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What is Financial Crime and How do Financial Institutes Detect and Prevent It?
Your essential guide to financial crime: what it is, the different types, how to detect financial crime and measures to prevent financial crime. We also dive into the key trends and areas driving innovation in financial crime.
Protecting finances and wider financial assets is pivotal for the continued success of any business. While individual enterprises need to exact their own form of security measures, it’s also the responsibility of financial institutes to deal with the ever-increasing threats that criminals pose to organizations across the world.
In this short guide, we’ll explore some of the most common types of financial crimes, as well as the detection methods, challenges faced, and preventative measures which institutions are carrying out to heighten the fiscal safety of businesses.
What is financial crime?
Financial crime refers to illegal activities involving money or financial transactions aimed at obtaining financial benefits through dishonest means. It encompasses a wide range of criminal activities that are typically motivated by financial gain.
Criminal organizations, businesses, and individuals engage in these activities to either conceal illicit funds or illegally increase their wealth, often exploiting financial systems, institutions, or loopholes in regulations. Activities can involve complex transactions across multiple jurisdictions, making detection and prosecution challenging.
What are the main types of financial crime?
While there are many different types of crime which fall under the financial bracket, some occur more frequently than others. Here are some of the most common, and impactful, financial crimes which businesses fall victim to:
Fraud
One of the oldest and most impactful forms of financial crime, fraud employs deception and dishonesty to steal funds from unsuspecting victims. Fraud can be seen as the overarching branch under which most money-related crimes take place. Theft, corruption, embezzlement, money laundering, bribery, insider trading, and extortion are all types of fraud.
Cyber crime
A modern form of crime which has become increasingly popular as more financial information is stored on the internet. Cyber crime can involve the active hacking of financial institutions, as well as the employment of deceitful techniques to acquire personal information online.
Bribery and corruption
These factors occur when an individual or group either gains an advantage or circumvents a legal system as a result of a financial payment. This is not always a direct monetary payment, but rather the exchange of any high-value asset. Any of the following can be considered a bribe:
A direct cash payment or bank transfer
Gifts, meals, or tickets for an event
Discounts or credits
Rebates
Additional fees paid for services not rendered
Payment of expenses or loans
Terrorist financing
Terrorism financing refers to the process by which funds are provided, collected, or moved to support terrorist activities. This can include money obtained through legal or illegal means, including donations, drug trafficking, fraud, extortion, and other criminal activities. Funds may be used directly to carry out attacks or to support the broader operations of terrorist groups, such as recruitment, propaganda, and training. Terrorist organizations often rely on complex financial networks, using shell companies, smuggling, and alternative banking systems like hawala to evade detection.
Money laundering
In order for ill-gotten gains to be successfully accessed, money laundering is often a requirement. This process involves a series of financial transfers whose purpose is to hide the illegitimacy of the money in question. Money that’s been stolen or earned illegally is moved between accounts in such a way that it becomes very difficult to track its origin, thus hiding its illicit nature.
Insider trading
The use of private knowledge when trading company stock on a public exchange is also considered a financial crime. This gives a trader an unfair advantage, which can be used to help themselves and potentially harm others.
What are the current trends in financial crime?
The continued evolution of global businesses has helped charter in a new age of industry. However, just as most sectors continue to adapt to and overcome challenges, so too do criminals. Here are some of the ways modern approaches to financial crime have seen new trends emerge:
Real-time payments
The use of real-time payments has had a hugely positive impact on online businesses. This has been thanks in no short part to the continued progression of open banking, which sees application programming interfaces (APIs) sharing information between financial institutions in a matter of seconds. Such is its impact, the open banking industry is expected to reach $135bn in total value by the end of 2030. However, this mass sharing of personal financial data has also proven a profitable area to target for criminals.
Manipulation and usage of AI for criminal means
Innovative technologies such as artificial intelligence (AI) and machine learning (ML) have transformed how we think about business. While this pioneering new-age tech has ushered in an array of positive changes, criminals have also adopted its use for their own means. Perhaps most common of all in this regard is the trend of spear phishing, which uses AI to generate messages for specific targets, before intercepting their devices with undetectable malware. This cost US businesses as much as $2.9bn across 2023 alone.
