OpRisk & Compliance - September 2009

OR&C Intelligence - Financial crime

A new OR&C Intelligence Survey shows that, as profits fall and levels of fraud increase, financial institutions are working hard to adopt an enterprise-wide approach to fraud management. Victoria Pennington assesses the results.

During any downturn, an increasing amount of fraud and financial crime is revealed, as fraudsters are no longer able to hide their misdemeanours under healthy and growing profits. However, the depth of this financial crisis has not just served to uncover significant amounts of financial crime - due to substantially decreased profits at financial institutions, the proportion of profit dollars lost to fraud has increased. "At a time when banks are under financial pressure, fraud attacks - and the losses attached to them - are escalating. Plus, the operational costs associated with fraud and AML compliance are all increasing substantially as a proportion of total profits," says David Dixon, managing director of global solutions at Norkom Technologies.

The latest OR&C Intelligence Survey results show that 91% of respondents expect fraud attacks to increase over the next 12 months, with 66% experiencing increased fraud losses this year. But budgets are under pressure, and, as fraudsters get ever more sophisticated, the costs of the advanced tools and techniques required to catch them are rising. "Financial institutions all over the world have experienced a challenging year driven by the global financial crisis," says Dixon. "Pressure on revenues and profits has never been greater, which has led to increased board and senior management focus on cost containment and restricting investment programmes." But having an integrated financial crime management system has been proven to help reduce operating costs, at least once the implementation stage has passed. And this message does seem to be getting across to senior management at financial institutions.

The survey shows that 55% of firms have an integrated multi-year plan in place for financial crime (either financial crime overall, or all anti-money laundering (AML), or all fraud). This is up from 50% last year, and an additional 22% expecting to have such a plan in place within two years. Senior fraud managers have been motivated to make more serious moves towards implementing an integrated fraud risk management system, hoping to catch fraud before it affects the bottom line. "The good news is that a majority of survey respondents are on the right path," says Dixon. "Some 79% are deploying technology to help with AML compliance and 67% have deployed similar technology for fraud risk management."

There is a real commercial need not just to monitor and report crime, but to intervene and prevent it. Companies using technologies that include case management and workflow capability are able to achieve this more easily and are reducing their fraud losses as a result. The survey shows that, of those firms that have implemented a technology solution that consolidates information from disparate detection systems, 63% have seen savings of between 5% and 50%.

The increase in fraud, and the commercial need to prevent it, is not the only issue driving this adoption of multi-year, consolidated AML and fraud strategies. The threat of new, tougher and more all-encompassing regulation also looms, which places added pressure on banks. Some 83% of respondents expect increased regulatory oversight of financial crime in the next one to three years, with 76% believing the focus will be on operational risk governance. Under the operational risk umbrella, 66% expect an AML focus and 59% a fraud focus. Fifty per cent of respondents said their senior management team has increased its own focus on fraud. "Our respondents clearly feel the stress of the financial and current regulatory pressure," says Dixon. As the exact nature of the expected regulation is, as yet, uncertain (but will affect both fraud and AML environments) banks need to have fraud and compliance operations in place that are extremely agile and able to accommodate change.

"Companies using technologies that include case management and workflow capability are able to achieve this, and are reducing their fraud losses as a result - as clearly proven in the survey," says Dixon. "Financial institutions are increasingly recognising that what happens after detection is critical in terms of fraud loss containment. Year over year, the percentage of respondents who have deployed a common case/workflow management system has increased from 35% to 43%, while the percentage who intend to deploy such a capability within two years has grown from 31% to 36%. The message is that 79% either have or intend to have this capability within two years."

The benefits of taking this approach include reduced losses, better investigative analytics, better controls, as well as integrated monitoring and reporting. According to Norkom, leading case/workflow management solutions can be integrated with a financial institution's operating systems to accelerate direct action against compromised accounts to reduce losses. And 77% of those systems enable their users to take action that stops fraud in its tracks. "Fifty-six per cent of respondents who have this kind of capability say this has led to substantive reductions in their fraud losses," says Dixon.

From the results of the survey, it is clear the drive towards consolidating crime management, both AML and fraud, across all the bank's operations - underpinned by technology - will continue to gain adherents regardless of budgetary pressures.