Fraud and Money Laundering: Coordinating Against Criminal Threats

Fraud and money laundering are often connected in criminal and regulatory contexts, and this proximity is reflected in the crossover of responsibilities of AML and anti-fraud employees. However, while they face similar threats, AML and fraud departments often operate in relative isolation from each other as a consequence of their differing objectives.

Given the damaging financial and reputational effects of fraud and money laundering, it is important for financial institutions to be able to coordinate their AML and anti-fraud responsibilities effectively to both prevent criminal activity and protect themselves against regulatory consequences.

Defining AML and Anti-Fraud

Fraud and money laundering exist on a continuum of criminal activity. Fraud is considered a predicate crime for money laundering since it involves the use of deception or dishonesty to generate illegal proceeds that must then be laundered to conceal their criminal origin and to embed them within the legitimate financial system. Indeed, AML and anti-fraud departments tend to utilize the same detection tools and parameters when conducting their respective investigations, including:

• Data and transaction monitoring software
• Account and customer information
• Peer group definitions
• Watch lists

However, while anti-fraud and anti-money laundering departments both function to detect and prevent financial crime, and use similar methods, they differ in their reasons for doing so. On one hand, fraud departments function to directly address criminal activity and protect organizations from immediate and potentially significant financial losses. On the other hand, anti-money laundering departments focus on regulatory compliance and the need to protect the financial system itself — goals which, unlike anti-fraud efforts, do not tend to directly benefit an organization financially.

The difference between AML and anti-fraud is often reflected in commercial attitudes towards the two processes and the internal cultures that develop around them. In a commercial context, anti-fraud may be perceived as a more cost-effective measure for firms because its impact can be easily quantified in financial terms: by preventing fraud and money laundering, firms protect their profits. On the other hand, the anti-money laundering process often has a more difficult time demonstrating its value because it primarily protects the financial system rather than a single firm, and only protects from hypothetical financial loss given the possibility of future noncompliance fines.

Connecting Fraud and Money Laundering

The causal connection between fraud and money laundering can inform the process that firms use to detect and prevent those crimes. If a customer makes a deposit with a suspected fraudulent check, for example, a fraud department must protect itself by investigating and establishing that the funds are real and that there is no risk of financial loss to the firm it works for. That process might involve requesting information from the customer or any associated financial institutions.

A fraud department’s conclusion that suspect funds are real does not eliminate the possibility that they are being laundered to conceal their criminal origin. While no further work is necessary from the fraud department, the anti-money laundering department must conduct its own investigation to establish the risk associated with the customer and the transaction. The AML process should involve a range of prescribed customer due diligence and screening measures, as well as coordination with financial authorities. 

In this podcast, ComplyAdvantage CEO Charles Delingpole interviews Hubert Rachwalski, CEO at Nethone. Nethone is a Poland-based fraud detection company using machine learning to detect and prevent card-not-present fraud and account takeover. Charlie and Hubert discuss the intersection of fraud, AI and money laundering. 

Fraud and Money Laundering Working Together

Many firms choose to coordinate their AML and anti-fraud measures in order to more effectively address both types of crime. By working together, fraud and money laundering departments can also take a holistic view of the criminal threats they face and streamline the overall compliance response. While the integration of AML and anti-fraud provides several benefits, it must be done carefully, ensuring compliance obligations are not compromised in an increasingly complex regulatory environment.

Firms may choose to integrate AML and anti-fraud as a single process or, alternatively, continue to work both functions separately while collaborating more closely on their respective investigations. In both contexts, firms should formalize the relationship between their AML and anti-fraud departments and set out the features of their strategy. These may include:

• A single transaction monitoring system that integrates both fraud and money laundering rules, along with relevant policies and processes for when suspicious transactions occur.
• Cross-training of AML and anti-fraud employees to enhance interdepartmental expertise and encourage familiarity with corresponding policies.
• Regular meetings between each department during which employees provide feedback to their counterparts, discuss strategies, and share case information.
• An alert remediation process that serves both the AML and anti-fraud functions and involves benchmarks for successful case resolution.
• A workflow map charting the progression of cases and allocating responsibilities to relevant employees or departments.
• A unified case management system allowing AML and anti-fraud departments to share and exchange files between respective investigations.

Data and technology: AML and anti-fraud processes each require the collection and analysis of large amounts of data, but that process becomes more challenging in a system where departments are working in coordination with each other. Smart financial crime technology offers a significant advantage to firms seeking to coordinate AML and anti-fraud by adding speed and accuracy to the respective processes. Digital solutions and AI tools can help departments organize and align their data collection and analysis objectives and, combined with human expertise, help bridge investigatory gaps between fraud and money laundering.