In 2024, the FBI issued a warning for individuals and businesses to be aware of the escalating threat posed by criminals utilizing tools to conduct sophisticated phishing and social engineering attacks, and voice or video cloning scams. Similarly, Law Enforcement Agencies Interpol and Europol have highlighted the criminal usage of AI, including Large Language Models and Generative AI to support activities such as the re-production of language patterns that can be used to impersonate the style of speech of specific individuals or groups. This capability can be abused at scale to mislead potential victims into placing their trust in the hands of criminal actors.
Compliance costs create gaps for criminal exploitation
Compliance is one of the most effective ways to ensure money stays protected. A robust compliance system guarantees procedures are being followed in a manner which safeguards data. This is usually achieved with a strong compliance tech stack, as well as upskilling for team members through compliance training. The issue here lies in the costs of these factors. With more needing to be done to keep these policies and procedures updated, businesses occasionally neglect diverting budget into these areas. The net result of that are gaps in the system which criminals can look to exploit.
Poor compliance and weak systems and controls
Regulatory compliance involves adhering to laws, regulations, and guidelines set by governing bodies to ensure financial integrity, transparency, and security. Regulated organizations, such as banks, must implement robust compliance processes to prevent illegal activities such as money laundering, fraud, and market manipulation. When compliance processes and systems are poor or outdated, they can be exploited by criminal organizations to launder money, finance terrorism, or commit fraud without detection. Internally, weak compliance systems and controls can also lead to poor decision-making, such as failing to identify risks or not meeting legal obligations, resulting in fines, reputational damage, loss of customer trust and even jail time for executives in charge at the time of failure.
Augmenting financial crime programs
Financial crime prevention programs can quickly become outdated, but it can be time-consuming and expensive for organizations to outright replace them. An emerging alternative is to overlay extant solutions with new technologies that augment the capabilities of these incumbent measures. Entity resolution is a good example of where this kind of augmentation can take place, with the intention being to piece together internal and external data sources to provide a robust single customer view.
Key areas driving innovation in financial crime
The continued evolution of the financial crime environment has meant that the rules and regulations which govern them also need to adapt. Beyond the pressure of the industry itself, a number of specific factors have been at the forefront of these innovative steps. Here are some of the most important:
Digital currencies
With digital currencies becoming increasingly prevalent, regulators have had to find ways to engage with these online financial systems, while ensuring they are not used for illicit or illegal activity. AML regulations have already been introduced to address concerns relating to digital currency exchanges and wallets.
Information sharing
As part of the ongoing methods to prevent international financial crime, cross-border collaboration has become vital for heightened safety. Intergovernmental bodies such as FATF have worked to promote consistent standards when it comes to the safe sharing of cross-border information. This helps to optimize defences, vastly reducing the chances and impact of an attack.
Cybersecurity
This ever-present facet of financial crime management has and will continue to be a key driver on the FinCrime landscape. This is something which has seen wider community involvement than ever before, with the sharing of threat intelligence, setting common standards, and introduction of ways to exchange information swiftly all now factored into regulatory measures.
Environmental, social, and governance (ESG)
It’s now the responsibility of organizations in every sector to prioritise the ethical factors associated with ESG compliance. Regulatory bodies have had to adapt to this, ensuring that procedures implemented in no way compromise the integrity of existing FinCrime prevention measures.
Beneficial ownership
Clarity over beneficial ownership has been one of the most challenging aspects of regulatory compliance for financial bodies in recent times. A lack of disclosure makes it easier for criminals to avoid detection, whether through masking their activities or evading sanctions lists.
Financial crime by the numbers
The need for financial crime protection has never been greater. A 2024 AI, Fraud and Financial Crime Survey highlighted that as many as 58% of organizations said they spent between $5m to $25m in operational costs relating to investigating, combatting, or rectifying financial crime issues in 2023 alone.
Some of the other key takeaways from this survey included:
72% faced fake identities when trying to onboard clients
91% are rethinking voice recognition as a safety measure, owing to new AI capabilities
43% expect fraud activity to increase over the coming year
Unsurprisingly, AI is now being touted as a potential avenue to bolster financial crime prevention heading forwards. It’s thought that AI initiatives can boost productivity and creative problem solving in financial crime by as much as 50%, while McKinsey thinks 60-70% of work currently done by humans can be absorbed and automated by AI. This would reduce the strain on enforcement agents, while greatly reducing investigation and resolution time.
