How to Use Technology to Support Obama's Financial Fraud Enforcement Task Force

 
 
By Reetu Khosla  |  Posted 2010-11-04
 
 
 

How to Use Technology to Support Obama's Financial Fraud Enforcement Task Force


Fraud and financial crimes have generated a great deal of headlines over the past two years. From Ponzi schemes and investment scams to money laundering, financial institutions are being challenged today more than ever.

Government intervention and regulations are a first step to help fight the risks and challenges that are out there. However, technology will also play a key role in financial crime management moving forward, as institutions need the appropriate resources and tools in place to combat the ever-changing landscape of fraud.

Many institutions have stepped up efforts to monitor and detect fraud in the current environment. With constantly emerging threats and regulations, many banks and financial institutions have had to quickly implement plans to monitor, detect and manage financial crimes. Rules-based financial crime management technology has shown great promise, as it ensures that an institution's policies and procedures are in the system and are fully auditable.

Rules-based financial crime management technology also automatically identifies links between seemingly unrelated suspicious alerts and events and prioritizes higher risk activity. This ensures compliance to regulations while mitigating risk more quickly. If the organization identifies new risks, the solution can reflect such rule changes immediately or at a predefined date and time.

Financial institutions and insurers see financial crime management as a strategic initiative now. A lot of compliance is pure cost. There is no profit in compliance other than protecting yourself from regulatory scrutiny and stopping losses. However, if you don't have antifraud controls, the losses for most financial institutions and insurers exceed tens of millions of dollars in terms of the amount written off to fraud.

Fraudsters will test a bank to see what they can get away with. For example, they may start off with small-value transactions in order to see how far they can get, and wait to see if the transaction hits the detection system and is recognized as a threat. Through the use of auto-triaging technology, financial crime management systems are able to identify any related events and activities by automatically identifying a transaction or set of transactions as high-risk.

 

How to Use Technology to Support Obama's Financial Fraud Enforcement Task Force


title=Setting Precedent at the Federal Level}

Setting precedent at the federal level

The current administration's Financial Fraud Enforcement Task Force is focused on mortgage, corporate and securities fraud, as well as ensuring that all current financial recovery and rescue efforts protect taxpayer investments. The Task Force is also focused on monitoring any discrimination to assure that the financial markets work for all Americans.

The ramifications of the recent financial meltdown are still being felt in the economy. The Task Force is charged with assuring that the underlying fraud and greed that contributed to the deterioration of the financial markets will be monitored and held in check moving forward.

The Task Force has already made some progress in its mission. In June 2010, it completed an operation which targeted mortgage fraudsters throughout the country and was the largest collective enforcement effort ever initiated to confront mortgage fraud. Over a four-month span, the Task Force has brought 1,215 criminal defendants to justice. These defendants were allegedly responsible for more than $2.3 billion in losses. The Task Force has also been able to enforce civil actions that have resulted in the recovery of hundreds of millions of dollars.

The early results have been encouraging. Financial institutions and insurance providers also have to look at their internal controls to help stem the threat of fraud and financial crimes. Many financial organizations have limited visibility across operational silos where there are a large amount of manual processes and multiple detection systems. Investigators and employees may be more knowledgeable about what to look for in suspicious activity, but firms need to take a more holistic approach, including using technology to identify seemingly unrelated risks and prioritizing higher risk activity.

Using Technology to Curb the Threat


Using technology to curb the threat

Technology can play a key role in bridging the gaps that currently exist in financial institutions.  Fraud, Anti-Money Laundering (AML), sanctions and Know Your Customer (KYC) initiatives are areas where technology can make an immediate and drastic difference in operations through an integrated risk management approach.

KYC focuses on automating the regulatory requirements that are specific to global jurisdictions, customers and products in the onboarding of new customers. It is the due diligence and regulation that financial institutions and insurers must perform to identify their clients and monitor relevant information pertinent to doing business with them. As technology can assure that proper processes are followed, the fact that policies and procedures can be automated ensures compliance while accelerating the client on-boarding process. This drives better service and experiences for their clients.

Fraud and money laundering have also gotten far more sophisticated in recent years. Money laundering efforts used to focus on individuals who would bring bags of money into bank branches to make suspicious transactions. Today, insider trading, stock pump and dump schemes, and collusion between employees of financial institutions and criminal rings all pose significant threats.

Technology and software applications can now monitor customer transactions on a daily basis. They use customer information and account profiles to generate alerts on suspicious activity for the financial institution. Financial crimes case management technologies are further used to triage, investigate and identify high-risk activities and cases.

 

Bringing It All Together


Bringing it all together

The Financial Fraud Enforcement Task Force has created some infrastructure to ensure cross-agency collaboration to identify links between fraud and financial crime. Financial regulations are going through the greatest transformation in a generation to help address the alarming rate of fraud that we have seen in recent years.

The challenge faced by the Financial Fraud Enforcement Task Force is daunting, but technology is driving common practices and transparency across organizations that will enable the regulators to identify risks, fraud and financial crime more effectively and efficiently. Financial institutions can now complete the entire on-boarding process for new clients in less than half the time that it used to take. This includes meeting all due diligence requirements by risk, product and customer type, and assigning a risk rating for all new customers.

Though fraud schemes will continue to evolve and pose new threats moving forward, rules-driven, process-centric technology is providing the Financial Fraud Enforcement Task Force and our financial institutions with the ability and agility to adapt to emerging risks and new processes, as well as develop regulations to curb ever-increasing threats and minimize the threat of severe disturbances to the overall financial system.

In this scenario, organizations are implementing systems that effectively manage risk and compliance while also creating a framework that delivers better, timelier customer service. It's a win-win proposition for the organization and its clients.

Reetu Khosla is the Director of Financial Crime Solutions at Pegasystems. She has several years of regulatory experience in the banking and non-banking sectors, specializing in financial crimes and AML-compliance, operations and management. Reetu has implemented, developed and managed international Suspicious Activity Report (SAR) programs, sanctions, high-risk customers (foreign financial institution and private banking), regulatory response and internal audit response management.

Reetu has been invited by the FBI and private sector to train financial institutions on building effective AML programs. Her most recent positions include director of risk at Fidelity Investments, consulting financial institutions on developing their AML/fraud programs and working with the Department of Justice on analysis for AML regulatory requirements. She can be reached at reetu.khosla@pega.com.

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