From the front lines: Fighting financial crimes and fraud

Given the increasing sophistication of fraudsters and the severe implications for the individuals and organizations affected, combating fraud and other financial crimes is a major focus for financial institutions. While no single anti-fraud tactic or solution fully protects banks against criminal activity, measures such as identity verification can help reduce instances of fraud.

“At KeyBank, the security of our client accounts is one of our biggest priorities,” said Ken Gavrity, President, Key Commercial Bank in a recent video series on cybercrime and fraud protection.³ “Key maintains close relationships with several national security firms to make sure we’re up to date on emerging threats and best practices for combating them.”

At the 19th annual KeyBanc Capital Markets (KBCM) Emerging Technology Summit’s (ETS) Fincrimes & Fraud discussion in March, Robert Prigge, CEO, Jumio; Reed Taussig, CEO, Authentic ID; and Chris Zingo, Chief Revenue Officer, Fenergo joined moderator Tim Monnin, KBCM Managing Director, Financial Technology Investment Banking to talk about the biggest challenges institutions face when it comes to combating financial fraud, available solutions, and the opportunities for investors in this fast-evolving subsector of the cybersecurity industry. 

Sophistication, volume, and velocity

The increasing sophistication of the technology fraudsters use to commit crimes like identity theft poses a serious threat to financial institutions and their customers. From using generative AI to create fake identities, to automating massive account takeover attacks, criminals now deploy cutting-edge tools and tactics to gain access to financial accounts. Particularly when it comes to untraceable assets like cryptocurrency, financial crime is big business. As fraudsters’ tools become ever more sophisticated, the technology needed to protect against them must keep pace. As Prigge put it, “it takes AI to stop AI.”

The volume of fraudulent attacks is increasing rapidly. Zingo said account takeover fraud is up 354% year over year. For many financial institutions, keeping up with the velocity of financial crimes is especially difficult due to the fragmented nature of their systems, siloed teams, and a heavy reliance on manual processes. Taussig pointed out that in most banks he has worked with, network and data security responsibilities belong to a completely separate internal organization than fraud. Prigge noted that the high rate of turnover in the banking industry also makes it harder to protect against fraud and financial crimes, as people who leave take their institutional knowledge of the system with them.

Finally, new regulations and compliance requirements are increasing financial institutions’ share of responsibility for identity theft and other financial crimes. According to the panelists, bank executives — including CEOs and CFOs — can be held criminally liable for anti-money laundering (AML) compliance violations. As the cost of penalties for violations rises, banks that are poorly equipped to protect against fraud and scams face serious compliance risks.

Technology is a crucial defense against fraud

When it comes to protecting financial institutions and their customers against fraud and fincrimes, technology is critical — both the sophistication of the tools available and the capabilities of the institution’s own infrastructure. For example, identity verification (IDV) services can include authentication of physical documents like a driver’s license, as well as biometric technology that verifies a person’s identity via their face or eyes.

Guarding against fraud and theft is an important component of digital transformation for these financial institutions. Due to the high cost of maintaining physical branches, many banks — especially larger entities — are already investing in digital transformation and enhancing their online banking platforms. The ability to verify customers’ identities accurately, quickly, and seamlessly online and to ensure those customers can perform digital transactions in a safe and compliant way is central to these institutions’ evolving business models.

Embracing digital operations facilitates automation, which can help banks reduce their vulnerability to fraud. According to Taussig, almost all fraud happens because of human error: consider the well-known example of phishing attacks, in which a fraudster tricks a bank customer or employee to disclose their login details over email or SMS. Fraudsters have also begun to employ video and audio deepfakes to fool account holders or bank employees into approving fraudulent transactions. The more processes an institution automates, the fewer opportunities there are for fraud to happen because of human error.

The vital mission of protecting identity

Credit and debit card fraud may be the most familiar types of financial crime. However, these days, people use their identities much more frequently than their credit and debit cards. As a result, verifying and protecting those identities is critical to guarding banks and other financial institutions against fraud. Protecting consumers and businesses isn’t just a compelling business opportunity: preventing financial crime and keeping the world safer is an altruistic mission, and one that is vital to a functional society, as Zingo pointed out.

“This is probably the hottest sector of the hottest segment within security,” said Prigge during the panel. “I don’t think enough people are looking at it. It impacts their daily lives, and yet it’s not impacting their investment decisions — and I think that needs to change in 2024.”

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