Financial crime trends to watch out for in 2023


With the financial world becoming ever more interconnected with digital and technological innovations, the spectre of financial crime looms potentially larger than ever.

The new technologies gracing the market as the next big thing are numerous – and many companies are seeking out the best-of-breed to ensure they can win the future.

For businesses looking to make their mark, what financial crime trends should they watch out for this coming year?

According to Moody’s Analytics director Nicola Passariello, one of the key trends to watch out for this coming year will be cybercrime.

He remarked, “I see cybercrime as the main trend in financial crime in 2023 due the volume of transactions over digital channels growing exponentially; more people are using electronic methods to pay bills, to buy goods and services.

“We already saw a large increase with Covid-19 pandemic which triggered financial inclusion. According to the World Bank, two-thirds of adults worldwide now make or receive a digital payment, with developing economies growing at 57% in 2021.”

Passariello added that in India, more than 80 million adults made their first digital payment after the start of the pandemic, while in China they were 100 million adults. “If you include fast growing mobile money accounts in Africa, the surface for criminals to operate has widened,” he said.

The Moody’s director remarked that cybercriminals have a more sophisticated ‘modus operandi’ than the traditional media. “They are not hierarchical, they act from anywhere, they do not need to perpetrate physical violence to extort money, and they recruit highly skilled individuals they never met in person over the dark web to infiltrate your systems for ransom, to steal your identity and to conduct any type of fraudulent activity, typically scams.”

Looking ahead to 2023, Passariello believes that the industry will continue to see pressure on Russia and other outliers with more targeted sanctions depending on the development of geopolitical risks, as well as a convergence in terms of sanctions policy between the EU and the US.

One area of finance that stood out hugely last year was that of ongoing volatility in the crypto sector – the collapse of FTX was one key example of the continuing risks associated with the market. Passariello believes that the regulatory pressure on the ecosystem – seen in the EU’s incoming MiCA regulation – will have a ‘ripple effect’ globally.

Other predictions by Passariello included the surfacing of more hybrid forms of financial crimes, especially in high-risk jurisdictions.

He quipped, “We can easily predict a more intensive usage of AI to be able to identify patterns that are precursory to any predicate offence beyond the watchlists, in addition to managing a massive volume of data.

“Machine learning will become more critical in the risk management of a client relationship during the life cycle, at customer onboarding level and ongoing for customer due diligence.

Stuart Jones – CEO of Sigma Ratings – added, “Compliance and risk managers will need to consider and contend with an ever-increasing array of challenges in 2023, ranging from fallout from an aggressive sanctions campaign against Russia, a tightening global economy that will invariably fuel fraud, broad scrutiny across the crypto space and regulatory pressure for institutions to demonstrate progress regarding compliance program effectiveness.”

Embedded finance crime

The rise of embedded finance is providing a flurry of new opportunities for businesses and consumers alike to simplify and improve the efficiency of payment and purchasing processes.

In a definition given by McKinsey, embedded finance is the placing of a financial product in a nonfinancial customer experience, journey, or platform. Whilst this makes payments more much efficient, it also opens a new avenue for financial criminals.

Roger Walton – chief revenue officer at Resistant AI – believes that the explosion in embedded finance has been accompanied by a massive increase in financial crime, adding that with the continued growth of embedded finance, fraud prevention and AML will also need to be embedded.

He continued, “Many non-financial companies are now offering financial services as part of their offering, which criminals are constantly testing for vulnerabilities. Companies are embracing automation and want to gain as many customers as possible, but in their haste to be the next ‘super app’, many are onboarding their customers through light touch processes.

“Firms should ensure they have robust processes to assess customer risk at the point they onboard customers and on a continued basis. If non-financial companies don’t strengthen their defences in the year ahead, there will be a spike in nefarious activity.”

Alongside fraud in the area of embedded finance, there is also in the opinion of Walton a ‘perfect storm’ brewing with the economic environment for technology to increase the amount of financial crime.

Walton commented, “Fraudsters are highly-organised and have access to the same tools as financial institutions; they even have weekly ‘standup’ meetings just like the developers at financial institutions.”

Over the coming year, he states, criminals in this area will become even more organised. Many of them, Walton argues, can currently onboard themselves in dozens of different ways and create hundreds of loan applications to test the defences of financial institutions simultaneously.

Walton concluded, “From here, their methods will become even more sophisticated. Dealing with this threat will require an even smarter response.”

Financial crime awareness

In the opinion of Danny Gal – COO at RegTech firm Clausematch – this year there will be three key trends that stand out. These include financial crime awareness, a move away from a siloed approach and more robust audit trails of financial crime.

He explained, “I believe you’ll see a continued emphasis on financial crime awareness among companies of all sizes. One trend to expect to see is that compliance is no longer a ‘tick-box’ exercise to remain in the clear of financial crime. Ensuring you have the right policies, procedures, and processes in place is critical, but now adherence is even more important. Companies must create a culture of compliance.”

Secondly, Gal underlined that he believes firms will no longer be able to take a siloed approach to financial crime. “This affects the entire onboarding and ongoing management of customers. Changes in beneficial ownership and structure will impact who you thought you were doing business with, and so it’s important to establish strong communication across the business. We’ll see that trend really take hold in 2023.”

Gal also suggested that in 2023, regulators will begin to conduct a full audit trail of financial decisions in a company, asking for rationale and evidence. “Again, no longer is financial crime compliance segmented to one part of a business: it impacts everything. It’s interrelated to other topics such as operational resiliency and cyber security, and firms should look at all of these with a holistic approach to tackle compliance and adherence.”

Copyright © 2023 FinTech Global

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