Financial crime risk management and compliance
Learn about financial crime risk management (FCRM) in the financial services industry and explore strategies for preventing financial crime—without overspending—by tapping into finance cybersecurity technology.
What is financial crime risk management?
Financial crime risk management is the practice of attempting to identify and prevent financial crime—for example, fraud or money laundering. While financial crime is a reality for all businesses, financial services providers such as banks, credit unions, investment firms, and insurers are the primary targets—and attacks are becoming increasingly sophisticated.
Financial crime risk management often includes setting up financial crime prevention systems, ensuring continual regulatory compliance, and flagging suspicious activity. But—so far—financial services organizations have not managed to keep up. Criminals have grown more adept at hiding their crimes in the boom of digital transactions. And despite the best efforts of financial analysts, very little of what is stolen is ever recovered.
To gain a true strategic advantage and reduce financial risk to their organizations, financial institutions and insurers need to reevaluate every aspect of their business. This begins with identifying vulnerabilities, then implementing fraud protection, anti-money laundering (AML), and cybersecurity technologies that can keep pace with criminals.
Assessing financial crime risk vulnerability
Financial services organizations are top targets for financial crime. But while implementing effective controls can help mitigate the risk of financial crime, efforts to prevent it are only as successful as an organization’s understanding of its unique vulnerabilities.
To get a clearer picture of how vulnerable it is to financial crimes, banks, investment firms, and insurers can perform an enterprise-wide financial crime risk assessment (FCRA). An FCRA follows a three-step approach:
Step 1
Identify inherent risks that exist in the absence of mitigating controls. For example:
- Customers
- Products
- Channels
- Geographies
- Qualitative risks
Step 2
Select and assess controls to mitigate the inherent risks you’ve identified. For example:
- Policies
- Processes
- Systems
- Training
- Record keeping
- Investigations
- Due diligence
- Suspicious transaction report filings
Step 3
For each of the risks identified during your assessment, take one the following actions:
- Accept the risk.
- Mitigate the risk by strengthening controls.
- Reject the risk by eliminating it.
Once clear on the risks at play, an organization can start taking steps to lower its overall likelihood of becoming a victim of financial crime.
The five pillars of financial crime risk management
Financial crime risk management systems are vital to ensuring that financial resources and data are safe from cybercriminals. But for a financial crime risk management system to be truly effective, it needs to both mitigate the risk of threats to the organization and provide benefits like greater operational efficiency or an improved customer experience.
An effective financial crime risk management system should have the following characteristics:
Holistic
Every financial crime risk management system should take a comprehensive view of potential risks—connecting data across the organization to locate threats. Every gap in security should be taken seriously and directly addressed by the plan to avoid any loopholes that could be exploited by financial criminals.
End-to-end
Preventing, detecting, investigating, and resolving threats are all crucial parts of an effective financial crime risk management system. But the process shouldn’t stop there. The system should also have built-in capabilities for learning from each incident, so it can iteratively improve over time.
Customer-centric
An effective financial crime risk management system should naturally result in a better experience for customers. The focus should be on increasing detection accuracy, lowering the number of false positives, and reducing any unnecessary disruptions to customer activity. A frictionless, secure experience is the goal.
Automated
Automating threat detection, investigation, and response is crucial to ensuring the financial crime risk management system can be sustainably maintained. When building the plan, look for opportunities to reduce the human capital and infrastructure needed to maintain risk and compliance controls. Cybersecurity technology for financial services can help with this.
Adaptive
A financial crime risk management system that is too rigid will soon be outdated. As business needs and financial crimes evolve over time, the plan for addressing them should also change. An ideal threat mitigation strategy will be flexible, scalable, and adaptive, ensuring it provides the greatest possible coverage against financial crimes.
The challenges of protecting against financial crime
There are many hurdles that can keep financial services organizations—and those in other industries—from implementing financial crime risk management solutions, not the least of which is feeling overwhelmed in the face of increasingly sophisticated attacks. Additionally, as financial transactions continue to transition online, protecting against attacks has largely become a technological concern.
But while it can be tempting to wait for a problem to arise before addressing gaps in security, cleaning up an attack is always more costly than preventing it in the first place. The reality is that all financial services organizations will experience a cyberattack at some point—but some will be more prepared to handle it than others.
