Fighting Fraud In A Faster Payments Landscape

NACHA recently released new figures on ACH network volume, revealing earlier this week that Same-Day ACH volume grew 46 percent between Q4 2017 and Q4 2018, surpassing 50 million transactions for the first time.

Accelerated payments are taking off in several markets around the world, and NACHA’s latest figures demonstrate U.S. demand for faster payment capabilities, too. The growth of Same-Day ACH seems to also suggest that previous concerns about the risk of more fraud as a result of accelerated transactions has not held the industry back from adopting the functionality.

That doesn’t mean the payments and financial services space can afford to ignore the threat of money laundering and other kinds of fraudulent activity in the context of faster payments. Indeed, in the U.S., the Federal Reserve’s Faster Payments Task Force published a report last April urging the nation to review the current regulatory landscape.

“This effort should also be ongoing,” the Task Force stated in its report, “so as to ensure that regulations are flexible to the evolving design of faster payments and the evolving security technologies and threats.”

The report also issued a slight warning to the industry: While faster payment innovations and technologies are progressing, solutions “tend to focus on technology more than risk,” with less attention paid to risk mitigation and legality than to speed.

There are many questions ahead as faster payments initiatives gain more ground in the U.S. and abroad, the Fed said, but it would be unwise for the faster payments community to assume compliance will be easy – particularly in an environment in which financial regulations are becoming ever more stringent.

“As the U.S. moves from an antiquated, check-based system to more real-time systems, you haven’t got weeks or months – you have to check immediately if there is a threat,” explained Charles Delingpole, CEO of anti-financial crime technology platform Mimiro.

Failure to understand the risk of non-compliance with tightening regulations, like anti-money laundering (AML) and know your customer (KYC), is particularly dangerous considering the increased number and value of non-compliance sanctions.

Research published last year found that 18 of the 20 largest banks in Europe have been sanctioned for money laundering activity in the last decade, with the United Nations Office on Drugs and Crime estimating that criminal money laundering may have reached $1.6 trillion in the U.S. a decade ago.

Since then, European financial institutions including BNP Paribas, HSBC and Commerzbank have seen multibillion-dollar fines for money laundering activity. In the U.S., 91 percent of the total $26 billion in AML and KYC fines were issued upon U.S. banks, separate data revealed.

“There are many banks that have been shut down or fined billions of dollars, and these problems are only going to become more acute as money moves faster, and moves more internationally.”

As the U.S. focuses on enhancing payments speed domestically, payments innovators have taken the speed of cross-border payments to task, too. Notorious for a lack of visibility, the traditional intermediary banking system means money can move between financial institutions before it lands at its final destination, often without senders and receivers being able to pinpoint where the funds are at any given moment. Organizations like SWIFT and Ripple are emerging as heavyweights in the effort to accelerate cross-border transactions.

But information about a transaction can often start out limited, degrading as funds move in the cross-border journey, said Delingpole, making KYC and AML compliance all the more difficult. Increasingly complex supply chains, with organizations operating today with thousands of suppliers in hundreds of jurisdictions, add to the challenge of compliance, risk mitigation and an overall sense of transparency in payments, he noted.

“It’s chaos,” he said. “Supply chains lengthening in distance, and also complexity – the sheer number of suppliers and intermediaries makes it almost impossible not to somehow do evil.”

As a provider of compliance technology, Mimiro is part of a blossoming RegTech market aimed at preparing corporates and financial institutions to handle the lofty weight of compliance as payments accelerate and regulations tighten. Investors see the need for solutions of this sort, too, with Index Ventures recently leading a $30 million Series B round for the firm’s machine learning-powered risk analytics and compliance platform.

It is paramount that technology is able to aggregate and analyze all of the data necessary to assess individuals and entities for KYC and AML compliance purposes, explained Delingpole, but technology cannot be the only answer: There must also be a culture shift.

While there has been an evolution in the “moral culture” surrounding issues of financial crime, what remain today are remnants of a past culture of acceptance surrounding illicit activity.

The attitude that AML and KYC fines are simply the cost of doing business is “no longer acceptable” for banks and corporates, Delingpole said, though it may have been in the past. And while non-compliance fines appear to continue to creep up on the world’s largest financial institutions, the market must not accept that non-compliance is simply an inevitable nuisance.

“The modus operandi of the past shouldn’t be acceptable in the future,” he continued. “Just because things are bad doesn’t mean you should accept them.”