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Are Money Laundering Concerns Preventing Investment in Gulf Countries?

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Archives, Global Trade Daily, Uncategorized

Are Money Laundering Concerns Preventing Investment in Gulf Countries?

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Money laundering is a global problem, but it has been a major obstacle for Gulf countries in particular as several institutions in the UAE alone failed over the years to perform the necessary security checks to counter money laundering and the financing of terrorism.

While the Gulf takes action to enhance the procedures of banks and law firms alike, the question remains of whether the region’s financial crimes created a reputation too bad for investment to grow yet. Then again, it could just be a matter of time and marked improvement.

Money Laundering Around the World and the Gulf

The process of money laundering typically has three stages: placement, layering, and integration. But these steps aren’t always clear-cut, which can make them even harder to spot, especially when dealing with very careful criminals.

As the United Nations explains about money laundering, the stages could be combined, missing a step, or repeated several times to obscure the fraud from authorities. As a result, the global GDP sees at least $800 billion to $2 trillion laundered for illicit activities.

That’s why keeping customers and businesses safe from financial crimes requires constant vigilance and strict security measures like know your customer (KYC), customer due diligence (CDD), anti-money laundering (AML), and countering the financing of terrorism (CFT) checks.

And these efforts pay off. SEON’s article on AML toolkit explains details on what is in the best AML software around that streamlines fraud detection and prevention. This includes risk scoring, politically exposed person (PEP) checks, and data enrichment, all of which can clearly depict each customer and whether they might be involved in money laundering.

Any firm can have this level of screening from the moment a new client signs up and assess them again as necessary, but to make a whole country more reliable, dozens of institutions must apply and police such procedures.

When it comes to Gulf countries, the Basel AML Index map of global risks shows that, as of 2021, Saudi Arabia, the UAE, and Bahrain are of medium risk, scoring 5.12, 5.91, and 4.50, respectively. There is room for improvement, but the region is far from a lost cause.

With the Central Bank of the UAE (CBUAE) introducing new anti-money laundering guidelines that also combat the financing of terrorism, one of many positive moves in the Gulf, the drive for a more secure and attractive industry is gaining momentum. But is it enough to attract greater investment?

Reports of numerous convictions, huge fines, and evidence of corruption in financial institutions undermine the integrity of Gulf countries. Potential investors see them as a big risk that could muddy their legitimate activities, cost them a lot in damages, and ruin their relationships with customers and partners.

At the end of the day, the only way to improve investment in the Gulf is decisive action and concrete results that prove their new ethics and professionalism are strong and here to stay.

Initiatives Aimed to Boost Investment in Gulf Countries

Governing bodies and businesses have already taken steps to counter fraud and terrorism financing. The first major initiative was the UAE Ministry of Economy’s anti-money laundering law that came into effect in 2018.

Firms and individuals were slow to comply with Federal Decree No. (20), but a crackdown followed. In 2021, the MoE released a list of money laundering violations, which amounted to 26 cases with fines ranging from Dhs50,000 to Dhs1 million each.

If nothing else, this shows investors that Gulf countries are serious about changing their corporate atmosphere for the better. But efforts go beyond official legislation and monitoring.

There are initiatives like the Gulf Coast Anti-Money Laundering Forum that takes place every year to discuss challenges and solutions related to anything from financial fraud in cryptocurrency to managing a business and its security during and after a pandemic.

The digital world also opens doors to spread awareness and host easily accessible spaces for discussion, not to mention online forums like Creative Zone’s UAE Anti-Money Laundering and Financial Crimes Initiative.

You’ll even find training courses addressing the Gulf’s problems with financial crime, another strategy that encourages the exchange of experiences and ideas, all of which nurtures people’s understanding of fraud and how to stop it. 

Combine these opportunities with fully functional software dedicated to the prevention and detection of fraud, and the Gulf’s solid foundation for reliable trade is clear.

Available Technology Can Combat Financial Crime

In addition to investing in cybersecurity strategies to counter cyber attacks, more and more firms are specifically embracing software and hardware that help prevent money laundering and related risks.

With the support of KYC and CDD systems, for example, they can analyze users’ data and verify their identities, monitor their transactions for anything suspicious, and ensure they have no connection to criminal watchlists. 

Additional AML and CFT layers of security make it harder still for bad actors to get a foothold with fake IDs, for example. They can still slip through as their technology improves, too, but the programs above are constantly looking for signs of money laundering and terrorism financing in new and existing accounts.

Furthermore, efficient equipment, like secure computers that can handle the required software and trustworthy phones for two-step verification and video ID validation, strengthen a firm’s ability to catch financial crime before it takes root and causes damage to the business and its customers.

Improving a firm’s security with all these features is expensive and time-consuming. Yet organizations in the UAE, Saudi Arabia, and beyond are stepping up and, at the very least, meeting the demands of anti-money laundering laws. 

Concerns about financial crime in the region have been a big reason why investors hesitate to build relationships with Gulf countries and this pattern may continue for a while. Nevertheless, trade should flourish as regulations take effect, violations fall, customers feel safer, and the voices advocating a secure, crime-free economy grow in strength and number.