Fight financial crime
Financial crime trends across the globe:
As we’ve discussed, across the last decade there have been a total of 16,150 AML events, with the US seeing by far the most with 11,472. They also led the way for the most events per capita, with 3.37. Elsewhere, the top 10 nations across the last decade in this category looked like this:
The US – 3.37
The UK – 2.46
The UAE – 1.06
Australia – 0.36
Canada – 0.24
Israel – 0.21
South Africa – 0.2
Sweden – 0.16
Poland – 0.14
Austria – 0.12
Looking to the future, financial organizations have managed to pinpoint some of the areas where they expect to see the greatest need to adapt moving forwards. The areas highlighted were:
Ensuring compliance with regulatory changes – 33%
Keeping ahead of emerging risks – 25%
Updating legacy technology – 20%
The reputational impact of non-compliance – 19%
Lack of regulatory alignment – 3%
It’s in these areas that financial institutions across the world are going to need to focus more time and resources on in order to heighten the safety of their clients and customers.
How is financial crime investigated across borders?
For international organizations, financial crime extends beyond borders. With judicial legislation often differing on a country-by-country basis, it is challenging for both institutions and law enforcement to effectively police financial attacks that transcend nations.
Some of the issues faced when trying to do this are:
Cross-border information sharing
Effectively communicating vital information across international borders can be complex. There are a host of barriers to effective cross-border comms, not least of which are language barriers and limited channels of communication. This can result in information becoming limited or fragmented, making it more difficult to understand what’s required to resolve an issue.
Jurisdiction and responsibility
Another time-consuming aspect comes in determining whose legal responsibility it is to investigate and prosecute international financial crimes. Deciding on this is an additional step which can add weeks or even months to a case – which can in turn make it harder to successfully prosecute as trails run cold.
Unclear legal frameworks and regulatory arbitrage
With no consistency in the usage of global law for prosecuting financial crimes, criminals can and do exploit loopholes in international legal framework to maximize the impact of their crimes. Similarly regulatory arbitrage refers to the practice where criminals exploit differences in regulations across jurisdictions to evade detection and engage in illicit financial activities, such as money laundering or terrorist financing. Criminals take advantage of varying regulatory standards, using lenient jurisdictions as safe havens or routes to mask illicit transactions that would be flagged in more strictly regulated environments. For KYC and financial crime professionals, understanding regulatory arbitrage is crucial as it reveals vulnerabilities in the global financial system and helps organizations identify high-risk entities and behaviors that may not immediately align with local compliance standards. By addressing regulatory arbitrage, financial institutions can strengthen their defenses against cross-border financial crimes and reduce the risk of unknowingly enabling criminal networks.
There are ways to alleviate these issues, however. As we continue to form one global society, more is being done to ensure that cross-border financial crime is being targeted and prosecuted in an effective manner:
Interagency collaboration
Thinking about how to work with foreign law enforcement and agencies should be built into the framework of a nation’s own compliance procedures. This could mean creating specific task forces to deal with different types of crime, as well as having a clear approach to how foreign policies work during investigations.
Treaties and agreements
Treaties like the United Nations Convention against Corruption (UNCAC) and the Basel Committee on Banking Supervision's Cross-Border Cooperation already exist to make investigating international financial crime easier. These need to be regularly reviewed and updated. Furthermore, factors like mutual legal assistance agreements between countries can streamline investigations and prosecutions.
Enhanced technology and data analytics
Just as criminals utilize modern tech to enhance their operations, so too can it be used for protection purposes. Providing technical assistance and capacity-building to developing countries can have a huge impact in cross-border financial crime investigation. This can be extended to offering training programs, workshops, and seminars on financial crime prevention, detection, and enforcement to relevant officials and law enforcement agents.
Public-Private partnerships
Direct contact and engagement with banks, fintech firms, and other corporations in the private sector is often a must for investigating financial crime. Doing this internationally often requires public-private collaboration. For this reason it’s vital to establish information-sharing procedures and platforms that reassure private sector organizations that their information is being kept safe.
How are financial institutions fighting to detect and prevent financial crime?
As more is understood about how criminals act and where they might target a financial system, more robust approaches to safeguarding against them are being implemented. These can be found at every touchpoint on a customer life cycle, and focus on encouraging organizations to totally rethink their approach to financial crime prevention.
