AML Fraud: How to Detect and Prevent It in 2024

Money laundering and fraud are two distinct financial crimes but they are also interconnected in many ways. They mostly come hand in hand as criminals earn illegal money and then start looking for ways to launder it and make it look legit. That’s why a comprehensive AML fraud detection approach must be in place to help financial institutions avoid fines and penalties and also enable them to save their reputation as well as any potential financial losses.

What is AML Fraud?

Money laundering typically occurs in three stages: placement, layering, and integration. When criminals and fraudsters try to manipulate and circumvent AML regulations to hide the source of their illegal funds, it is considered fraud. They usually use methods like shell companies, real estate, smurfing, and hawala networks to evade detection.

While fraud AML specifically focuses on the laundering part of illegal money, other types of fraud include a broader range of deceptive practices with the intention of achieving different outcomes. For example, credit card fraud occurs when an unauthorized use of a credit card to make purchases or withdraw funds takes place.

However, if the amount withdrawn is huge, then the proceeds from the credit card fraud might need laundering. In other words, we can say that fraud and AML are uniquely centered on the process of cleaning dirty money to make it look clean and from a legitimate source.

How Does AML Fraud Work?

Any act of money laundering is illegal, and the fraudulent aspect arises when criminals bypass AML controls and regulations that are intended to prevent such activities.

The second stage or phase of laundering money, the layering stage, is the stage where criminals distance the funds from their criminal source or origin. They achieve that through a series of complex methods, such as transferring funds between multiple accounts or across different jurisdictions.

Sometimes, criminals use stolen synthetic identities to open accounts that allow them to make complex transactions and avoid detection. They might also misuse crypto platforms to deposit illegal funds into these accounts and then move them through peer-to-peer money transfer apps or cryptocurrency exchanges.

Therefore, what matters the most is the customer onboarding phase, which is the initial stage where customer information is collected, and thus AML regulations are in place to prevent those criminals from using fraudulent IDs, for example, to open an account that will later be used to launder money. Hence, customer screening and customer due diligence processes are crucial in AML fraud detection. 

Why is AML Fraud Detection Important?

AML fraud detection is important because the money we're talking about has most probably been earned through drug trafficking and other shady dealings.  Let's break down why AML fraud detection is of utmost importance:

1. AML fraud detection stops crime in its tracks! During this process, you don't only catch money laundering but also might catch bigger crimes that are tied to it. 

2. Financial institutions are required by law to have strong AML systems in place. If your institution does not catch suspicious activity from the very beginning or fails to report it, then you should expect serious fines and money laundering scandals. These will affect your institution's reputation and trustworthiness. 

3. Speaking of trustworthiness, when you know that your bank or financial service has strong AML policies and controls, you will automatically feel safe and trust that your investments and money are in good hands. 

AML Fraud Detection Mechanisms

Fraudsters have different methods and mechanisms, but all fraud detection has methods and techniques to stop it before it happens.

AML fraud detection techniques and tools identify and flag potential money laundering activities.

1. Transaction monitoring systems

Whether it is a rule-based system or ML & AI-based systems, both flag transactions that meet specific criteria, such as large cash deposits or frequent transfers to high-risk jurisdictions.

Now, machine learning and artificial intelligence systems can analyze huge amounts of transactional data in real time so this helps in identifying patterns and anomalies that might indicate suspicious activities. Unlike rule-based systems, AI/ML models continuously learn from new data which is a big advantage for AML and fraud detection.

2. Customer due diligence (CDD) & Know your customer (KYC) Processes

Onboarding is a crucial step in detecting fraud and AML. CDD and KYC verify the identities of your customers, assess their risk profiles, and monitor their transactions for unusual behavior. When necessary, you can apply enhanced due diligence to high-risk customers and PEPs.

3. Suspicious activity report

Your institution is required by law to file SARs when risky or suspicious transactions are detected.

4. Data analytics

Data analytics and customer analytics uncover hidden patterns and trends that might potentially be linked to money laundering. Network analysis and clustering algorithms enable you to identify relationships between entities and detect complex money laundering schemes.

5. Blockchain

Blockchain and Distributed Ledger Technology (DLT) offer new possibilities for AML by providing transparent and immutable records of transactions. These technologies enable enhanced traceability and accountability, making it more difficult for criminals to conceal their activities. Financial institutions and regulators are exploring blockchain-based solutions to improve the efficiency and effectiveness of AML processes.

The FRAML Approach

FRAML, short for Fraud and Anti-Money Laundering, represents an integrated approach that combines efforts to detect and prevent both financial fraud and money laundering. It's about integrating efforts to detect and prevent fraud and money laundering under one roof. Integration fraud detection and AML efforts cover all your bases. When looking out for fraud, you're often catching behaviors that could signal money laundering too, like identity theft.

However, getting FRAML up and running takes some strategy. It needs better overlapping and syncing up the two systems, AI to spot unusual patterns, machine learning to adapt to new threats, and analytics to crunch all that data. It is like a holistic unified approach that provides a better view of customer behavior.

AML Fraud Detection: Challenges & Best Practices

Detecting and combating fraud AML presents several challenges in today's financial landscape. Still, there are effective strategies and best practices that institutions can employ to mitigate these risks.

Detect AML Fraud with FOCAL

FOCAL is a platform that enables financial institutions to comply with AML regulations and proactively fight fraud. For example, FOCAL fraud prevention solution uses artificial intelligence to find inconsistencies in loan application data to stop any fraudulent or fake applications from getting approved.

Moreover, FOCAL utilizes official and government databases to verify customer and business identities, and this includes national ID verification, commercial registration verification, IBAN verification, and address verification. And when talking about verification, we should also mention that FOCAL also checks customer risk profiles and conducts customer due diligence thoroughly.

The platform also keeps an eye on all transactions to spot any abnormal deviations from the pattern, which might indicate warning signs of money laundering or fraud.

Conclusion

In summary, the FOCAL platform is one of the best fraud detection and anti-money laundering software that empowers financial institutions to identify and prevent any suspicious transactions. If you would like to see FOCAL in action and see how it will enable and empower your business, please book a one-on-one demo with one of our experts.