<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2023/06/FRM-Blog-Banner-2-1-2.webp" alt="M2P Fintech" title="" width="100%" height="383"><ul class="list-node" id="bbuv8bhp5"><li><p class="text-node" id="nfay5wd4s">Over 95,000 UPI fraud cases were reported in 2022-23.</p></li><li><p class="text-node" id="p94t5sckz">More than 42% of Indians experienced financial crimes.</p></li><li><p class="text-node" id="bzw55rrli">95% of Indian firms experienced new types of cyber frauds.</p></li></ul><p class="text-node" id="8mqd7fwwm">Cyber frauds are surging every day.&nbsp; You may have experienced it, or you would have come across a cyber fraud victim. Living in an era of the highest technological sophistication and still falling prey to cyber frauds sounds like an irony.&nbsp;</p><p class="text-node" id="a6nju4rh2">The global digital payments market is expected to grow at 15.5% and reach $111 billion in 2023 and hit $198 billion by 2027. Payment modes such as UPI, credit/debit cards, digital wallets, and other contactless modes have gained a lot of prominence due to their speed, convenience, and security. Despite phenomenal advances, cyber frauds in the form of phishing, spamming, SIM swapping, account takeover frauds, etc., increase by the minute. Hackers are evolving with technology and adopting sophisticated strategies to infiltrate banking infrastructure and commit cybercrime.&nbsp;</p><p class="text-node" id="e1llvwu6m">This is why organizations need a robust <strong>Fraud and Risk Management (FRM) system</strong> to defend against data theft, breaches, and other forms of cybercrimes. Before getting into the details, let's first understand what is fraud and risk management.</p><h2 class="heading-node" id="k1k07wioo"><strong>What is Fraud and Risk Management?</strong>&nbsp;</h2><p class="text-node" id="7vrdlgnzz">Fraud Risk Management is a systematic approach to reduce frauds, especially transaction related. It encompasses identifying, managing, and mitigating breaches in addition to preventing frauds and risks. Businesses that include financial institutions, ecommerce companies, healthcare providers, government agencies, and insurance companies, use FRM systems to combat risks associated with digital transactions.</p><p class="text-node" id="xald7x6wc">In this blog, we'll discuss how to design an FRM system and best practices to follow while designing. Before diving into it, let us go through the usual cyber frauds because knowing how hackers function can help you create an FRM system capable enough to handle those frauds.</p><p class="text-node" id="3uniwdxzp">Here we go!&nbsp;</p><h2 class="heading-node" id="nm6kjndnr"><strong>Types of Cyber Fraud</strong>&nbsp;</h2><img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2023/06/Design-request-for-FRM-blog_2_V2-1.webp" alt="M2P Fintech" title="" width="100%" height="223"><h3 class="heading-node" id="u16fnp09p"><strong>Account Takeover (ATO) Frauds </strong>&nbsp;</h3><p class="text-node" id="mlqaf0sxi">Account takeover fraud occurs when hackers gain unauthorized access to a victim's online account and take control, often without their knowledge or consent.&nbsp;&nbsp;</p><h3 class="heading-node" id="29imu321k"><strong>Phishing</strong>&nbsp;</h3><p class="text-node" id="9gw5vtwg0">Phishing is an attacking method used in ATO where the hacker sends an email to a user posing as a genuine entity. The user gets tricked by believing the email to be legitimate and discloses their private information.&nbsp;</p><h3 class="heading-node" id="mdhb5jdk8"><strong>Brute-force Attack</strong>&nbsp;</h3><p class="text-node" id="bdxu4pfuz">Hackers try a combination of username/password on multiple accounts till they crack into a user’s account.&nbsp;</p><h3 class="heading-node" id="1qp070zis"><strong>SIM Swap and Device-related Fraud</strong>&nbsp;</h3><p class="text-node" id="qe2wqnzaj">SIM swap is a technique used by fraudsters to get control of a user’s phone number. By controlling the phone number, hackers can take advantage of two-factor authentication to access the user's devices, their bank accounts, social media accounts, and more.