Dai Bedford, EY Global Banking & Capital Markets Advisory Leader
Criminal networks exploit the global banking system to launder their proceeds. An intelligence-led approach leveraging new technology is helping to combat them.
Whether it is the trafficking of humans, drugs, weapons or laundering money, tracking crimes in the 21st century is an enormous global challenge. Often they are hidden from sight, operating within closed communities – making it incredibly hard to fight effectively.
Since convictions are frustratingly rare, it is crucial to find evidence that can help lead to successful prosecutions.
The solution could lie in an old journalistic adage: follow the money.
Why is it so hard to spot criminal finances?
The scale of financial crime, of criminal networks laundering their ill-gotten proceeds through the global finance system, is vast.In total, there is estimated to be US$2.4 trillion of illicit funds in circulation – but only about 0.2% ever gets recovered.
When you look at this activity in the context of the international banking system, it’s not hard to see why it’s difficult to detect –everyday around 1.2 billion financial transactions take place. Spotting which of these are connected to financial crime is incredibly difficult. Transactions happen in a fraction of a second and are followed almost instantaneously with new, related transactions.
It’s not just challenging to identify criminal transactions – it is also very expensive. The average financial crime operations budget of a global bank is more thanUS$1 billion a year, because banks that fail to stay compliant face huge penalties. Since 2008, banks globally have paid more than US$320 billion in fines for breaching financial crime regulations.
Because of this, many banks’ approach to filing suspicious activity reports to the authorities is to focus on quantity over quality to remain compliant. It is a case of providing the entire haystack in the knowledge that somewhere in there is a needle. Through my experience dealing with the global banking industry, I estimate that more than 90% of banks’ alerts of suspicious activity are false alarms.
This is neither an efficient nor an effective solution. The laundering continues and the criminals are not being caught.So, how could we do things differently?
Red flag reporting isn’t enough
To counter the rise in financial crime, the global banking industry and regulators need to move to a more intelligence-led approach. There is increased appetite among banks to go beyond simply flagging suspicious activity for compliance purposes. Banks want to leverage technology to more cost-effectively identify potential criminal behavior, as well as prevent the creation of fake accounts in the first place.
I believe there are two key areas banks can and should focus on:
- Better ID verification–The first step is to build a better identification system for individuals seeking to set up an account.If banks could use government-trusted sources of personal data, such as a biometric passport, to verify the identity of individuals, then it would make it much more difficult for criminals to open bank accounts under an alias.
- Better data analysis–New technologies can also be applied to improve data analysis when trying to identify suspicious behavior. Machine learning, artificial intelligence and automation tools can help filter out the ”false positives”– accounts that look suspicious but are not – and focus on the real problems, using technology-enabled investigative tools.
It also requires a change of mindset from regulators in terms of how they think about the process of compliance and data sharing.
Collaboration is critical
An intelligence-led and data-driven approach to tackling the financial side of organized crime will not fully work unless there is collaboration. This collaboration should not be just between the banks, but across governments, regulators, auditors, security agencies and banks.
This will require data sharing, and also improving access to trusted data sources, and supporting and facilitating the adoption of new technologies such as artificial intelligence and machine learning. The framework for identifying financial crime needs to be transformed to a cost-effective, tech-based model that aligns all stakeholders and enables information to easily flow between both the public and private sectors.
The good news is that this is increasingly the consensus across the globe.
Banking regulators are looking at how financial technology and process innovation can change the way they think about know-your-customer (KYC) protocols and tackling money laundering. They are talking about what they can do as a group to facilitate different ways of working to make the whole regime more effective.
It is in everyone’s interest to shift banks’ focus of financial crime away from compliance and toward proactively preventing and disrupting it. This is why, at EY, we are helping banks and regulators leverage technology, data and new ways of thinking to better detect and prevent financial crime.
Only by working collaboratively across organizations can we help create a world where the very worst criminals can no longer use the complexity of the global financial system to hide the proceeds of some of the worst crimes imaginable.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
Who Needs an Offshore Bank Account?