Here are a few common challenges preventing organizations across industries from taking the necessary steps to guard against financial crime:
Dependency on legacy systems
Overall, the financial services industry has struggled to keep pace with technological innovation. But replacing outdated systems with modern finance cybersecurity technology is one of the best investments an organization can make if it wants to protect itself against sophisticated financial crimes.
Concerns about customer experience
Many financial services organizations end up weighing the customer experience against the impact of implementing more robust cybersecurity controls. App and software developers are under pressure to provide as frictionless an experience as possible. But strong cybersecurity should be just as high a priority.
Shifting financial compliance requirements
As financial crimes increase, regulators are swiftly increasing pressure on the financial services industry to establish financial compliance requirements that help protect customers and their assets. And while keeping up with these ever-changing requirements can feel overwhelming, they’re vital to maintaining consumer trust.
To overcome these hurdles, financial institutions need to accept the fact that hackers will always locate gaps in security. The answer lies in identifying and addressing vulnerabilities before they’re exploited. Fortunately, there are many tools that have been developed to help with this.
Effective, efficient financial crime risk management
There are many reasons to create a financial crime risk management system. It can help prevent noncompliant activity, enable your organization to respond to active threats, boost regulatory compliance, improve business continuity, and build trust with customers. Fortunately, this can be accomplished in a way that also maximizes resources.
To reduce costs and save time:
- Take a proven, integrated approach to avoid wasting resources.
- Rationalize compliance activities that are already taking place across the business.
- Implement processes comprehensively across the organization.
- Choose integrated financial risk management technologies that address multiple concerns at once.
Microsoft Cloud for Financial Services—a trusted tool for protecting against fraud
Through Microsoft Cloud for Financial Services, Microsoft and its partners provide financial services companies with a trusted platform that makes it easier to:
- Manage financial services data at scale.
- Protect against fraud and other forms of financial crime.
- Stay on top of evolving regulatory compliance requirements.
Among other benefits for retail banking, Microsoft Cloud for Financial Services helps prevent fraudulent digital account creation and takeover through proactive fraud detection and biometrics. It also gives merchants the tools they need to safeguard purchase transactions, improve revenue, and boost customer retention.
Not only does Microsoft Cloud for Financial Services specifically protect against fraud, but through the Compliance Program for Microsoft Cloud, it also supports risk, audit, and compliance teams in assessing and addressing compliance, security, and privacy concerns.
Start protecting against financial crime
As financial crimes become increasingly prevalent, it’s more important than ever for financial services organizations to deliver resilient and secure financial infrastructure. Follow these steps to begin implementing financial crime risk management and compliance solutions in your organization:
- Perform a financial crime risk assessment (FCRA).
- Build a financial crime risk management system based on your findings.
- Select integrated solutions that address all your security and compliance gaps.
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Frequently asked questions
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Financial crime risk management is the practice of attempting to identify and protect against financial crime.
Major types of financial crime include:
- Corruption
- Bribery
- Fraud
- Money laundering
- Theft
- Insider trading
- Payroll and billing schemes
- Terrorist financing
- Market manipulation
- Tax evasion
- Counterfeiting
- Identify theft
- Transaction skimming
- Misuse of company funds
Impacts include:
- Loss of financial resources
- Damaged or stolen information
- Costly reputational damage
- Reduced customer trust
- Regulatory scrutiny
Financial services organizations can guard against financial crime by identifying risks and vulnerabilities, upholding regulatory procedures, and implementing, stress-testing, and monitoring financial crime prevention protocols and technologies over time.
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Every organization, regardless of size, location, or industry, is vulnerable to financial crime—but financial services organizations are most frequently targeted. To determine their unique risk level, organizations can perform a financial crime risk assessment (FCRA), a method that can help identify specific gaps in security and compliance.
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There are many hurdles that can keep financial services organizations from implementing financial crime risk management systems, including:
- Being overwhelmed in the face of increasingly sophisticated attacks
- Dependency on legacy systems
- Concerns about damaging the customer experience
- Shifting financial compliance requirements
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Organizations that want to implement reliable financial crime risk management solutions can save time and money by:
- Taking a proven, integrated approach to avoid wasting resources.
- Rationalizing compliance activities that are already taking place across the business.
- Implementing processes comprehensively across the organization.
- Choosing integrated financial crime risk management technologies that address multiple concerns at once.
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Getting started with financial compliance and financial crime risk management technology is truly simple. Begin your journey with Microsoft Cloud for Financial Services by contacting your Microsoft account executive.
Learn more about Microsoft Cloud for Financial Services.
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