Cleaning up the Digital Ecosystem

Guest post by Ro Paddock, Head of Anti-Financial Crime (AFC) at digital identity specialist Fourthline.

Global lockdowns forced all sectors of society to find new, technologically driven ways of continuing daily activities. The result is threefold: a permanent reshaping of consumer behaviour, a resetting of expectations and an acceleration towards digitalising everything from commerce and entertainment to banking. The number of digital transactions skyrocketed. McKinsey revealed an online spending increase of 30 percent to $347 billion in the first six months of 2020 over the same period in 2019. This acceleration to digital increased the digital transactions value to $767 billion in 2020, up 22 percent from the previous year.

While the growing uptake in digital payment methods is largely a positive thing, criminals capitalised on new opportunities. Our April 2021 Fraudulent Behaviour data showed a 37 percent year-over-year increase in fraudulent account creation attempts. Fraudulent hotspots emerged in the pandemic, where criminals were finding gaps in the fraud-fighting system. For instance, fraudulent activity was four times higher in France than the rest of Europe in Q1 of 2021. Criminals had responded fast and employed increasingly sophisticated methods to trick the system. It triggered a growth in the cost to protect financial institutions. In Europe alone, LexisNexis Risk Solutions estimates that the annual cost of financial crime compliance was $137 billion in 2020.

Responding to the Current Situation

In early July 2021, the UK House of Lords Industry and Regulators Committee held two evidence sessions exploring the regulatory costs faced by the UK’s heavily burdened financial sector. The committee considered the cost of anti-money laundering rules for businesses and consumers. As well as how these could be mitigated following the UK’s withdrawal from the EU. They discussed the disproportionate cost of anti-money laundering controls on small businesses and considered the idea of a shared services model. That could streamline the process, taking cost out of the system and increasing efficiency from a consumer perspective.

The committee also highlighted the challenges created by information-sharing restrictions that prevent firms from piecing together the different networks they see. As well as helping law enforcement close down vulnerabilities across the digital ecosystem. Essentially, you need a network to defeat a network. But without information sharing law reforms, the creation of such a network will be vastly limited. The EU is undergoing its own fundamental reform of its anti-money laundering regime. With a rumoured establishment of a single anti-money laundering body that fosters collaboration. The Anti-Money Laundering Authority (AMLA), a new EU agency, will be at the centre of the reformed regulatory system. It is being established to coordinate national supervisory authorities and regulators. The US, Singapore, and other jurisdictions are also implementing more collaborative, outcome-focused institutions. As suggested by one member of the Industry and Regulators Committee, Nick van Benschoten, perhaps the UK should follow suit during what “is a timely opportunity to look at what other fundamentals we are trying to achieve”.

Financial Crime Knows no Limits

Technological advancements mean that information can flow freely through a borderless transnational digital network. This is creating a platform on which criminals in any nation state can commit digital financial crime across the world. Hotspots in crime are emerging across Europe, but the link between detecting cases and prosecution is not yet strong enough. As touched on earlier, a key issue contributing to this is the lack of communication, data sharing and therefore transparency between law enforcement agencies in different jurisdictions.

Let’s consider an example: Company X has clients across France, Germany and Spain, but is based in Germany and does not have a branch in the other countries. This means that they are only regulated by German authorities, and information on fraudulent attempts to their clients’ accounts in France and Spain will not be passed on to the German regulators or to company X. Therefore, those fraudsters will not be prosecuted and will continue to roam in the digital ecosystem, looking for other opportunities to attack.

The goal is to have a safe, secure future in the digital ecosystem. But if information on known fraudsters is not shared across all relevant governing and regulatory bodies, then no one is safe from fraudsters. In order to accomplish this, we must harness consistency, collaboration, and communication across Europe and the whole digital landscape. Only by doing that can we build a repository of known fraudsters that is shared with different financial entities so that they can be kept out of the ecosystem for good.