&nbsp;</p><h2 class="heading-node" id="m1sj54yqb"><strong>Authentication Protocols to the Rescue</strong></h2><p class="text-node" id="jcnf7nkd3">Most organizations have some sort of strategy to defend themselves from frauds. Some organizations use a proper FRM system, some follow stringent security protocols such as <strong>3-D Secure Authentication (3DS)</strong> and <strong>Two-Factor Authentication (2FA) </strong>as an additional security layer. But the deployment of these security protocols depends on the marketplace. Many markets (such as the United States) do not use 3DS because they prefer customer convenience over security. This may lead to frauds unless strong controls are in place. On the other hand, in markets such as India where there is a mandate for 2FA, fraudsters still persuade gullible customers to share OTPs. Not taking requisite measures can give fraudsters access to stolen card credentials. They try their luck at different merchants to see if they can go through and bypass risk controls.&nbsp;</p><p class="text-node" id="0dy23j2gj">The best way to battle cyber frauds is to design a risk engine capable of not only identifying existing frauds but also new ones.&nbsp;</p><h2 class="heading-node" id="drco1veje"><strong>How can you Design a Robust FRM to Tackle Fraud?</strong></h2><ul class="list-node" id="08lc91nt7"><li><p class="text-node" id="aivz9jpnj">Accessing requisite data</p></li><li><p class="text-node" id="euz6f2dre">Introducing the right balance between frictionless flows and challenges</p></li><li><p class="text-node" id="vd6icpdrs">Interfacing FRM with external systems</p></li><li><p class="text-node" id="tsl4pkbcs">Embracing advanced risk checks</p></li><li><p class="text-node" id="wlsdqri6i">Adopting a combination of rules and models</p></li></ul><h3 class="heading-node" id="akzmswrji"><strong>Accessing Requisite Data</strong>&nbsp;</h3><p class="text-node" id="liqkp5hja">In this data-driven world where frauds are mutating in novel ways like the Corona virus, we need requisite data to develop an efficient and holistic FRM system.&nbsp;</p><h4 class="heading-node" id="ph9lh45q3"><strong>Types of data we need for fraud management</strong>&nbsp;</h4><h5 class="heading-node" id="7t9bcfucg"><strong>Transaction data</strong>&nbsp;</h5><p class="text-node" id="f5ec7facd">All financial data related to digital transactions, including credit card transactions, bank transfers, wire transfers, etc. This data must include the transaction amount, date, time, location, and other details. This data is used to build a historical profile of the customer.&nbsp;</p><h5 class="heading-node" id="8p7zx77jg"><strong>User data</strong>&nbsp;</h5><p class="text-node" id="mqzlj6dzv">User information such as name, address, phone number, email address, employment, income, credit history, etc.&nbsp;</p><h5 class="heading-node" id="sohlvxzkd"><strong>Device data</strong>&nbsp;</h5><p class="text-node" id="jp210zusa">Device type, operating system, browser type, and other technical details.&nbsp;</p><h5 class="heading-node" id="1749otx7p"><strong>Geolocation data</strong>&nbsp;</h5><p class="text-node" id="rmhkbl9uq">Location of the transaction - IP address, GPS coordinates, and other data that can be used to determine the user's location.&nbsp;</p><h5 class="heading-node" id="0s8b81av5"><strong>Behavioral data</strong>&nbsp;&nbsp;</h5><p class="text-node" id="9vi5cu6ps">Browsing history, search history, and other online activities that may be relevant to the transaction.&nbsp;</p><h5 class="heading-node" id="vbouas7eo"><strong>External data</strong></h5><p class="text-node" id="kjzmveyt8">Information from external sources, such as credit bureaus, public records, and other third-party sources that can provide additional insights into the user's risk profile.&nbsp; Now that you have all the requisite data for building an FRM system, what next?&nbsp;</p><h4 class="heading-node" id="zt4bvsebg"><strong>Customer profiling</strong>&nbsp;</h4><p class="text-node" id="pd5uuffif">Customer profiling is a process in which a business or organization collects and analyzes information about their customers and analyzes their behavior, preferences, and potential risks.</p><p class="text-node" id="816xflcbu">Comprehensive customer profiling enables business &amp; risk teams to design the most appropriate models &amp; rules to mitigate fraudulent transactions.