Understanding & Managing Financial Crime Risk

Understanding & ManagingFinancial Crime RiskWhite PaperCopyright 2016 NICE Actimize. All rights reserved.

TABLE OF CONTENTSWhat is Financial Crime Risk? . 3Dealing with a Growing andPublic Problem. 4Understanding Financial Crime toManage Financial Crime Risk . 5Prevention Risk . 5Detection Risk . 6Investigation Risk . 7Strategic Approach to Financial Crime Risk Management . 85 Pillars ofFinancial Crime Risk Management . 8How Firms Deal With Financial Crime . 9How NICE Actimize Helps Financial ServicesOrganizations Manage Financial Crime Risk. 11ABOUT NICE ACTIMIZE . 11Copyright 2019 NICE Actimize. All rights reserved.

What is Financial CrimeRisk? Of the many vulnerabilities and threats to thefinancial services sector, financial crime riskhas emerged as a pervasive, yet widelymisunderstood category of risk. As consumers,governments, and the financial industry havegained familiarity with various forms of financialcrime, financial services organizations haveseen that the underlying risk of financial crimesnot only includes the direct action taken bycriminals, but also includes the impact ofdeterrence, detection, and resolution on theorganization and its customers.But what is financial crime risk? As the term isonly now becoming part of the lexicon of thefinancial services sector, establishing a singledefinition will help guide the discussion andeliminate misunderstanding: A financial crime is a regulatory,reputational, or monetary act orattempt against financial servicesinstitutions, corporations,governments, or individuals byinternal or external agents to steal,defraud, manipulate, or circumventestablished rules.The essential aspect of this definition is theimpact beyond the actual financial criminal actitself, because financial institutions feel theeffect of these incidents far beyond thespecific incident or situation. Working with thisdefinition, there are three main areas offinancial crime risk posed to financial servicesorganizations: Criminal Acts: These include actualfinancial crimes and explicitly illegalacts, such as account takeover, insidertrading, illicit employee activity, terroristfinancing, and market manipulation.Most financial institutions andconsumers are able to identify thesetypes of activities and their downstreameffect.Copyright 2019 NICE Actimize. All rights reserved.Compliance & Monitoring: Activitiessuch as trading and sanctionscompliance, suspicious activitymonitoring, and Know Your Customer(KYC) requirements are typically drivenby regulations and are traditionallyseen as just the cost of doing business.More recently, financial servicesorganizations have come to understandhow technology and processes affectinvestigators, compliance officers, andcustomers. Continued investment inintelligently combining technology withprocesses is now often mandated in aneffort to limit regulatory fines, sanctionsviolations, and other financial crimerisks. This also helps financial servicesorganizations to gain additional valuefrom compliance programs, eitherthrough greater efficiencies or byleveraging collected data in sales andmarketing activities.Intangible Impacts: These “softer”effects include the indirect impact ofprevention, the burden placed oninternal processes, as well as thepossible negative impact of customerdisruption and reputational damage.Additional examples of less tangibleimpact include finding extra resourcesto support timely regulatory filings orexaminations, increased data storageneeds, and the “cost” of enforcing auditand supervisory procedures such asongoing education and the opportunitycost of neglecting “regular” activities.Often, these opportunity costs are notcalculated in the total cost incurred toan institution despite their significance.

Dealing with a Growing and Public ProblemWith financial crime, any news is bad news, and there has been no shortage of bad news lately.Whether the topic is the loss of monetary or informational assets, regulatory scrutiny, or costlyreputational damage, the issue of financial crime and the wider effects on the financial industry are inthe headlines now more than ever before. But while the effects of financial crime are apparent, efforts toprevent it are not as easily executed.Financial services organizations have the difficult task of effectively identifying the greatest risks tothemselves and to their customers, protecting both parties against unnecessary risks and satisfyingregulatory requirements for greater transparency, awareness, and consolidation of information acrossthe organization. For many such organizations, this challenge is compounded by a stagnant or evenshrinking budget allocation, making these tasks even more daunting. Financial services organizationsare increasingly realizing that they must move beyond the traditional reactive and siloe’d approachtoward a more comprehensive Financial Crime Risk Management strategy.Copyright 2019 NICE Actimize. All rights reserved.