By Luigi Wewege is the Senior Vice President, and Head of Private Banking of Belize based Caye International Bank
Even today, many people believe that offshore bank accounts are only for the rich. Those in the upper-class ranks can indeed benefit from establishing international accounts and depositing into them regularly.
You should also know that people with more modest incomes can also benefit from choosing to open one or more offshore bank accounts. If any of the following applies to you, then looking into accounts with the right offshore bank is something you should seriously consider.
People Who Want Resources for a Rainy Day
It’s always nice to have some money set aside for a rainy day. One way to do that is to set up an account for use in emergencies. While you want to access that account at will, you don’t want it to be one of the bank accounts you use for typical purposes.
This is where an international bank account can be helpful. Many of these accounts require a minimum deposit to become established. If you put in enough, the balance will generate some interest. In the best-case scenario, that interest would be enough to handle whatever emergency has arisen without depleting the remaining balance.
Anyone Who Likes the Idea of Competitive Interest Rates
Speaking of interest rates, did you know that some offshore locations offer better rates than what you can get from a domestic bank? For example, there are time deposit accounts that allow you to earn an impressive amount of interest if the balance is kept over a certain amount. Some offshore accounts like this one have a tier system for interest; as the balance reaches different levels, you qualify for higher interest rates. That’s a great way to make money and save, letting your money work for you.
Remember that you don’t have to start the account with more than the minimum deposit required. It’s always possible to start with a smaller balance and then gradually add to it until you reach a level that generates interest. For people of more modest means, this is often a great way to get started with offshore banking.
Those Who Plan on Living Abroad
You may have a dream of retiring to another country someday. Now is a great time to begin preparing for making that transition. If you establish accounts with an offshore bank now, it will be easier to ensure the process of transferring assets from your domestic accounts will be more straightforward.
Since you plan to visit that intended retirement location between now and when you make it your permanent home, it’s nice to know there are funds on hand if you need them.
Don’t forget that those who are preparing to be expats may receive certain tax benefits. Depending on your country of origin, those benefits may be based on confirming that you are an expat. Bank accounts that are located offshore and have local addresses attached to them can satisfy that requirement.
People Who Travel Internationally
Right now, the primary focus is on making sure you have an account complete with a debit card for use while traveling abroad. Depending on where you’re going, a card associated with an offshore account may work better than using the one related to a domestic bank account.
Why could this be the case? The exchange rate between the country you’re visiting and where the account is based may be more favorable. Perhaps the banking laws that apply to the country where your account resides is more favorable for some other reason. Whatever the combination of circumstances, you end up finding it advantageous to use your offshore debit card rather than withdraw from your domestic funds.
Anyone Who Wants to Build Nest Eggs for Retirement
In an uncertain world, setting aside money for the retirement years is a must. You’ll find that establishing an offshore savings account can help you with this goal. Depending on the terms that come with the account, it’s likely to be a better choice than depositing funds into a domestic savings account.
It’s not just the interest rate that may be more attractive. The fact that the account is based in another country may make you less tempted to withdraw the funds unless they are seriously needed. In this way, you protect yourself from falling into a pattern of making deposits and then withdrawing funds to pay for things that you don’t need. The result is that the money remains in the account, earns interest, and leaves you more financially comfortable when you retire.
Those Who Value Their Privacy
Privacy is another reason to consider opening an offshore account. The fact is that you don’t want everyone to know where you have your funds deposited. While the information will come to light should you die, there’s no reason why you have to share it now. You’ll find that an international bank is a great way to protect your privacy as well as your money.
International banks are known to be careful with information about depositors. You are free to designate authorized people to access your account. However, without your permission, there is little than can be done by others to gain information regarding your account other than through specific courts.
People Who Want to Reduce Their Tax Obligations Legally
Depending on domestic tax laws, the funds you place in offshore accounts may be subject to less taxation. In some cases, the money may not be taxed unless you choose to transfer it to a domestic bank account. Thanks to this measure, it may be possible to deposit up to a certain amount in your offshore account annually and reduce your tax burden.
