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Banks have been a target for digital crime since the dawn of the Internet. Today, however, global criminal networks, nation-state hackers, and organized crime syndicates are employing far more sophisticated methods to burrow into the banking system to hide illicit gains made through human trafficking, drug trading, and other illegal activities.
The criminals’ goals are simple yet difficult to defend against:
Conceal the sources of illicit funds
Hide what they intend to do with their gains
Obtain money that doesn’t belong to them by any means
Fraud is by far the biggest challenge banks face today and it comes in two different guises:
Crimes against customers. These are being perpetrated by third parties trying to defraud customers into sending money to them. The effect on customers downstream is the loss of trust in their financial institution, which ultimately damages the bank’s reputation.
Crimes against the bank itself. This is particularly prevalent in an economic downcycle when companies or individuals who may be facing hard times engage in fraud to secure loans to keep their businesses afloat. The obvious fallout from defaulting parties costs banks millions, making compliance even more difficult.
Transnational organized crime is always troublesome, but in times of global economic downturn, this threat becomes even more problematic as crime syndicates pounce on ailing or failing states. These organizations love power vacuums and are quick to jump in to resolve disputes, which often provides a toehold to make money through more traditional means.
Nation-states pose a significant threat via ransomware and cyber-activities that include both “hacking” to steal funds, hack digital assets and currencies, or commit cyber fraud. These organizations also participate in cyber intrusions to gain information or simply to disrupt commercial activity.
Decentralized Finance (DeFi) organizations do not always adhere to anti-money laundering (AML) or anti-financial crime regulations, which makes them a perfect exploitation target for crime syndicates. Banks need to tread very carefully around these organizations to ensure they do not become part of what is largely unregulated activity where regulatory expectations on banks are far more substantive than for new market entrants.
Political and geopolitical realities are also a factor in the financial crime equation. Today’s savvy criminal operators know which countries talk to one another and which don’t, so it’s easy to send money over certain borders, knowing those transactions will never be shared or traced.
Adding to this is the complexity of financial institutions themselves, which is caused by the sheer volume of funds and millions of transactions occurring every day. Criminals seek to hide their illicit funds in the much larger flow of legitimate funds coursing through the financial system like a single drop of water added to a stream.
“All of these factors are causing banks to transform the way they monitor financial data, leveraging artificial intelligence (AI) and machine learning (ML) to detect suspicious activity that may be lurking in the dark corners of this highly complex transactional maze.”
Group Head of Financial Crime Risk and Compliance, HSBC
As a leader in banking innovation, HSBC has embraced technology and driven several new solutions designed to thwart financial crime. With the help of leading-edge companies like Quantexa, HSBC has been able to:
Detect more financial crime, faster, with less unnecessary friction for customers;
Identify entire criminal networks seeking to exploit its products and services, enabling the reporting of more useful information to law enforcement;
Better protect its customers and shareholders.
All banks have a Money Laundering Reporting Officer or someone in a similar role who is responsible for overseeing the firm’s financial crime program, including investigations into any suspicious activity. At HSBC those responsibilities are deftly managed by Jennifer Calvery, Group Head of Financial Crime Risk and Compliance.
Recently, we asked Jennifer to give us a snapshot of the financial landscape—what threats are trending, what new challenges banks are facing, and how new technology solutions are helping banks like HSBC crackdown on financial crime.
“My job is to make sure that our products and services are not exploited by criminals, which is an ever-moving target,” Jennifer began.
Jennifer explained that the breadth of HSBC’s footprint and the high number of products and services they offer make HSBC an appealing target for criminals as they attempt to launder money, commit fraud against the bank and the bank’s customers, evade sanctions and taxation, and generally move illicit funds around the world.
“Criminals are adept at understanding which countries will or will not share information with one another,” Jennifer added, “So they would love to have access to our international network to move and hide their funds in the dark spaces, making the management of this threat endless.”
“Today, you also have digital assets and currencies that you didn’t have five years ago. You have new payment methods and changing payment rails and corridors, where trade and transactional activity has increased substantively. So, in addition to geopolitics, those are the kinds of things that change over time.”
Being able to see exactly what types of crimes are being committed at a very granular level is hard for banks to see. For instance, each month, on average, HSBC monitors over 1.2 billion transactions for signs of financial crime and screens approximately 117 million customer records for sanctions exposure.
To survive in this reality, banks need technology and skilled personnel to reveal the full picture of individuals, organizations, and their counterparty networks to:
Detect potentially illicit transactions as they are happening.
Aid investigative teams looking at transactions that have already happened to determine if there is illicit activity occurring.
As a digital innovator, HSBC is embracing best-in-class technologies to unlock the value of solutions like Quantexa’s Decision Intelligence (DI) platform to automate data gathering and connect data in a way that provides a full picture of their customers and their counterparty networks. Ultimately, this is helping investigators detect illicit activities faster with less unnecessary friction for customers. Quantexa is delivering this capability at the speed and scale that HSBC requires to ensure its customers and shareholders continue to remain safe.