Understanding FinancialCrime to Manage FinancialCrime RiskThe myriad challenges encompassing financialcrime risk require a change in institutionalmindset and a greater understanding of what tolook for, how these incidents occur, and whatmeans institutions have to resolve andremediate them. The initial step in building thisawareness of financial crime risk is inunderstanding how different types of riskmanifest themselves beyond functional ordivisional segmentation. When viewed from ahigh level, effectively managing financial crimerisk falls into three main categories:Prevention RiskThe initial phase in the lifecycle of financialcrime risk deals with threats that have not yetaffected the institution; this can be thought ofas the programs and activities to halt anysuspicious or non-compliant activities beforethey become an issue. For financial servicesorganizations, many of these activities require agreat deal of resources and insight intocustomers that may not be available or easy toaggregate.These examples highlight the complexity ofprevention and associated risks: Stopping suspicious persons fromopening accounts or moving funds intothe institution prevents risk to theinstitution, but may also turn awaylegitimate customers, therebydecreasing new business.Balancing the risk of doing businesswith suspicious entities withoutcompletely closing off from high-riskregions in which valuable customersand businesses reside or do business.Deterring illicit actions from internal andexternal parties diminishes threats, butmay cause unwieldy and frustratingcontrols, thereby inadvertentlyupsetting customers, partners, oremployees.Copyright 2019 NICE Actimize. All rights reserved. Ensuring the network isn't being usedwith infected devices requires constantvigilance, dedicated resources, and anunderstanding of the ever-shiftingdigital threat landscape.Determining the suitability of newclients and their own risk appetiteaccording to the appropriateregulations requires ongoing trainingand education of personnel.Identifying potential risk areas andchallenges having to do with clientrelationships, accounts, information,and transactions before a problemoccurs is both extremely valuable andextremely difficult with information silosacross complex institutions.The challenge of preventing financial crime riskis extremely difficult, perhaps more difficult thanthat the other phases of the financial crime risklifecycle. It requires a delicate balance betweenlegitimate activity and risky activity, often withlittle or no transactional or behavioralbackground (i.e. in the case of opening a newaccount). In addition, the time required to makethese decisions is typically quite short, with ayes or no decision oftentimes meaning thedifference between a customer relationship forthe next decade and giving business to acompetitor.However difficult it may be to do, identifying notjust active, but also potential threats, enablesfinancial services organizations to diminish riskand reduce the costs associated with losses,fines, investigations, and customer remediation.Proactively addressing financial crime risksrequires a great deal of collaboration andcoordination across the institution, but providestremendous benefits to the institution andreduces both risk and cost.

Detection RiskThe next phase in the financial crime risklifecycle involves identifying and responding tothreats that are active or ongoing. Effectivelyhandling these types of risks requires bothaccuracy and speed, as a few seconds meanthe difference between stopping a criminal actor suffering the effects of a financial or dataloss, compliance violation, or major customerdisruption.Financial services organizations have acquiredand built a myriad of systems and sensors tomonitor for specific events and types ofbehavior; however, the many technologies lackthe wider scope needed to see incidents incontext. That lack of greater visibility oftenallows complex, cross-channel schemes to goundetected as criminals exploit the gapsbetween detection systems.The challenge of detecting complex risks withinfinancial services organization includes: Identifying deviations and anomalies orunexpected changes for a single useracross all the devices, channels, andactivities with which they interact withthe institution.Monitoring such changes andanomalies in customer behavior,account usage, suspicious patterns,behavior, financial or non-financialtransactions, and seeing theinterconnectivity between activities aswell as how certain sequencesincrease risk.Comparing how user behavior shiftsover time as compared to priorbehavior, prior account usage, peergroups within that individual account ororganization in a way that is fastenough to react to events, but scalableacross all of the institution’s customers.Copyright 2019 NICE Actimize. All rights reserved.Detecting a suspicious incident among millionsor even billions of transactions and nonmonetary activities requires broad coverageagainst various avenues of risk as well as theintelligence to correlate patterns from acrossthe organization into a single, context-drivendecision mechanism. While financial servicesorganizations often have greater context whendetecting risk than when preventing risk, thechallenge is no less difficult as patternscontinuously shift. This means that thedetection methodology and technology that iseffective today may not be as useful in the nearfuture.Maintaining effective financial crime riskdetection is an ongoing activity. Financialservices organizations have found success bydeveloping programs that both learncontinuously from customer activity andpreserve more traditional model and precedentbased detection logic, all the while adapting tonew patterns of risk. By constantly looking atthese patterns and understanding the nature ofthreats and vulnerabilities, institutions canseparate anomalous, but low-risk activity fromtruly suspicious acts. This has the additionalbenefit of not overloading staff with alerts andnot unnecessarily disrupting customerexperience.