What is financial crime? | Napier AI

Learn about financial crime — illegal acts involving money. Discover the most common types of financial crime and how they could impact you.

Financial crime is an umbrella term which refers to any illicit act by which the perpetrator illegally acquires the property of the victim. There are several categories and multiple scales of financial crime, and both perpetrator and victim can be economies, governments, businesses, or individuals.

Criminal networks have access to cutting-edge technologies. Financial institutions also need to equip themselves with the right tools to stop criminals. Greg Watson, CEO of Napier AI, summed up the issues facing us in the Napier AI / AML Index:

“Financial crime threatens us all, and that’s why we must come together as a community to combat it and fill the gaps in knowledge.”

In this post we explore the different types of financial crime and how best to prevent it.  

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Financial crime can be broadly categorised into the below action areas:‍

Fraud

‍Fraud occurs when the perpetrator knowingly deceives the victim with false information to acquire funds, legal standing, or the property of the victim. One of the most prevalent forms of financial crime, it puts entire countries, organisations, and individuals at risk.‍

Corruption and Bribery

Bribery is typically committed when an official in a position of power in an organisation solicits or is solicited illegally to favour a certain entity or individual in decision-making processes over which the recipient of the bribe has influence. The bribe itself can take various forms, including money, valuable goods, or promises of a future benefit for the official. ‍

Embezzlement 

Embezzlement occurs when someone managing a person or organisations money misappropriates funds for their own personal gain. This could include transferring to their own accounts and creating false documentation to hide the evidence. 

Tax Evasion 

Tax evasion is the deliberate avoidance of paying tax. Some methods used here include failing to report income, claiming false reductions and refusing to file a tax return. Companies may also invest in or store assets foreign countries with more relaxed tax laws, allowing them to under-report their actual holdings. 

Insider Trading

Insider trading occurs when someone within a business has prior knowledge of the financial situation of their company, or companies that they work with. With this knowledge they make informed decisions to sell or buy stocks effectively cheating. 

Money Laundering

Money laundering is universally understood as being the act of hiding the source of illegally accrued money or goods, thereby generating a veneer of legitimacy for the illicit funds. Money laundering disguises the origins of the money or goods, and can be perpetrated by individuals, tax evaders, criminal organisations, corrupt government officials and even the financiers of terrorism.

While there are multiple methods of money laundering, central to all of them are three consecutive steps. These are:‍

1. ‍ Placement. This stage is when the funds or goods generated by financial crime are initially entered or placed into the legitimate economic environment.‍
2. Layering. In this stage of money laundering, successive layers of legitimacy are gradually applied to the illicit funds, disguising the origins of the ill-gotten gains. The complex financial transactions include, but are not limited to, electronic transfers between countries, using shell companies as cover, and moving funds between multiple banks or between multiple accounts within an institution.‍
3. Integration. Once the layering stage is judged by criminals to have sufficiently covered the source of the funds, the money is extracted, and often used for high-value purchases such as property or expensive goods. This serves to assimilate the proceeds of financial crime into the regulated banking framework.

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Technology has never been more critical for the financial sector — particularly in the war against anti-money laundering. 

On the one hand, money launderers and other bad actors exploit rapidly evolving technologies to invent new and innovative ways of committing financial crime. While law enforcement has had some recent notable successes, the war is ongoing. 

On the other hand, regulators globally are expanding and tightening the controls in place to fight financial crime. Financial institutions with inadequate AML measures face colossal fines and other sanctions if they are found to be lacking.

The main elements needed to fight financial crime

The AML programmes which are currently employed in the financial sector vary, but all have the core elements below:

• ‍Know your customer compliance, or KYC, is inclusive of customer/client due diligence (CDD). It is the verification phase of onboarding clients. It includes establishing the client’s identity and assessing what level of financial crime risk is incurred. To aid onboarding, Napier AI uses a cutting-edge client screening process which is built multi-screening configurations, an integrated sandbox and an intelligence data explorer.
• Transaction monitoring refers to the ongoing study of a client’s financial activities. It is a critical component in the fight against financial crime and money laundering, since this is how illegal activity will be detected. Possible criminal transgressions are reviewed and analysed by AML teams and appropriate responses are decided upon. Napier AI utilises a leading transaction monitoring system based on a big data platform, a no-code rule building and integrated sandbox, and ongoing intelligent analysis. ‍
• Suspicious Activity Reports (SARs), also known as Suspicious Transaction Reports (STRs), are a legislative requirement (in the United Kingdom) of most financial institutions, which has been put in place to combat financial crime. Flagged financial transactions or suspicious customers must be reported to the regulatory body for investigation. Napier AI offers an STR Builder to help make the process of reporting faster and more efficient.

Napier AI’s Perpetual Client Risk Assessments  features real-time comparative customer behaviour analysis, dashboard graphical renditions of customer activity, and a holistic view of all customer data and intelligence.

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Napier AI is a RegTech delivering anti-money laundering and financial crime compliance software to financial institutions, payments and wealth & asset management firms. Napier AI designs and engineers technological innovation to make a measurable difference in driving down financial crime. 

Trusted by over 100 institutions worldwide, the company’s platform, Napier AI Continuum, is transforming compliance from a legal obligation to a competitive edge. The modular platform offers end-to-end financial crime compliance software, and core to it is Client Screening, Transaction Monitoring, and Transaction Screening. 

Napier AI exists to transform financial crime compliance through NextGen technology, helping organisations worldwide fight financial crime more effectively and efficiently. Our proprietary research report, the Napier AI / AML Index, found that $5.2 trillion USD is lost to money laundering every year across the globe, but $3.13 trillion USD of this could be returned to economies using AI-powered anti-money laundering (AML) solutions. 

Our purpose is to enable businesses to proactively detect, mitigate, and prevent financial crime, through automation. This will not only ensure regulatory compliance, but also safeguard the integrity of the global financial system. 

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