While those in banking face several challenges in today’s evolving financial landscape, here are three difficulties that Jennifer puts at the top of her list:
Activities-based sanctions may be the biggest challenge facing banks today. “As a global bank that operates in many different jurisdictions, not all of whom agree with one another on how they would characterize various issues, sanctions can be a flashpoint and something we have to comply with by law and navigate carefully,” Jennifer explained.
“They’re also more difficult these days. Today, sanctions are more … [about] behavior: ‘Don’t do this kind of activity with someone who looks like this,’ not ‘looks like’ in a physical sense, but ‘a company that does this type of activity.’ That’s not as simple as looking for a name, and it requires a different type of technology, which banks don’t have in place as yet.
“With sanctions, you’re usually trying to do things in real-time—stop the transaction in real-time and don’t let it go through. Anything we have today that looks for behaviors tends to be post-transaction, not in real-time, and so it’s making our life a lot more complicated. When you have nearly 39 million customers and you’re looking at…more than a billion transactions each month for signs of criminality, that is challenging.”
Getting a contextual global data picture that clearly shows “who is transacting with whom” is critical, Jennifer explained. “It can present challenges when you are trying to put together a good picture of even only one customer’s activities where that customer may be undertaking multiple types of activity in multiple markets.
“The vast, vast majority of what is going on is completely legal and legitimate, which is why context is so important, given the very small sub-segment of customers whose activity we need to understand in more detail.”
Data localization and information sharing barriers can present challenges for banks like HSBC as Jennifer sees it. If you have countries that agree to the importance of putting the big picture together to reveal criminal networks and there is consensus that they want banks to move forward, that’s great. “But each country will rightly have their own view informed by their unique experience on where to strike the balance between security at one end of the spectrum and data privacy at the other.”
For HSBC, overcoming these challenges is all about utilizing technology at scale and speed to combine disparate data pieces to get the full picture.
To screen for illicit activities across the millions of transactions that happen daily at a bank like HSBC, technologies like AI and ML must be employed to automate the processes and deliver them at scale. Doing so enables the bank to find more financial crime, faster, with less unnecessary friction for customers. These technologies must be deployed properly, however.
As Quantexa Chief Evangelist Imam Hoque described in a recent article, “To use AI to its full capacity, banks need to understand the network and its wider context. Understanding the network and its wider context is the first step in reducing false positives and becoming more efficient and effective in the fight against criminal activity. Contextual monitoring uses entity and network analysis techniques and advanced analytical methods to detect anomalous and suspect activity.
“When understanding a customer, whether fraudulent or not, it is important to consider all entities: shared identities, bank accounts, addresses, transactions, time correlated events, relationships, the list goes on. When fraudsters industrialize their activity to increase profits, they regularly re-use part of identities or leave parts behind to trick the system and miss any connections to related fraud.
By replicating your best investigators’ approach across networked data, the AI will alert far more accurately and then provide the investigator team with a picture and wider, more detailed explanation of the fraud.”
Adding dynamic Entity Resolution to connect billions of data points across internal and external data sources in real-time or batch, then creates a single, enterprise-wide view of people, organizations, places, and more. For group heads like Jennifer, who are charged with managing financial crime risk and compliance, Entity Resolution is what allows her to see if the John Smith that banks in the UK is the same John Smith that banks in Hong Kong. But Entity Resolution doesn’t stop there.
The true beauty of this technology is that it also shows all of the counterparties that John Smith is connected with, so Jennifer’s team can determine if it’s the same actor.
Graph Analytics provides a simple way to use the context of resolved entities and relationships in scenarios, rules, and models.
As Jennifer described, Graph Analytics allows her to see, “who’s transacting with whom, and who is related to whom based on some other identifier.… So you can start to pull together networks of individuals, and those networks can help you to understand the full breadth of what’s happening.
“Understanding that full breadth, understanding that Jane Doe is Jane Doe and the same Jane Doe, and then being able to do that at scale are all very significant attributes that we get from working with Quantexa,” she added. The ability of Graph Analytics to show those connections in a full visualization is particularly important for her investigators who want to view entire counterparty networks as they search for illicit activities.
“Everyone at HSBC has a role to play in managing financial crime risk, but we also employ specialists who are fully dedicated to rooting out problematic activity.” For HSBC’s most sophisticated investigations, Quantexa’s DI Platform allows for the right tools to be used to get the best outcomes in the most challenging of circumstances and Jennifer sees her work with Quantexa on building these detection solutions as critical.
Being able to see data “in context,” through Quantexa’s Decision Intelligence Platform is one of the key ways HSBC has been able to fight financial crime and make better, faster decisions at scale regarding who they want to do business with and who they are doing business with. This has positively impacted HSBC’s investigative process in several key areas:
Finding more crimes, faster: Before Quantexa, finding networks of illicit actors was often a slow and laborious manual process. Speed in identifying illicit transactions and those who are making them, and being able to visualize the extended networks they are connected to are critical for HSBC. “[Now] we find more of those financial criminals who are exploiting our products and services, and we find them faster, through tools like Quantexa,” Jennifer said.