About the Author

Gergo Varga’s fight against fraud has been going strong since 2009. Working at various companies, he’s even co-founded a startup. He has authored the Online Fraud Prevention Guide for Dummies and hundreds of other articles and guides. Based in Budapest, Gergo enjoys reading, tech and philosophy.

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Archives, Banking, Education, Global Trade Daily

A Guide to Choosing AML Solutions for Banks and Fintech

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If you’re a bank or financial institution, it’s important to be aware that instances of online money laundering are on the rise. 

However, with the help of suitable transaction monitoring software, banks and financial institutions can help prevent fraud and stay compliant with AML regulations. 

Let’s look at the basics of transaction monitoring as well as key features to look out for.

The new face of money laundering

According to the UNODC, money laundering losses amount to 2% to 5% of the world’s GDP. 

It is also becoming an increasingly online pursuit for criminals, catching onto new trends like the increased popularity of cryptocurrencies and blockchain – a report by Chainalysis found that cryptocurrency money laundering rose by 30% in 2021. This is possibly due to the increased anonymity in cryptocurrency transaction processes.

Naturally, these developments make it harder and harder for banks and financial institutions to catch money launderers, meaning that they need the latest technology to keep up with these increased risks. It’s not just banks and financial institutions either eCommerce sites are also seeing a rise in fraudsters targeting their operations as well as their customers. 

Fortunately, with the help of modern AML technology, you can catch online money launderers more easily. Transaction monitoring software in particular helps banks and financial institutions spot suspicious transactions and fulfill their legal obligations.  

Read on to find out why it’s important to stay compliant with AML regulations, how transaction monitoring software works as a solution to money laundering, and how to get the most out of features currently on the market. 

Transaction monitoring vs AML

To develop a good understanding of the differences between transaction monitoring and AML, it’s first important to know that AML stands for Anti Money Laundering.

Although related, there are some key differences between the two terms to look out for. Transaction monitoring is part of AML, but AML goes beyond this to include measures such as identity verification of each customer at onboarding, as keeping certain information about them up to date at regular intervals.

How does transaction monitoring software work?

During any financial transaction – deposit, withdrawal, payment and so on – a customer creates data on the bank or financial organization’s system. This is even the case when they transact offline, in person, as the transactions are still subject to these regulations. 

Behind the scenes, in the bank’s digital infrastructure, transaction monitoring software feeds this data through risk rules. These risk rules are based around flagging suspicious actions such as the following:

  • suspicious account activity and nature of the transaction
  • high value transactions (the threshold is different for each country)
  • high value cross-border transactions
  • cash withdrawals and deposits of a large sum
  • the source of inbound and outbound funds is unknown

Separating this information out from regular customer behavior, transaction monitoring software puts the data from these suspicious transactions, withdrawals and deposits into what is known as a SAR file, or Suspicious Activity Report. The file is designed in such a way so that financial analysts and regulators can review it. 

There are online systems in place that allow you to file a SAR if you need to, and transaction monitoring software options on the market that do this automatically for you. 

So, how do you know when you need to file a SAR? If your customer’s transaction doesn’t match that of a customer’s usual behavior nor their stated purpose, then this is cause for suspicion. An example of this might be that a customer declares their purpose for a bank transfer is to purchase a house but then, contrary to this, the money is left untouched in their account for a suspiciously long time.

Even when the transaction does match a customer’s usual behaviors, you still ought to also check if your customer has been involved with any sanctions lists, politically exposed persons (PEP) lists and other blacklist mandates.

When customer behavior looks out of the ordinary, you can consider whether they have made a high value transaction or withdrawn a large sum of money. If there’s a reasonable explanation, such as moving house, or going on holiday, then this isn’t usually cause for concern. 

Most financial organizations have defined workflows for gathering evidence from their customers on the source of funds, for example, when the software does flag such cases. They either employ workflow software for this, as explained in a guide to automation by Integrify or integrate the process into their AML/transaction monitoring platform. If there’s no reasonable explanation, then this is flagged as a potential case of money laundering and usually results in a SAR.

As you can see, it’s a process of elimination, which helps to find the best possible story to explain a suspicious transaction. After all, a number of transactions can look suspicious to a bank but for legitimate customers, there are logical explanations that often have to do with a change of life circumstances, for instance. 

Transaction monitoring software usually flags suspicious behavior instantly, meaning that if you’ve got software, you don’t have to manually check every single customer transaction, deposit or withdrawal to see if it’s a case of money laundering. A manual strategy is completely unrealistic – even for challenger banks and neobanks, which tend to be smaller in scale.

Ultimately, transaction monitoring is broad in its scope, covering all aspects of a customer’s credit behavior, transaction activity, currency exchange or wire transfer activity. However, as elaborated in an explainer on transaction monitoring on the SEON website, transaction monitoring software solutions tend to also address other AML requirements, such as identity verification and KYC – and beyond, sometimes including customer monitoring and onboarding checks, transaction velocity monitoring, and so on, all of which are fraud prevention measures.