Some of the most effective are:
Ensuring that compliance procedures are optimized is one of the most powerful methods a financial organization can utilize. This can be achieved in more than one way:
Make the most of evidence-based and auditable processes to heighten accuracy
Carry out early-risk assessments through customer segmentation
Try to enhance quality financial crime judgement practices, rather than just prioritizing a thorough data collection exercise
Detecting and identifying financial crimes before they happen is one of the most effective ways for any organization to remain protected. By identifying the key enablers of financial crime, you’ll be able to stop issues at source, and vastly negate the chances of an incident. Some of the most effective ways to do this are:
Using decision intelligence to get a wider perspective on a variety of data, making it quick and easy to detect who customers are and what their motives might be.
Employing typology-based scorecards to cluster alerts together and ensure that only customer accounts which have multiple red flags are tagged for further analysis. This helps to expedite and streamline the investigative process, while also reducing false negatives. The scorecard system quickly assesses which accounts are or aren’t a threat.
The way in which personas interact with each other is now also a tool which banks can use to assess when crimes might take place. Suspicious activities and relationships with fraudulent accounts can pre-emptively identify threats.Unlike traditional systems, Quantexa’s AML software offers a holistic view of risk. It visualizes hidden connections and identifies hidden risks through additional context.
Improving Know Your Customer (KYC) operations is critical to bolstering the fight against financial crime and enhancing compliance standards across financial services. KYC processes are the frontline defense in identifying high-risk clients and potential threats before they materialize. However, traditional KYC practices often rely on manual, siloed data handling, which can lead to inefficiencies, higher operational costs, and missed red flags.
By adopting an intelligent, data-driven KYC software—such as those utilizing Quantexa’s advanced network analytics and entity resolution capabilities—financial institutions can improve accuracy, reduce false positives, and create a holistic view of customer risk.
A streamlined and centralized approach to KYC allows compliance teams to detect and monitor patterns of suspicious behavior across global data sources, automating parts of the process and reallocating resources to high-risk areas.
Ultimately, enhancing KYC operations not only reduces the financial institution's regulatory risk but also strengthens the broader financial ecosystem by detecting and preventing money laundering, fraud, and other illicit activities more effectively.
Relying on increasingly advanced technology also puts more power back in the hands of financial organizations. Turning to data analytics can transform any approach to financial crime management and mitigation.
What are the three lines of defense against financial crime?
The Three Lines of Defense model is a robust framework for risk management, widely used by financial institutions to safeguard against financial crime, mitigate risks, and maintain regulatory compliance. This model delineates clear roles and responsibilities across three key lines, promoting a proactive and coordinated approach to managing risk and compliance challenges.
First Line of Defense (Operational Management)
The first line of defense includes business units and operational management, who are directly responsible for managing and identifying risks in their day-to-day activities. This line proactively detects and reports potential issues and ensures adherence to internal controls. By being close to operations, the first line is crucial for identifying suspicious activities that may indicate financial crime and working to embed a risk-conscious culture within the organization.
Second Line of Defense (Risk Management and Compliance)
The second line consists of dedicated risk management and compliance functions, which support and oversee the first. This line develops policies, monitors risks, provides guidance, and ensures regulatory compliance is integrated into business processes. It plays a vital role in assessing the institution’s exposure to financial crime risks, implementing compliance programs, and fostering a proactive approach to risk mitigation, reducing potential liabilities, and maintaining the organization's reputation.
Third Line of Defense (Internal Audit)
The third line, internal audit, provides an independent and objective assessment of the first two lines' effectiveness. Internal audit evaluates the overall risk management framework, ensuring that both the operational and compliance aspects are functioning as intended. This line is critical for verifying that the institution's risk exposure is within acceptable limits and that mechanisms for detecting and preventing financial crime are robust, ensuring transparency and accountability at every level.
How is Quantexa working with financial institutions to mitigate financial crime?
At Quantexa, we work closely with financial institutions to ensure financial crime is detected, monitored, and ultimately mitigated in an efficient and effective manner. Our team of industry experts and trusted professionals utilize leading software and tools to enhance each of the following areas:
Typology-based scorecards
Our unique approach serves to create a scorecard system, which ensures that accounts are assessed with far more context than what a single, suspicious transaction might trigger. By assessing the customer themselves, associated transactions, and related parties, the system is able to accurately predict and even score the expected level of threat. This contextual monitoring of accounts provides a more refined, streamlined, and accurate assessment, which in turn means organizations can make balanced and confident decisions.
