Screening Service is a partnership between leading financial institutions and partners to drive better watchlist screening.
Private: One initiative identified shared financial crime risks (e.g., human trafficking) that the financial institutions were not aware of in isolation, but became aware of through sharing financial crime risk data.
Technology helps to optimize information sharing
The technology exists to support information sharing safely, securely, and in compliance with data privacy requirements. Examples include AI/ML, LLM algorithms, API-based solutions, data encryption and anonymization techniques, and predictive analytics to model future financial crime trends based on shared data.
The global private-public initiatives noted above are experimenting with and leveraging some or all of this technology, which should help define an agreed-upon approach.
An entity resolution approach
Quantexa had an opportunity to participate in the 2023 ACAMS The Assembly Conference PwC Hack-a-Thon, which focused on information sharing between financial institutions.
Through our work with some of the largest global banks, government agencies, etc., we have proven that resolving internal data, such as customer accounts and transactions, and external data, such as shareholder information and watchlists, are a fundamentally different approach to financial crimes monitoring and investigation. This approach allows for the alerting and highlighting of direct and indirect risks throughout a network. Not just transaction risk which is a hallmark of rules-based legacy solutions.
We believe that entity resolution (ER) and network generation (NG), combined with several of the technology approaches noted above, are foundational to the success of information sharing. The inclusion of financial crime risk data such as denied/closed accounts, internal watchlists, and SARs/STRs within a network provides a different element of risk identification, unlike anything that exists today.
Leveraging our approach for the Hack-a-Thon, we were able to automatically produce the following results on 1.5M+ data points:
Every high-risk network identified involved risk known by one financial institution, but not the other. Without the power of ER/NG, this risk would not be known to the other financial institution(s). Two examples highlighted shell company and SDN risk:
Even with the growing regulatory support and active information sharing initiatives, self-preservation and risk aversion are causing things to progress too slowly. This is the nature of who we are as humans but is further increased by the nature of the work we do and what we experience in fighting financial crimes. Change can be hard.
What will it take to change the narrative and move faster?
We need more financial crime professionals from across all aspects of our industry willing to stick their necks out and take a chance. We need a consortium of financial crimes professionals sick of the status quo and willing to collaborate. We need to take full advantage of the changing regulatory environment.
While there is still a lot of work to do, we are making incremental progress, and progress is advancement. Our collaborative efforts to drive change in information sharing will optimize our processes and technology, ultimately bringing true transformation to the way we fight financial crimes.
My favorite quote is relevant to this topic. As U.S. astronaut Ron Garan has written, “We are only limited by our imagination and our will to act.”