&nbsp;&nbsp;</p><h3 class="heading-node" id="k0o72ows2"><strong>Introducing the Right Balance between Frictionless Flows and Challenges</strong>&nbsp;</h3><img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2023/06/Design-request-for-FRM-blog_3_V3_2000X1000.webp" alt="M2P Fintech" title="" width="100%" height="383"><p class="text-node" id="c7fzx4a7i">A natural question arises when developing an FRM system,</p><p class="text-node" id="rbouwfiy0"><em>Why not increase the number of authentication steps to increase security and prevent cybercrime?</em></p><p class="text-node" id="x06kegryg">Yes, the authentication journey can be made more complex but will definitely impact the user experience.</p><p class="text-node" id="m3gegg55o"><em>What will the user feel if they are subjected to strenuous procedures just to make a normal digital transaction?</em></p><p class="text-node" id="z6vax8eza">On the other hand, if the number of authentication steps are fewer/none, the probability of a hacker breaking into the system tends to go high. That is why, while designing a risk engine, it is important to strike a balance between frictionless user experience and introducing a challenge. Having a configurable, customizable challenge experience is critical to identifying different fraud strategies.&nbsp;&nbsp;</p><h3 class="heading-node" id="rbhucvi5z"><strong>Interfacing FRM with External Systems</strong></h3><p class="text-node" id="551fbw91j">To enhance the security capabilities with the ever-evolving frauds, you need to interface the FRM engine with external systems such as whitelists, hotlists, spam lists, disposable lists, etc. By regularly pulling data from these systems, you can keep the FRM updated in real time.</p><p class="text-node" id="ngwesm6rw">Let’s take a scenario.</p><p class="text-node" id="5ml5oqnm7">A user lost his credit card. He immediately alerts the card issuer to block the card. The issuer hotlists the lost credit card, meaning the card is permanently blocked. Now, when a hacker tries to make a transaction using the lost card credentials, an FRM system can classify it as fraudulent if it is interfaced with hotlists.&nbsp;</p><p class="text-node" id="885j5wvzp">Integrating hotlist information into the Fraud Risk Management (FRM) system can significantly enhance an organization's ability to identify and manage potential risks. These risks may include money laundering, fraud, terrorist financing, etc. By leveraging this integration, organizations can proactively mitigate these risks and ensure compliance with relevant regulations.&nbsp;</p><h3 class="heading-node" id="dwd2niduz"><strong>Embracing Advanced Risk Checks</strong></h3><p class="text-node" id="pr1574hgf">Behavioral biometrics distinguishes genuine users from criminals by analyzing users’ physical and cognitive digital behavior. By assessing user behaviors such as mouse movements, typing cadence, swipe patterns, device orientation, etc., and comparing it with the historical user profile, the behavior can be classified as either good or bad.</p><p class="text-node" id="8j8nn2rv2">For example, genuine users practice different paces and navigation patterns, whereas cybercriminals rely on copy, paste, and automated programs. Genuine users use the autofill feature to fill in personal details, whereas criminals enter the data manually.&nbsp;</p><h3 class="heading-node" id="t9lliq7kr"><strong>Adopting Rules and Models</strong></h3><p class="text-node" id="x86ze3vcq">When building an FRM system, many organizations solely rely on Machine Learning (ML) models for fraud detection. ML models help the FRM system scale, adapt, and visualize emerging threats and frauds.</p><p class="text-node" id="dsnl5q0fu">Does that mean you should stop following a rule-based approach?</p><p class="text-node" id="q9l0ztocw">After all, why should anyone still follow the rules when there are efficient ML models that can learn by themselves?</p><p class="text-node" id="h5kd41erl">Though the ML-based approach facilitates real-time processing and can automatically detect anomalies and unique frauds, it takes time to set up and train the models. Moreover, an ML-based approach can get tricky and complicated, whereas rules are good for certain edge cases where a rule must be deployed quickly to arrest a threat.</p><p class="text-node" id="677vvpvhj">That is why it is important to design a risk engine that combines rules and models.