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The financial crime ecosystem: Merging cyber, fraud and money laundering

When Louis Freeh was the director of the FBI he said, “The fraudster’s greatest liability is the certainty that the fraud is too clever to be detected.” Fraud as a crime has been around for many millennia, much like other core crimes across the ages. The notion of falsely representing a financial proposition has become such an enduring and resilient crime. Efforts to stop fraud have become more complex to keep up with motivated and well-resourced fraudsters.

Now well into the 2020s, both the police and private sector have sought ways to deal with fraud and all the associated technology and the inevitable downstream laundering of funds. The Canadian Anti-Fraud Centre reported that in 2022 the Centre received reports of fraud and cybercrime totalling $530 million. What is most concerning is that they estimate only five to 10 per cent of these crimes are ever reported. The difficulty with many approaches is that the focus is segmented to one aspect of a larger process of financial crime.

With the global pandemic we saw a wholesale shift in consumer banking and spending habits and the financial services and retail industries ramping up their ‘digital ready’ posture. Overnight, many customers abandoned in person banking/shopping and moved to digital platforms to do their finances. This caused a shift at financial institutions and retailers so they could better serve their customers but also maintain their ability to monitor financial crime, including money laundering. Tools such as transaction monitoring programs had to be altered to account for rapidly changing consumer banking habits. During this time, law enforcement had to realize their ability to investigate financial crime. The pandemic badly strained their ability to maintain front line policing let alone lesser priorities such as this. All this contributed, in some part, to a drastic increase in reported fraud across Canada and internationally. With geopolitical risks and recession looming¹ globally, it is a critical point in time that both law enforcement and the private sector align on a philosophy and on the critical data required to combat financial crime in the years ahead.

It’s during these huddles we need to find a consensus across law enforcement, government and the private sector that we not only name things the same way but mean the same things when we do so.

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There are a growing number of associations, conferences, symposiums, webinars and law enforcement huddles that deal with fraud, cybercrime and money laundering. One would need a sizeable budget to attend all these events. It is, however, an encouraging sign that the volume and velocity of these events is growing again and is much needed.

It’s during these huddles we need to find a consensus across law enforcement, government and the private sector that we not only name things the same way but mean the same things when we do so. Establishing common terms and their scope is critical to moving forward in a coordinated way. The first step is examining and reordering the criminal continuum of financial crime. Almost all fraud is now committed in cyber spaces. Maintaining a robust line of sight to all the intelligence this offers is the first step in an ecosystem of financial crime. Once the cyber enablement phase is completed, the actual fraud is committed using these digital channels. The fraud could consist of a number of scams, such as business email compromise, investment fraud, emergency scams or theft of personal information. The funds are transferred through banking channels and placed in the accounts or hands of the criminal actors. But the ecosystem cannot end there. These funds must be laundered through the financial system to be usable and ‘cleaned’. In this final stage, criminal actors go through the three stages of money laundering: placement, layering and integration.

What is essential in this approach is that both law enforcement and the private sector consider financial crime to include the cyber aspect, the actual fraud and the downstream laundering of funds to better understand the criminality and dynamics of the schemes. With these tactics, both law enforcement and private sector entities can better tailor strategies and responses to financial crime by anticipating all three stages from the outset. It is entirely beneficial that when we all say financial crime, we immediately think of this criminal ecosystem and think of end-to-end issues and strategies to better our responses.

The last aspect of this philosophy is that of data intelligence. It’s this space law enforcement has a distinct advantage of pooling intelligence from all three phases of the financial crime spectrum. Although law enforcement will limit access to sensitive information by and large cyber, fraud and money laundering are housed in a singular silo. It is in the private sector, and financial institutions in particular, that these three stages oftentimes are housed separately and unsearchable to the different teams.

By considering financial crime as an ecosystem of stages, and by leveraging and pooling data intelligence, both law enforcement and private sector entities are better positioned to combat the crime of the 21^st century. The sooner we realize that the vast majority of crime is financially motivated, the better off we’ll be in meeting the challenge.

References

1. World Monetary Fund. “Safeguarding Financial Stability amid High Inflation and Geopolitical Risks.” Accessed at www.imf.org/en/Publications/GFSR/Issues/2023/04/11/global-financial-stability-reportapril-2023.

Cameron Field is Vice President at Vidocq Group and a retired member of law enforcement. Contact at cameron.field@vidocqgroup.com.