Keep in mind that the offshore banks in many countries do provide limited information to domestic tax agencies. Do keep accurate records and report offshore funds by following the requirements of your country’s revenue agencies. Doing so ensures that you get to enjoy the benefits but do not create any issues that could make things difficult at home.
Anyone Who Wants to Protect Their Wealth from Political Risk
If the political climate at home is somewhat unstable, you may be wondering what would happen if things got worse. How would it affect your holdings or possibly the ability to make use of them? The money in your domestic accounts could indeed become difficult to utilize if things get worse. That won’t happen with your offshore accounts.
Even if there are problems with domestic banks, they won’t affect the funds found in your offshore bank accounts. They could end up being the means of keeping your head above water until things are more stable at home politically.
Those Who Want to Protect Assets in the Event of Domestic Legal Actions
While the political situation may not be a pressing concern, there’s another issue that you may want to consider. What would happen if someone sued you, and the judgment was not in your favor? What would happen to the financial assets held in domestic accounts? The most likely outcome is that the court would authorize the seizure of those balances to satisfy the judgment.
If that happens, the funds kept in your offshore savings, term deposit, or checking account cannot be automatically seized. You can use the balances in any way you see fit. That includes being able to support yourself while you re-establish your domestic accounts after the judgment is satisfied.
How to Open Your Offshore Bank AccountHow HHsdalfasd
Have you been thinking about establishing one or more offshore bank accounts? There is no better time than now to open an account.
Caye International Bank, located on Ambergris Caye island in Belize, offers a full range of banking services. We’ve been helping individuals and corporations with their financial needs for almost two decades.
Contact one of our financial service professionals today to discuss your many offshore banking options.
This is a Sponsored Feature.
Luigi Wewege is the Senior Vice President, and Head of Private Banking of Belize based Caye International Bank, a FinTech School Instructor and the published author of The Digital Banking Revolution – now in its third edition.
You can follow his posts on trends shaping the banking and financial services industry on Twitter: @luigiwewege
More Regulations on the Horizon for Banks as Pandemic Exposes Security and Identity Deficiencies
OneSpan Global Financial Regulations Report reveals coming regulations on identity verification, Open Banking, AI, cryptocurrencies and biometric authentication aimed at enabling secure, digital economies
OneSpan™ (NASDAQ: OSPN), the global leader in securing remote banking transactions, today released the inaugural OneSpan Global Financial Regulations Report. The report examines regulatory and legislative initiatives impacting financial services globally in fraud prevention, digital identity, data protection, payments, Open Banking, e-signatures and more.
Governments around the world are considering and enacting laws, policies and regulations to enable and protect digital transactions and commerce, with the global COVID-19 pandemic further increasing the focus on remote banking, telehealth and other remote alternatives for essential activities. This is in large part due to the pandemic having exposed shortcomings in the current security, data management and privacy policies of financial institutions and others. At the same time, the race to digitize the industry to keep pace with evolving customer expectations and competition is also driving rapid regulatory change.
As a result, there will likely be more data privacy and data protection laws enacted throughout the world, each bringing unique regulatory requirements for financial institutions. To help financial services leaders navigate the uncertainty, the OneSpan Global Financial Regulations Report includes guidance on the following trends:
- Artificial Intelligence is under increasing scrutiny as adoption grows: Regulators and governments worldwide are grappling with the creation of frameworks for the development and application of AI that focus on data protection and privacy, as well as the ethical and transparent use of the data.
- Digital identities and remote account openings are gaining traction worldwide: Regulators in Hong Kong, Pakistan, Greece, Macedonia, Mexico and Turkey approved remote bank account openings in 2020 – a clear indicator that even processes rooted in traditional face-to-face meetings in the branch are now going digital and touchless around the globe.
- Open Banking is growing rapidly throughout the world: As third-party providers (TPPs) are allowed to use banking information to help consumers save money, borrow more easily and pay efficiently, banks will increasingly work with TPPs. In the U.S., the Consumer Financial Protection Board (CFPB) issued an Advanced Notice of Proposed Rulemaking on consumer authorized access to financial data, which could be the catalyst for Open Banking in America.