</p><p class="text-node" id="zb7mgl4xk">After building a risk engine based on the above steps, it is important to test the engine periodically in real-time and get feedback on its performance. That is the job of a fraud/risk analyst. Then, they improve the system by fine-tuning the rules and models.&nbsp;</p><h2 class="heading-node" id="ju5uswrou"><strong>M2P Fraud and Risk Monitoring System</strong></h2><p class="text-node" id="dljxlcrc3">M2P’s Fraud Risk Monitoring system leverages all the best practices in designing a risk engine. It evaluates the risk associated with various use cases (transaction, onboarding, login, and other non-payment scenarios) across all channels, including cards (authentication &amp; authorization), BNPL, core banking, payment gateway, UPI, etc.&nbsp;</p><p class="text-node" id="dln1sjaa1">Our FRM system combines many sources of data and performs customer profiling by interfacing with external system. We deploy advanced risk checks such as behavioral biometrics to classify genuine users and follow a holistic approach that combines rules and models.&nbsp;</p><h3 class="heading-node" id="0yp3vmls5"><strong>Why M2P FRM?</strong>&nbsp;</h3><h4 class="heading-node" id="nlv820xtf"><strong>Effective Rule and Data Management</strong>&nbsp;</h4><p class="text-node" id="exrdxyb1s">Our FRM lets the user upload historical data, review rule performance, and deploy it after fine tuning the rules. Depending on the implementation of risk rules, the users can run the system in a listening mode (without uploading any historical data). In this case, the source system receives the risk score but does not make business decisions. Users can turn off the listening mode once the risk rules have been finalized.&nbsp;</p><p class="text-node" id="djj2tciz1">If users do not have any pre-defined rule set, our system provides a standard rule set covering all mandatory and a few optional/ conditional parameters.&nbsp;</p><h4 class="heading-node" id="eyi1c6dvd"><strong>Customizable Case Management Modules</strong>&nbsp;</h4><p class="text-node" id="f3drqcjwh">The case management section allows the issuer to flag a certain type of transaction as a case (based on a case definition) and conduct further analysis to determine if the transaction was genuine/fraudulent. The case management flow can be customized as per business &amp; risk preference.&nbsp;</p><p class="text-node" id="lxln3fwx5">Our Case Management module can help you:&nbsp;</p><ul class="list-node" id="tmaa6nywo"><li><p class="text-node" id="2lll5ft65">Set case definition (automatic rule) to flag certain transactions as cases&nbsp;</p></li><li><p class="text-node" id="g95ih3tr7">Prioritize cases as high/medium/low&nbsp;</p></li><li><p class="text-node" id="xlmyvgqy9">Assign cases to be investigated by analyst&nbsp;</p></li><li><p class="text-node" id="hjlq7j1x1">Automate case investigation via IVR/SMS/WhatsApp&nbsp;</p></li><li><p class="text-node" id="peawoxy7s">Assign and reassign cases based on category, ageing, priority, etc.&nbsp;</p></li></ul><h4 class="heading-node" id="kt5dbo5zy"><strong>Comprehensive Reports and Dashboard section</strong>&nbsp;</h4><p class="text-node" id="gxtngy81h">From fetching detailed transaction report, rule performance report to case management report till managing overall FRM system performance, filtering the dashboard by score, transaction outcome, genuine vs. fraudulent transactions, etc., our FRM gives a comprehensive reports and dashboard section to the users.&nbsp;</p><h4 class="heading-node" id="dxbq3wuqi"><strong>Seamless Feedback </strong>&nbsp;</h4><p class="text-node" id="vheirj89u">Our FRM eases the life of the fraud analysts. Whenever the analysts come with feedback, it is easy for them to incorporate into our risk engine.&nbsp;</p><p class="text-node" id="f2astmaig">At M2P, we have had the privilege of collaborating with a diverse range of clients, and built lasting relationships with banks, NBFCs, and neobanks. Our team consists of seasoned professionals who possess a deep understanding of market trends and industry standards. With this knowledge, we craft innovative solutions that effectively combat cyber fraud and provide our clients with the protection they need.</p><p class="text-node" id="9zp550uq3">Do you want to protect your customers from cyber frauds?&nbsp;</p><p class="text-node" id="qe7ocukj1">Reach out to us at <a class="link" href="mailto:business@m2pfintech.com">business@m2pfintech.com</a>!