Banking risks: managing evolving financial crime typologies

The shifting typologies compliance professionals seek to identify, monitor, and report on reflect the volatility of the wider economic landscape. In this blog post we highlight some red flags for emerging fraud and AML typologies we feel that banks should understand and assess.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

Tax evasion

Tax evasion was the top predicate offence to screen against for 36 percent of respondents for our survey for the 2023 State of Financial Crime report, released earlier this year. According to the Tax Justice Network, states lose £79 billion to corporate tax abuse each year. UK banks will benefit from leveraging risk indicators for tax evasion money laundering highlighted by Malta in 2021, including:

  • Firms declaring zero income revealed as doing business by third-party reports.
  • Customers trying to discover whether earnings will be reported to regulators.
  • Organisations with incomplete documentation affecting tax evaluations.
  • Accounts appearing to mingle business and personal income.

Russian Sanctions evasion

Due to the Russia-Ukraine conflict, Russia rose to first place in the 2023 list of geopolitical hotspots most concerning firms – cited by 46 percent of respondents. As sanctions have increased, Russian entities have been seen to be attempting to exploit weaknesses in western sanctions regimes via key emerging sanctions evasion methods, including:

  • Procuring goods through proxies.
  • Obfuscating the origins of banned commodities.
  • Recent changes to ownership and corporate structures.

It is crucial not to take a minimalistic approach to detecting potential Russian sanctions exposure – western government agencies will increasingly focus on improving private sector implementation and reducing evasion.

Crypto and ransomware

2022 saw an acceleration in the convergence of ransomware and cryptocurrencies, while state-sponsored ransomware actors in Russia, DPR Korea, and Iran have become more critical. Red flags highlighted by FinCEN and AUSTRAC include:

  • A customer talks about someone assisting them in a cryptocurrency purchase.
  • Immediately after a digital wallet receives funds from an external wallet, the owner quickly makes numerous trades with other wallets before moving funds elsewhere.
  • A customer submits a photograph of data on a computer screen during onboarding.

Investment scams

Our survey data showed tax and investment fraud continues to be a top concern for compliance professionals. UK Finance highlighted that in the first half of 2022 alone, investment fraud losses added up to £61.2 million. The 2023 Financial Conduct Authority (FCA) Handbook lists best practices banks should consider when screening for this fraud typology.

  • Include fraud loss in regular risk assessments.
  • Contact customers in a timely manner if investment fraud is suspected.
  • Tune transaction monitoring rules for investment fraud typologies, as recommended by subject matter experts.

Environmental crime

In our 2023 State of Financial Crime report, nearly one in three firms surveyed reported concerns about environmental crime, making it one of the top-selected typologies. Pandemic-related economic downturns reduced wildlife protection resources in key African regions, while China has eased wildlife trade restrictions introduced in June 2020 to curb Covid-19. United for Wildlife estimates illegal wildlife traders will “return to full profitability within two to three years.”

To curb the laundering of environmental crime proceeds, banks should:

  1. Implement frequent enterprise-wide risk assessments.
  2. Provide regularly updated training in typologies and risk indicators for environmental crimes and related activity.
  3. Ensure existing controls are sophisticated enough to dynamically detect these risks. This includes enhancing transaction monitoring rules and scenarios, which can be done with minimal upheaval through an artificial intelligence overlay that works with existing systems.

Key takeaways

Effective screening against each typology depends on a sound underlying risk management system. Compliance frameworks must effectively trace ultimate beneficial owners (UBOs), screen PEPs, and enable robust enhanced due diligence (EDD) practices. Reliable supply chain risk management and know your business (KYB) are also key. Technologies such as artificial intelligence overlays can help banks enhance existing processes.

For more insights, download Comply Advantage’s The State of Financial Crime 2023.

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