- Facial recognition is driving the greatest changes to banking regulations: As banks increasingly use facial recognition technology for Identity Verification requirements, they are housing large amounts of consumer biometric data. Standards organizations such as the National Institute of Standards and Technology (NIST) and Fast IDentity Online (FIDO) Alliance and are developing frameworks that could be adopted at the national level and would stipulate how banks protect and store their customers’ biometric data.
- Regulation is on the way for cryptocurrencies: As digital banking platforms have experienced massive growth, many governments and industry bodies worldwide have begun to look to Central Bank Digital Currencies (CBDCs) and cryptocurrencies in terms of what they might add to the financial sector. This has resulted in new and refreshed conversations around the possible uses of CBDCs and cryptocurrencies.
“The COVID-19 pandemic could become the most serious challenge to financial institutions in nearly a century, while at the same time the industry grapples with massive changes driven by regulatory developments,” said OneSpan CEO, Scott Clements. “Banks must act now to prepare for the significant changes coming their way in 2021. OneSpan’s inaugural regulations report will arm banks and financial institutions with the information they need to plan accordingly and be well-positioned for the industry transformation that has already started.”
Bank be nimble, bank be quick: how financial institutions can become more agile in times of pandemic
By Peter Simon, Financial Institutions Data Science Practice Lead, DataRobot
If banks want to survive and thrive in and after COVID-19, AI and machine learning are very important, but the current approach to making these technologies happen simply isn’t fit for purpose. Automating development, deployment and monitoring processes unblocks the bottleneck.
You’ve probably heard the one about COVID-19 doing more to change the way we work and to make global business digital in one year than the last thirty years of the “paperless office”. Something similar seems to be going on in financial institutions: the rapidly-shifting environment in the pandemic is driving changes to how banks work more urgently than a decade of competitive threats from fintechs and challenger banks ever did. At the same time, it’s unleashing a gale of creative destruction that could threaten the very fabric and existence of venerable financial institutions if not addressed.
Let’s cut through the hype and take the following premises as read:
- The COVID-19 pandemic is awful in many ways and devastating human lives and livelihoods.
- There are unprecedented (yeah, sorry, that word) downside risks to the global economy as a consequence of both the pandemic and policy reactions to it. These are affecting businesses across all industries and countries; the business of money is no exception.
- COVID-19’s effects are different from a typical recessionary downturn in a number of ways, and unpredictable. Yes, the pandemic has felt like a slow-moving train wreck this year, but business conditions have been moving fast, and one month’s certainties quickly become the next month’s history.
So what’s a bank to do? There are three challenges to address; let’s call them the three stages of ‘Rona Response.
First, survival. Banks’ short and medium-term survival will depend on their ability to identify and mitigate risks as the economy changes during and after the crisis. One would think that, almost a year into the pandemic, this stage would be complete, but arguably the worst of it will only arrive once fiscal policy ‘life support’ measures finally expire. As it is, the number of large corporate bankruptcies in the US this year already looks to be on track for an all-time high, with correspondingly high risks of collateral damage—and correspondingly difficult decisions to be made.
Next, resilience. Survivors will need to be proactive with identifying at-risk clients and help them before it’s too late. This will earn customer loyalty, better protect shareholders by reducing loan losses, and help banks and their communities to recover more quickly (thus being an investment in the institutions’ long-term viability as businesses). It will also shore up the odds of survival should the economy and/or the pandemic take another turn for the worse.
Finally, long-term adaptation and growth. The focus here is on preparing the post-COVID world, whatever shape it may take. It looks like we won’t see a return to “business as usual” anytime soon, but the ability to adapt quickly to whatever shape the “new normal” takes will ensure long-term profitability. There’s no time to wait and see how this new shape will pan out, as by then the most responsive institutions and fintechs will have stolen a march.