&nbsp;</p><p class="text-node" id="i5xbl37li"><strong>This blog was co-written by </strong><a class="link" href="https://www.linkedin.com/in/madhusudhanramakrishnan/"><strong>Madhusudhan Ramakrishnan</strong></a><strong>, Associate Vice President – Product Management, M2P.</strong>&nbsp;</p><p class="text-node" id="xzflhlbqm"><a class="link" href="https://m2pfintech.com/newsletter/"><strong>Subscribe</strong></a><strong> to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.</strong>&nbsp;</p><p class="text-node" id="wefsck1wj"><strong>Follow us on </strong><a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/"><strong>LinkedIn</strong></a><strong> and </strong><a class="link" href="https://twitter.com/m2pfintech"><strong>Twitter</strong></a><strong> for insightful fintech tales curated for curious minds like you.</strong>&nbsp;</p>

Building a Robust Fraud and Risk Management (FRM) System

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/10/AML-Banner-01-3.webp" alt="M2P Fintech" title="" width="100%" height="236"><p class="text-node" id="j0uymrkpk"> Money laundering costs the world nearly 5% of its GDP. The losses are estimated to be over $2 trillion per year.&nbsp;&nbsp;</p><p class="text-node" id="mabcr56j7">For starters, money laundering is not some harmless misdemeanor. It’s a serious financial crime with significant economic and social consequences. As 90% of money laundered is off the radar, criminals and terrorist financiers find it very easy to fund and monetize illegal activities.&nbsp;</p><h2 class="heading-node" id="2opmmtuxc">What is money laundering?</h2><p class="text-node" id="n8exyicdq">Money laundering is an illegal process that conceals the origin of ill-gotten funds and makes them appear as if they are from a legitimate source.&nbsp;&nbsp;</p><p class="text-node" id="qm8mvw68c">Here’s an example.    &nbsp;</p><p class="text-node" id="0uwzm6gte">A could have gotten paid for organized criminal activities such as drug trafficking, corruption, embezzlement, or gambling. Now, to spend the gains without drawing attention, A uses shell corporations, high-cash businesses, and other naive financial companies to illegally clean the dirty money and let it out in circulation. </p><p class="text-node" id="3oskgadu4">Now money laundering doesn’t affect just a particular set of businesses. Its dystopian effect surpasses industries and nationalities.&nbsp;</p><h2 class="heading-node" id="c9ru60ga0">How does&nbsp;money laundering&nbsp;happen?</h2><p class="text-node" id="lgmejts9z">Money launderers&nbsp;traverse&nbsp;three stages to&nbsp;stealthily&nbsp;release&nbsp;illicit funds into the financial ecosystem.&nbsp;</p><h3 class="heading-node" id="4qgmrotqs">3 stages of money laundering</h3><h4 class="heading-node" id="qbxu15oy4">1 Placement&nbsp;</h4><p class="text-node" id="f8augkopo">Here the laundered funds are shifted from criminal associations to be placed and positioned as a legitimate source. Usual techniques to mask the identity include false&nbsp;invoices,&nbsp;moving money to heavy cash flow businesses, foreign bank accounts, and offshore companies.&nbsp;&nbsp;&nbsp;</p><h4 class="heading-node" id="atsxwq39d">2 Layering</h4><p class="text-node" id="bg49hsfbr">Otherwise called the ‘structuring phase,’ layering divides a large sum of money into small transactions to cover up money laundering. It blankets the international money movement, making it difficult for law enforcement to track down launderers. Ultimately, the laundered money circulates globally and is exchanged in foreign markets.&nbsp;</p><h4 class="heading-node" id="wv3wdgeq0">3 Integration</h4><p class="text-node" id="zgeassppk">Also called the ‘extraction phase,’ integration is the final stage of money laundering. In this phase, the laundered money returns to the criminals and integrates with the regular financial stream. Masked to be from a legitimate source, criminals can now legally recover their laundered money and use it for any purpose.&nbsp;</p><h2 class="heading-node" id="0oubbqivk">Need&nbsp;to combat money&nbsp;laundering&nbsp;</h2><p class="text-node" id="ah9nqc0pq">The impact of money laundering is severe. It decays financial health, income distribution, and tax revenues, in addition to promoting crime and slowing down economic growth.