Boosting productivity: AI and advanced analytics from Quantexa also provide HSBC with meaningful productivity gains. Before using these technologies, teams were not able to work as efficiently because the process had not been automated to flag suspicious activities accurately. Quantexa’s DI platform allows Jennifer to leverage the expertise of her best investigators in terms of how they identify financial crime, and then apply that at scale.
Stopping financial crimes: Before Quantexa, HSBC investigators were unable to see their customers and their connections in context as easily. Investigators had to look at each transaction individually to determine whether it was suspicious, which lengthened the end-to-end investigative process, but the problem doesn’t stop there.
“What we find is they have networks of accounts,” Jennifer continued. “within which are sleeper accounts that they’ve set up because they know it is only a matter of time before we will detect and close an account with suspicious activity in it, and they have another one waiting ready to be used the second that you close them out from the first account.”
“If you don’t put the whole network together and excise it as a single network of activity, you’re just running on a hamster wheel from one account to the next, and they’re always a step ahead of you. So what tools like Quantexa help us to do is understand our customer in context and their network in context so we can excise the entire problem area.”
Ability to deliver at scale: Partners like Quantexa that can deliver solutions at scale not only save development time (and money), but ultimately Quantexa provides far better service/solutions that are being expanded outward to other departments and use cases within HSBC to enhance customer services ever further.
“It’s important to have a tool like Quantexa for the ability to put that contextual view together,” Jennifer explained. “The ability to do that at scale is so important, because if you just have individuals trying to do it, there’s no way to keep up, and the more sophisticated the technology, the better you’re able to do it. Entity Resolution together with the network analytics is the key.”
Reducing false positives for better service: Before using Quantexa solutions, Jennifer said false positives were a real problem. “We would call a customer and ask questions to try to understand the purpose of a potentially questionable payment. To the extent those are false positives, we are unnecessarily inconveniencing a valued customer. So reducing this unnecessary friction has been a significant benefit.”
“If I wanted to boil it down into really simple terms, we find more of those financial criminals who are exploiting our products and services and we find them faster, through tools like Quantexa”
Group Head of Financial Crime Risk and Compliance, HSBC
As the largest trade finance bank globally, one form of lending that HSBC does is “receivables financing.” As Jennifer explained, “That’s where we lend a seller the money it is due from its buyer—its receivables, in other words.
“I think of it like a payday loan. The seller gets the money sooner than they would if they waited for the buyer’s payment to come due, and that’s the service we’re providing them.”
“When we do that, one thing we want to make sure of is that the customer who is coming to us with the proof of the money they are due, and based on which we are going to lend them money, doesn’t give that same proof to more than one bank, getting a loan on the same asset over and over.
“It’s known as “double financing,” and they could do it with more than one bank, or with us, where we’re in many jurisdictions. If we don’t connect the dots, they could do it to us in several different jurisdictions or across several different accounts, etc., different company names, all related to one another.”
“So we use Quantexa’s software to monitor our customer activity to look for instances of potential double financing. It’s [all] about putting together their network. If they’re double financing, we can start to say, ‘Wait a minute. All of these customers are really the same customer, and they’ve used the same thing several times to get loans from us,’ and then we can intercede.”
“We provide much more useful information to law enforcement with the Quantexa tool than with some of our previous tools, because we can give them the full picture of the network.”
Group Head of Financial Crime Risk and Compliance, HSBC
An international construction company that was caught in the act of double financing provides a good case study.
“It was a construction company customer who came to us for project receivables,” Jennifer began. “[They had] several construction projects and the Quantexa tool flagged the potential for double financing. … Our investigators uncovered that the borrower was engaged in wide-scale duplicative financing across multiple projects and contractors. We also saw that the company was…inflating its revenues, and that’s important to us. It helps us determine whether we want to continue the business relationship and get repaid.”
Where is Decision Intelligence going? Here’s what Jennifer sees on the horizon.
“I think we have to bring together a lot of different pieces of technology, including network analytics and Entity Resolution, together with decision engines that can make real-time, sub-second decisions, so ’should I block this transaction? Should I stop this transaction? Should I return this transaction?’
“You need to pair those together to get your speed-of-action, which, coupled with the processing power that you get from operating in the Cloud, is so powerful. These need to come together with data privacy–related technologies, because, in a world that gets less and less trusting, you’ve got to try to figure out how you can put together networks without moving key data across borders. So all of those things need to come together to make it work.”
When asked what keeps her motivated to do what she does every day, Jennifer described her thoughts this way.
“I think what inspires me to do this job at HSBC is that the size and scale of HSBC means that if we do what we’re seeking to do well, we can make a real impact for good globally, both by what we’re doing at the bank to protect our customers and the communities in which we operate, as well as the influence we have on others in the market when we share our learnings, including about technology partnerships like the one with Quantexa.
“It also always comes down to the people you work with. We have great people [at HSBC] and it’s inspiring to see their passion for what they do and how they tackle some pretty complex problems.
With the successful deployment of Quantexa’s DI platform, HSBC is now moving to expand its use to tackle challenges being faced by other departments with the ultimate goal of improving workflows to better serve their customers everywhere.
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