Persona-based risk identification
This system works by assessing how accounts and personas interact, with the ultimate aim being to work out when a crime is likely to take place. This helps to provide an overview of an entire criminal network (flagging multiple accounts at once), while also providing alerts for whenever any of these accounts are interacting with each other.
Reduction of false positives
Quantexa reduces false positives by leveraging advanced contextual data analytics and artificial intelligence to create a comprehensive and accurate view of entities and their relationships. By integrating data from multiple sources and analyzing it in a network context, Quantexa’s platform builds rich, context-aware profiles that help organizations better distinguish between genuine risks and harmless activities. This context-driven approach allows Quantexa to identify subtle patterns and anomalies, thereby minimizing the chances of misinterpreting normal behaviors as threats. Additionally, its machine learning algorithms continuously learn from feedback, improving detection accuracy over time and further reducing false positives. This way, Quantexa enables companies to focus their resources on actual threats, increasing efficiency and reducing the cost and operational impact associated with investigating false alerts.
Continuous risk monitoring
Quantexa uses advanced data analytics and AI-driven technology to provide real-time, continuous financial crime risk monitoring, empowering organizations to detect and mitigate potential risks proactively. By leveraging entity resolution and network generation, Quantexa enables firms to connect disparate data points, creating a holistic view of customers, transactions, and relationships. This approach helps uncover hidden risks and patterns that indicate potential financial crime, such as fraud, money laundering, and other illicit activities. With real-time alerts and insights, Quantexa allows financial institutions to strengthen compliance, reduce false positives, and enhance decision-making, ensuring a robust defense against evolving financial threats.
Enhanced data governance
Data management and ingestion is what we specialize in. Governance and internal transparency are enhanced as part of our service, which in turn allows organizations to take control and make actionable decisions based on this data.
Eliminate data silos
Our system helps financial institutions break down data silos, improving their ability to combat financial crime through a unified, data-driven approach. By connecting and analyzing vast amounts of disparate internal and external data, Quantexa’s platform creates a single, cohesive view of customer and transactional information. This enables banks and financial organizations to uncover hidden risks and detect suspicious activities in real time, resulting in stronger AML and fraud prevention efforts. Through advanced entity resolution and network analytics, Quantexa significantly enhances the accuracy of financial crime detection, streamlining compliance while reducing operational costs.
Uncovering hidden risks
By leveraging entity resolution and network analytics, Quantexa identifies patterns and relationships that traditional methods may overlook, enabling organizations to detect fraudulent activities, money laundering, and potential compliance risks in real time. Its platform integrates seamlessly with existing systems to provide actionable insights, helping businesses enhance decision-making, improve compliance, and minimize exposure to hidden threats. This approach not only reduces risk but also strengthens operational resilience.
Transparency at every step
This transparency and ease of data management also makes it easier to report on and justify key decision-making practices to internal stakeholders.
Financial crime FAQs
What is compliance in financial crime?
This is the name given to the measures and regulations used to ensure that financial institutions are doing what they can to identify and combat any kind of financial crime. Having a detailed compliance policy is a necessary step in protecting financial assets.
What are financial crime checks?
These are regular checks which are carried out with the purpose of identifying and preventing money laundering, terrorist financing, fraud, or other types of financial crimes which an institution might be the target of. The manner of a check will differ by each individual organization, but common methods include:
Gathering existing customer documentation
Screening customers against sanction lists
Examining customer behavior and carrying out enhanced due diligence
Performing regular reviews of customer accounts
Reporting any suspicious activity to the relevant authorities
These checks need to be regularly updated, and most conform to the jurisdiction of the country they’re being carried out in.
What are financial crime sanctions?
This is the term given to the restrictive financial measures and penalties imposed on individuals, entities and bodies who engage in criminal activity. There are many different types of financial sanction, but their primary purpose is to prevent further financial crimes from taking place in the future, as well as to punish those who’ve already committed them.
Useful links
We’ve discussed a lot in this guide, but there might still be more you want to discover about financial crime. Browse these handy sources to learn more.