The common thread in addressing these challenges successfully is the ability to be nimble in the face of rapidly evolving conditions—effectively becoming an “agile bank”. It’s not going to help anyone if ensuring survival, by changing the way your institution does business, takes a 2-year big-bang transformation programme involving comprehensive re-engineering of all the business processes, hundreds of PowerPoint slides and thousands of consultancy hours; at the end of all of that, it could well be too late. Far better to address these challenges by a series of small, incremental, but immediately impactful adjustments which are fast to deliver. A good place to start is the way in which financial institutions make decisions; not the big, strategic decisions, but rather the hundreds of thousands of everyday operational decisions a typical bank makes, such as which customers to approve, how to target the marketing, what pricing to offer to new and existing customers, which transactions require supervision or investigation, and so on.
Example AI applications in financial institutions, by stage of ‘Rona Response
|● Rapid-response models (address specific short-notice needs and gauge speed and extent at which drivers are evolving)
● Anomalous activity detection for risk flagging (compare to pre-crisis activity patterns)
● Explanatory models of previous crises (what drove KPIs? what is different this time?)
|Survival use cases, plus:
● Customer forbearance models: where to extend maturities, reschedule payments, grant temporary limit increases, reduce rates, and/or waive late fees
● Regulatory capital and liquidity needs scenario modelling
● Sensitivity analysis5
|Resilience use cases, plus:
● Determining new channel usage patterns and preferences
● More efficient client outreach, to increase value, positive brand awareness, and loyalty
● Automated pricing and targeted marketing of new products
AI and machine learning have made inroads in this space, but banks have often struggled to realise these technologies’ promise. A recent McKinsey study found that reasons for this include, inter alia, a lack of clear strategy, inflexible infrastructure and outmoded working models that make it difficult for business and technology teams to collaborate. Let’s add slow and largely manual development processes, poor communication between technology and business silos, and the glacial pace of governance and implementation to the case for the prosecution. If banks want to become more responsive and agile, the current approach to making AI happen quite simply isn’t fit for purpose.
Modern automated approaches to machine learning and AI (“autoML”) help financial institutions achieve this, unblocking the bottleneck and sweeping away some of the problems described earlier, by:
- making the people who build the models to automate the decisions much more efficient and productive, automating their repetitive tasks and massively shortening the development cycle;
- exposing the ability to build powerful predictive models to a wider audience, such as business intelligence (BI) specialists who currently focus on building current-state or historical information—this allows the business to get much closer to the models than was previously the case; and
- making governance, deployment, ongoing monitoring and model refresh a much faster process, by enforcing a structured, repeatable approach to addressing the business problems at hand—even automating much of the documentation needed for model validation.
What can be automated?
Embracing these technologies can lead to some quite astounding results. One of DataRobot’s fintech customers has accelerated their credit model governance process to the point where credit scoring models can be built and deployed in a matter of hours. This allows the business—which approves over three thousand loans each day—to react quickly to the changing realities of their marketplace by ensuring that their decisions are based on the very latest data. Of course, not all banks will be able to achieve quite as drastic an improvement in process speed, but it’s realistic to expect substantial benefits; typically, we see the model development cycle shorten from three months to less than three weeks, with model validation, governance and implementation times also substantially reduced.
Around the world, we’re seeing increasing numbers of financial institutions of all shapes and sizes adopting these technologies. This newfound ability to finally “do AI right” is therefore becoming an increasingly important ingredient in the recipe for financial institutions’ long-term endurance, resilience and adaptability.
 Bank jumping over the candlestick is optional.
 The fully paperless office apparently being on track to arrive at around the same time as the fully paperless toilet.
 Perhaps even in the original, Schumpeterian sense, but that debate is well beyond the scope of this article.
 Special care is needed with this use case, as the unprecedented nature of current events results in an absence of historical data on which to train the machine learning models, and models trained on what is available may not extrapolate well, or at all. We list it nevertheless, as it can be very powerful when used wisely.
 Available at https://www.mckinsey.com/industries/financial-services/our-insights/ai-bank-of-the-future-can-banks-meet-the-ai-challenge
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