</p><p class="text-node" id="9xx2ejc2v"> Institutions specializing in money movement, including banks, NBFCs, and other financial institutions, are more likely to be impacted by money laundering. Hence, they need to be highly vigilant.</p><p class="text-node" id="rjbrf6dyz">The September 11 attacks, popularly known as the 9/11 terrorist attack, had an intense effect on money laundering regulations, mainly focused on the banking sector. After this, the Patriot Act was introduced, which offered the US government power to fight against terrorism. It also directed the financial institutions to expand their Anti-Money Laundering (AML) programs and intensify due diligence on foreign bank accounts. Title III strengthened banking rules by improving communication between law enforcement and financial institutions. This resulted in the US enforcing a stricter AML regime, followed by other countries. </p><p class="text-node" id="09qzr6nph">In India, RBI imposes stringent anti-money laundering regulations. Banks must follow strict customer identification processes for account opening and transaction monitoring. Anything suspicious must be reported immediately to the appropriate authority. </p><p class="text-node" id="whspcs4nj">Strong Anti-Money Laundering (AML) regulations and compliance are critical in today’s modern landscape, where criminals are getting more sophisticated by the hour. Monitoring, assessing, and reporting vulnerabilities and suspected money laundering is crucial for financial institutions.&nbsp;&nbsp;</p><h2 class="heading-node" id="wkbd6qylf">What is Anti-Money Laundering?&nbsp;&nbsp;</h2><p class="text-node" id="c1qac7ial">Anti-Money Laundering (AML) regulations&nbsp;comprise&nbsp;laws nullifying&nbsp;money laundering or any associated fraudulent activities. It saves banks and other financial institutions from terrorism&nbsp;financing,&nbsp;drug rackets, and&nbsp;other organized crimes.  Comprehensive&nbsp;Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations enable&nbsp;financial institutions to comply&nbsp;with legal requirements and report suspicious financial activities.&nbsp;Technology innovation&nbsp;in&nbsp;&nbsp;<a class="link" href="https://m2pfintech.com/blog/how-is-ai-changing-the-financial-industry-top-6-use-cases-in-fintech-and-banking/">Artificial Intelligence (AI)</a>&nbsp;and Machine Learning (ML)&nbsp;prevents&nbsp;fraudulent activities without hindering&nbsp;customer experience. &nbsp;</p><h2 class="heading-node" id="3i7d0d4gq">4 Pillars of AML  &nbsp;</h2><p class="text-node" id="kiekpwrbh">For efficient anti-money laundering, businesses need to get the following pillars strong. &nbsp;</p><h3 class="heading-node" id="epyq8nxhc"><strong>Know Your Customer</strong>   &nbsp;</h3><p class="text-node" id="q8ssak98q"><a class="link" href="https://m2pfintech.com/blog/crack-the-kyc-jigsaw-ease-onboarding-compliance/">Know Your Customer (KYC)</a>&nbsp;is a critical process for financial institutions. It is a legal requirement for AML laws as it establishes and verifies identity, assesses risk factors, and monitors suspicious activities. &nbsp;<a class="link" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/">KYC</a>&nbsp;helps banks and financial institutions understand their customers and their financial dealings to serve them better and manage risks prudently. In India, RBI has enunciated KYC guidelines in the context of recommendations made by the Financial Action Task Force (FATF) on AML.  FIs need to get KYC information, not just at the time of opening a new account.  They obtain additional data from time to time in accordance with account conduct or at periodic refresh cycles based on risk categorization.</p><h3 class="heading-node" id="6ykiuco81"><strong>Customer Due Diligence</strong>   &nbsp;</h3><p class="text-node" id="kbg0gs8k2">Customer Due Diligence (CDD) is the control process where all the relevant information of the customers is collected and processed for any potential terrorist financing risks. CDD helps identify risks and provides a risk assessment to new customers&nbsp;(via online databases), politically exposed persons (PEPs), government records, watchlists, and sanctions screening.  </p><p class="text-node" id="k9h7ogxu6">CDD is an essential step in KYC that requires ongoing monitoring of money laundering risks posed by each customer. This&nbsp;<a class="link" href="https://m2pfintech.com/blog/why-is-risk-based-authentication-rba-critical-for-banks/">risk-based approach</a>&nbsp;will conduct a more profound due diligence process for those with higher non-compliance risks by identifying customers added to sanctions and other AML lists.  Customer due diligence detects money laundering techniques that include layering and structuring. Also known as smurfing, that is breaking up a huge sum of money into smaller transactions to evade reporting limits and avoid perusal. </p><h3 class="heading-node" id="i2h716qd4"><strong>Customer and Transaction Screening</strong>   &nbsp;</h3><p class="text-node" id="vn7x04lo2"> Banks and other financial institutions are the leading players in the financial landscape with broad customer portfolios. They need to monitor and control the money transfers that&nbsp;take place. As transactions involve several other banks and entities, an average-sized bank mediates thousands of daily&nbsp;<a class="link" href="https://m2pfintech.com/blog/tale-of-money-transfers-from-hawala-to-one-click-remittances/">money transfers.</a>&nbsp;So even a minor crime can bring significant consequences and lead to severe administrative collapses, hefty fines, and loss of credibility. Hence screening of all customer deposits and other transactions must be treated seriously.</p><h3 class="heading-node" id="fabe0ux9m"><strong>Suspicious Activity Reporting</strong>   &nbsp;</h3><p class="text-node" id="qg44rsikl"> Examining bank records for any unusual behavior or irregularity is a common procedure for law enforcement organizations investigating money laundering. To aid law enforcement in locating perpetrators in the current regulatory framework, thorough records are kept on every single financial transaction. Banks must have an unchangeable audit trail that regulators can rely on. However, it’s also crucial that compliance experts at financial institutions rapidly and effectively examine issues and close them.</p><h2 class="heading-node" id="gu7wuxkmw"><strong>How do you respond to money laundering suspicions?</strong></h2><p class="text-node" id="jh1n1nqiy">Simple. Ask the client for more information. Then you can quickly determine if there is any chance of money laundering or not.</p><p class="text-node" id="t6t1k7cnd">And remember to tick off this checklist to avoid the risk of money laundering.&nbsp;</p><h3 class="heading-node" id="jddlhozk9">Tick off the&nbsp;AML checklist&nbsp;</h3><p class="text-node" id="2d5dqcoe3"><strong>✅&nbsp;</strong>Ensure you run a deep check on your new clients. Revisit the purpose of the business partnership and try to understand why they chose your firm. Customer Due Diligence (CDD) helps in identifying the clients and helps assess/reduce the risk posed by them.&nbsp;&nbsp; </p><p class="text-node" id="nqvhbbaah"><strong>✅&nbsp;</strong>Keep track of the unusual transactions that take place at the client’s end.&nbsp;&nbsp;</p><p class="text-node" id="qmye9qgk7"><strong>✅&nbsp;</strong>Unusual sources of funds are another crucial warning that you must consider. Regulation 28 of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLR 2017) helps in analyzing transactions if they are processed with the knowledge of the clients. In some cases, asking for any documentary evidence like bank statements, recently filed business accounts, or any documents that confirm the source of funds will help identify any trace of money laundering.&nbsp;&nbsp; </p><p class="text-node" id="n08q36wyx"><strong>✅&nbsp;</strong>Consider the purpose of funds coming from third parties. It may seem like a regular feature, but it may act as criminal property sometimes. So, it is better to run a check on the funds from third parties and their source.</p><p class="text-node" id="21v8zcu60"><strong>✅&nbsp;</strong>If there is any change of instructions without prior warning from the client, ask for a reasonable explanation.</p><p class="text-node" id="ii4pqulf6"><strong>✅&nbsp;</strong>Money launderers are most likely to misuse trust, company formation, operation of a client account, and so on. To avoid these risks, you must comply with anti-money laundering guidance for the legal sector and apply for appropriate levels of CDD and enhanced due diligence before providing these services.