A man uses Bank Mandiri's online banking app in 2019. (Antara Photo/Dhemas Reviyanto)

Fighting Financial Crimes in Indonesia With Integrated Approach

BY :AMIT PAREKH

APRIL 10, 2020

Financial crimes such as fraud, money laundering or terrorist financing continue to be a growing challenge for the banking sector today.

Globally, costs of financial crimes have reached a record high, with losses estimated at an eye-watering $42 billion in 2020, according to a report from consulting firm Pricewaterhouse Coopers.

The banks themselves are facing increasing pressure from regulators, customers and shareholders to prevent more of these misdeeds while at the same time trying to grapple with the ever-changing landscape of financial crime, which has become increasingly sophisticated and diverse.

In keeping up with rapid industry changes, financial institutions are now considering a fundamental question: is the current approach to tackling financial crime sustainable, or should banks seek a more integrated approach to fraud and anti-money laundering (AML) compliance to gain improved efficiencies and increased effectiveness?

Where Indonesia Stands

On the regulatory front, Indonesian banks have to adhere to stricter compliance standards as the country tightens rules to curb money laundering and terrorism financing and adhere to international standards.

Most financial institutions now have to undertake a comprehensive program to inform reporting entities of the findings from their risk assessments.

At the same time, Indonesian banks are faced with new fraud challenges arising from the increased move to e-commerce, adoption of digital and instant payments and the rapid rise of digital payment platforms, such as GoPay and Ovo.

The introduction of interoperability between payment platforms and, more broadly, the increase in digital payments over cash, have increased fraud.

Criminals are starting to target vulnerabilities in the market and consumers who are new to such payment mechanisms.

As a result, card-not-present (CNP), phishing and phishing fraud have become more commonplace.

In addition to growing regulatory scrutiny and trying to stay a step ahead of criminals, retail banks are also trying to serve their customers better as well as safeguard their reputation.

For these reasons, addressing financial crime is growing as a significant operational burden.

It is no longer the sole domain of the compliance department but involves multiple functions from fraud to PR to customer service and the board of executives.

With so much at stake, banks must examine areas where synergies might exist to be more effective in managing financial crime.

In Indonesia, like many other countries, enhancing prevention controls and ensuring timely detection is a problem of technology and people.

Banks are often impeded by a shortage of skilled talent and siloed systems. This leaves banks struggling to deal with less efficiency and heavy workloads while having to ensure optimal service delivery for multiple functions.

The Importance of Convergence

Fraud management and AML compliance are both about tackling financial crime, but they are often managed by different teams, each with their processes and technology.

A recent survey by FICO revealed that 71 percent of APAC banks say that convergence between both functions will improve their ability to stop fraud and financial crimes – but is this a meaningful trend or simply wishful thinking?

Fraud and AML compliance teams often have common controls that should be leveraged to help them better detect criminal activity.

FICO estimates that there is about an 85 percent overlap in the requirements of the technologies that they use. For example, the data that AML and anti-fraud programs each record could be mutually beneficial.

AML programs have customers' demographic data and transaction histories, while anti-fraud programs record unusual account activity and changes to account settings.

Pooling this information together allows organizations to get a clearer view of what is being done on their network and who is accessing which accounts and systems at any given time.

It is key to remember that fraudsters themselves do not operate in silos when laundering money, so financial institutions need to ensure that their fraud and AML compliance teams communicate well with each other.

Information sharing can lead to more holistic investigations and will encourage organizations to develop consistent processes within a single framework, reducing overall risk.

The consolidation of fraud and AML processes can further ease the resourcing burden by eliminating duplicative tasks to help organizations effectively win the war against financial crime.

From 'Hotbed' to AML Success

FICO sees in Indonesia an increased collaboration and convergence between fraud and AML departments. The more mature markets such as the United States and the United Kingdom may be a few years ahead, but it will not be long before banks in the Asia Pacific and Indonesia follow in their footsteps.

The pace might be slower here due to different regulations and a more fragmented market. Still, the first positive signs of change are there, with 81 percent of APAC banks surveyed by FICO saying they have plans to achieve their convergence ambitions within the next three years.

Organizational changes within banks, such as combined reporting lines under the same heads, are happening in Indonesia as well.

Also, while many banks in Indonesia are running older rules-based financial crime systems, they are now looking to reinvest resources in artificial intelligence, machine learning and analytical platforms.

AI is undoubtedly the way forward; proven AI-based technology solutions that have been successfully used to fight fraud can be applied to AML. Financial institutions in Indonesia will benefit if they move on these fronts before regulation compels them

If they act now, they can protect their organizations, shareholders and customers from sophisticated fraud operations as well as prevent criminal activity by monitoring, identifying and stopping money laundering operations in their tracks.

Amit Parekh is the country lead for Indonesia at FICO, a global analytics software firm.

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