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RegTech, the unsung hero against financial fraud in a pandemic

There is no denying that globally, financial crime is a huge and growing issue, exacerbated by the onset of covid-19. In today’s digital world, more and more corporate systems are shifting away from the traditional pen and paper methods, to digital platforms and the internet. The increasing escalation of the covid-19 pandemic serves to further exemplify the urgent need for this transition to global industry, who for the most part, were caught completely off guard and unprepared.

In pre-pandemic times, money laundering and other associated financial crimes were already a huge problem for the Financial Industry, with January 2020 estimates of it costing anywhere between US$1.4 trillion and US$3.4 trillion annually - more than the whole British economy in 2019 by the latter estimate. As more firms switch their presence digital due to the disruptions caused by the widespread nature of the pandemic, and organisations and individuals are forced to make quick decisions on incomplete information, regulators have observed a notable spike in global financial crime since the beginning of 2020 in comparison to previous years.

The International Criminal Police Organisation, Interpol, headquartered in Lyon, France, was amongst the first to sound the alarm on this growing trend. On 1st April 2020, Interpol released a statement noting “criminals are taking advantage of the covid-19 pandemic to carry out financial fraud and exploitation scams” including those of “fraudulent investment opportunities and engaging in phishing schemes that prey on virus-related fears … various medical scams targeting innocent victims are (also) likely to increase, with criminals attempting to profit from the pandemic by exploiting people in urgent need of care, the goodwill of the general public and spreading misinformation about covid-19”. Interpol went on to urge businesses to remain vigilant and report any suspicious activity as criminals are now more likely to “seek to exploit gaps and weaknesses in national anti-money laundering” systems whilst they assume resources are being focused elsewhere.

In Singapore, scammers purporting to be from various government agencies have preyed on innocent victims’ fears of the virus to exploit them for hundreds of thousands of dollars. Government pay-outs to support businesses and individuals struggling during these times were not spared from scammers either, who quickly constructed bogus advertisements and webpages purporting to be reputable (often government) sources to further manipulate victims into handing over their details.

E-Commerce scams, particularly those of “covid-19 related items” such as face masks, have proven to be the most prevalent in Singapore for the first quarter of this fiscal year, accounting for approximately one in four scams. But amongst these, the most profitable scams are those of fake loans, which are up 27.9% from the same period last year, with scammers getting away with an estimated SG$41.3 million between January and March 2020 alone.

Many financial crimes occur due to a lack of verifiable information of the other party, or even the market as a whole. By mid April, the U.S. Securities and Exchange Commission (SEC) suspended trading for at least 20 companies due to questions regarding the “accuracy and adequacy” of the available information pertaining around the covid-19 related products offered in each case. The pandemic has created an increased sense of urgency, whereby organisations and individuals are feeling the pressure to move increasingly quickly, thereby compromising existing procedural safeguards in place guarding the movement of money.

Though there is no single solution cast in stone with regards to tackling financial crime, the last decade has seen a radical increase in the attention paid to the emerging ‘RegTech’ industry, which has grown substantially since the 2008 financial crisis to US$6.8 Billion in 2020, and is predicted to more than triple to a staggering US$21.3 Billion by 2027 according to newly published reports and data. Though relatively new, RegTech is fast proving its worth in the financial industry by offering solutions to modern issues such as curbing rising costs in the industry by automating processes traditionally done by workers, significantly reducing the risk of financial fraud.

Technologies ideally suited to support secure financial transactions include that of Blockchain, which offers unchanging records of each transaction, granting regulators unprecedented opportunities in terms of monitoring market activity. Tailored combinations of Blockchain and RegTech solutions are being increasingly viewed as the best industry practice in terms of the combatting of financial crimes in the current day, and future, due to its ability to assign unique identities and characteristics to ‘digital wallets’. Modern RegTech offers systems whereby market participants are automatically screened, and qualified, compliant transactions are automatically “greenlisted”, and non-compliant transactions blocked.

Globally, considerable resources are dedicated towards the combating of financial crime, with these crimes sometimes only being discovered years after having already occurred. Firms that are caught are made to pay tremendous fines and sometimes forced to return any dirty profits they may have incurred through these illicit acts.

The booming RegTech industry offers firms the opportunity to pursue a new and emerging form of regulatory compliance. With RegTech being a proactive rather than reactive technology, firms also have the opportunity to adopt a better stance, and strive for more effective and efficient compliance in the future. Despite the rise of financial fraud directly related to the widespread disruption caused by covid-19, this may be the big wakeup call businesses worldwide needed. With new digital systems, digital solutions must also be implemented. As mentioned in our April 8th blog, despite these highly troubling and uncertain times, data quality regarding the accuracy and timeliness of transactions cannot be compromised. If there has ever been a time for companies to step up their compliance game, it would be now.

Once we emerge from covid, we will be in a very different technological age for business, things will never return to the way they were before as recently as December last year. This transition to digital – though in some cases forced, and despite a turbulent start, will facilitate business transactions and compliance to standards never seen before. Firms who don’t take the necessary steps to ensure their compliance now, risk being left behind later.

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