</p><p class="text-node" id="k3mjqe1yq"><strong>✅&nbsp;</strong>Pay attention to cash transactions, strictly follow your company’s cash policy, and don’t accept cash payments above the specified limit. There is always a high risk posed by cash.</p><h2 class="heading-node" id="4nrz33gno">Challenges in implementing AML  &nbsp;</h2><p class="text-node" id="aimmphv0f">AML compliance is indispensable. But effective implementation is the key challenge for banks and financial institutions.  Increased governance, lack of skilled resources, requisite tools, technology, and in-depth knowledge are a few bottlenecks that impact AML deployments.</p><p class="text-node" id="0d49pjcfs">Let’s take a brief look at some of the challenges below.</p><p class="text-node" id="tgh2lw5en"><strong>Increased governance -&nbsp;</strong>These financial institutions and banks face difficulties managing cross-border and multi-jurisdictional AML compliance and customer due diligence requirements. The major challenge they face is identifying beneficial ownership and initiating remedial measures to address the prevailing AML gaps uncovered by regulatory reviews.  </p><p class="text-node" id="zqqa32v4o"><strong>Lack of skilled personnel -</strong>&nbsp;Fetching professional resources with in-depth knowledge of AML is a tough challenge. Other issues include high onboarding timelines and costs, and attrition. With evolving regulatory requirements, organizations must invest considerable time and effort in keeping pace right.</p><p class="text-node" id="1e1lkxqp6"><strong>Complicated processes and technology -&nbsp;</strong>AML compliance requires banks to put in place a multiplicity of processes and technology solutions that will consolidate KYC data and systems in a single repository. They also need to create infrastructure for cross-channel detection of suspicious activities, improve data quality, and standardize data to enable a centralized analysis of fraud and financial crimes. The risk level assigned during onboarding varies according to the transactions undertaken by the customer. Banks must assess the risks dynamically for each customer and change risk levels accordingly to prevent false positives. This necessitates continual transaction monitoring for each customer, which is a daunting task.</p><h2 class="heading-node" id="9x7kxfrw4">In conclusion&nbsp;</h2><p class="text-node" id="vradle2w1">If you are a business looking to combat money laundering, you must invest in a robust AML platform focusing on the four critical aspects.&nbsp; </p><p class="text-node" id="x66xr3eaq"><strong>Research and Technology</strong>&nbsp;– With state-of-the-art technologies like artificial intelligence, you can detect false positives and conduct in-depth research to eliminate wrongdoings.&nbsp;</p><p class="text-node" id="zyq0b72es"><strong>Constant Communication</strong>&nbsp;– Regular communication should be between the parties involved, including law enforcement, government, regulatory bodies, etc. Communication will keep all parties informed, analyze suspicions, and identify possible networks to tackle money launderers.&nbsp;&nbsp;</p><p class="text-node" id="0l5p8rxqj"><strong>Leverage Data Analytics</strong>&nbsp;– Analytics arms you with data and insights to identify and detect patterns concerning money laundering.&nbsp;&nbsp; </p><p class="text-node" id="0a3fgei05"><strong>System Standardization</strong>&nbsp;– Proper standardization helps to communicate and process data that hinder fraud detection.&nbsp;&nbsp; </p><p class="text-node" id="o36k7kptf">Want to know more about AML deployment?&nbsp;Write to us at <a class="link Hyperlink SCXW36320282 BCX8" href="mailto:business@m2pfintech.com" target="_blank" rel="noreferrer noopener">business@m2pfintech.com</a>.</p><p class="text-node" id="j0hdotul6"><a class="link" href="https://m2pfintech.com/newsletter/"><strong><em>Subscribe</em></strong></a><strong><em>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.</em></strong></p><p class="text-node" id="u41gwavuj"><strong><em>Follow us on&nbsp;</em></strong><a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/"><strong><em>LinkedIn</em></strong></a><strong><em>&nbsp;and&nbsp;</em></strong><a class="link" href="https://twitter.com/m2pfintech"><strong><em>Twitter</em></strong></a><strong><em>&nbsp;for insightful fintech tales curated for curious minds like you.</em></strong></p>

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