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When you think of fraud, you’re not alone in thinking of cyber security, identify theft, infrastructure security and network security. More than a third of capital markets firms and corporations say rising cyber and fraud risks are one of their top concerns. And a similar number say they are investing in RegTech to address it. Those challenges continue to grow – including synthetic fraud – and there are increasingly smart technology solutions to address those issues. These concerns are also part of a significant shift to cloud services; according to our latest Readiness research, 98% of firms are increasing their reliance on managed cloud services this year.
But the familiar categories of securities fraud – including insider trading and market manipulation – continue to challenge detection and generate illicit assets that need to be laundered. These crimes are also getting more sophisticated and demand a smarter approach to prevent and detect them.
This is another example of the potential benefits of taking an ecosystem view of compliance, because it gives you a more complete and integrated view. Consider what data you need to track the suspicious indicators of these crimes: 1
- Insider trading: Correlations among transactions and market prices; the identity, family relationships, and location of the customer; the customer’s trading patterns trading; correlation between account openings and large transactions
- Market manipulation: Trade characteristics (hard to price, low liquidity, and so on); Intelligence on the issuer including its business and officers; Patterns in the customer trades, transfers, journaling, including wash or cross trades of illiquid or low priced securities.
- Securities offering fraud: Correlations between known customer and multiple accounts; patterns of transfers and payments; the identify and trading patterns of the customer
The questions are familiar, and there is already a strong foundation with trade surveillance tools. But now you have better individual tools – with more comprehensive KYC and identify management, AI and machine learning to look at patterns in transactions and eCommunications surveillance to detect previously unseen patterns in communication and transactions.
And by bringing these together in an ecosystem view, you have the opportunity to build a coherent understanding of customers – including their accounts, businesses, relationships, and communications – and of transactions – both individual trades and patterns over time and markets.
Assuming this makes sense, what are the takeaways?
- Use the tools – Look for technology that leverages the power of data science, machine learning and AI
- Connect the dots – Build the information infrastructure to bring these elements together into a coherent view
- Find partners in crime-fighting – Look for vendors with a broader view that spans cyber security, fraud, AML and regulatory compliance
And remember – addressing fraud effectively doesn’t just benefit you, it benefits us all. After all, it’s the reason we have anti-money laundering rules – because you don’t have to launder money if there’s no criminal transaction.
1 FATF, Money Laundering and Terrorist Financing in the Securities Sector¸ Paris, October 2009