Which rules do I need to be compliant with?

There can be damaging repercussions to not complying with AML legislation.

These include fines, business disruption and potential damage to your reputation as an institution. For repeat offenders, extreme cases can even result in removal of the organization’s banking license. 

Different countries have different thresholds for when it’s right to flag and scrutinize a transaction. For instance, the US has a transaction threshold of $3,000.

AML is a set of requirements that banks and financial institutions have to comply with. Banks and financial institutions therefore have to have AML strategies in place to make sure that they achieve this successfully. 

How to choose transaction monitoring software

Now that you have an understanding of what transaction monitoring software is as part of your AML approach, you can look at choosing the best transaction monitoring software for your bank or financial institution’s needs. 

There are many pluses of doing so, such as increased efficiency in detecting money laundering, and compliance peace of mind. This software can also help you to rank the suspiciousness of user behavior, allowing for a degree of prioritization. In the case of high risk operations and regulatory environments, transaction monitoring software can be adjusted to more strict rulesets. 

Despite its efficiency and outright necessity, a transaction monitoring software option can still be costly. It can also take up a lot of your valuable business time and often requires a full risk management team even if the software’s helping you process more data than usual. You might be looking at outsourcing this solution to a third-party or deploying a specialized, onsite solution – which will have to be managed primarily by your own team. Keep in mind that, in addition to the AML solution, the fraud/risk team who operates and maintains this software can also be on-site or off-site as well. 

Whatever your solution, every bank is probably trying to increase efficiency while remaining complicit with AML requirements. 

In reality, there’s no one-size-fits-all transaction monitoring software solution, especially as organizations have additional pain points and mandates to address. But, fortunately, there are a lot of options out there. 

  1. Organizations are well advised to start the process with their legal and compliance consultant, to fully map out the legal landscape that applies to their activities. 
  2. Then, you may want to continue with listing your adjacent and additional risk prevention needs as an organization – meaning those features that transaction monitoring software sometimes has, and you may be interested in.
  3. From there, consider whether it’s going to be in-house or outsourced software, the size of your team of fraud analysts, the level of automation you desire, and your overall risk tolerance, and you’ll be able to create a shortlist to investigate further.
  4. Investigate your shortlisted software, including getting quotes and hands-on demos, when available.

Key transaction monitoring software tips 

In terms of key features, we suggest looking at how flexible the product is (in terms of rules setting), a user experience that is seamless with an UI that’s functional and easy to navigate. 

  • In terms of flexibility, the more your transaction monitoring software can create advanced statistical models that enable easier detection of obscure money laundering methods, the better. 
  • Preconfigured rules are also very useful to have, as it means that you don’t have to have an engineer to set up new rules, which could be often as the requirements of your business change. 
  • Software that allows for flexibility where the growth of your business is concerned can be useful, as it will be able to handle an increased transaction volume. 
  • User friendliness is also something one might want to consider. Is the software intuitive and easy to use, while providing sufficient functionality to your in-house team? Also, does it negatively affect your customer journey compared to other compliant software? 
  • Keep your eye out for customizable rulesets and scoring methods – this makes the tool you deploy adaptable to different regulations as they change or as you expand to other locales. If there are any criminal or legislative changes, your AML compliance team can set new parameters. 
  • Data transparency and granularity is also key. Some transaction monitoring software allows your team to manually review customer activity according to criteria created for high risk activity. This is especially useful if you want to bring in your own expert team to review human activity. Human judgment can play a useful part in spotting money laundering, especially if automatic transaction monitoring software processes themselves haven’t quite caught up with new money laundering methods.

In 2022, efficient AML software has never been in higher demand, largely due to the exponential growth in challenger banks and fintech startups. 

Per Statista, 38% of personal loans in the US are granted by fintechs rather than legacy institutions, while fintech revenue is projected to reach $190 billion by 2024. But money laundering is equally on the rise. 

When it comes to transaction monitoring, there’s no one-size-fits-all. Put the above tips to good use to choose the software that’s right for your organization.

About the Author

Gergo Varga has been fighting online fraud since 2009 at various companies – even co-founding his own anti-fraud startup. He’s the author of the Fraud Prevention Guide for Dummies – SEON Special edition. He currently works as the Evangelist at SEON, using his industry knowledge to keep marketing sharp, communicating between the different departments to understand what’s happening on the frontlines of fraud detection. He lives in Budapest, Hungary, and is an avid reader of philosophy and history.

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Archives, Commentary, Global Trade Daily

E-Commerce Fraud up by 178% over the Holidays: Trends and Predictions

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A recent report recorded a rise of 178% in malicious e-commerce fraud websites observed from October to December of 2021, compared to the rest of the year.

What caused this impressive rise, how does this affect businesses who accept online payments, and how is the fraud landscape looking moving forward?

Malicious Shopping Websites on the Rise

Set up to coincide with the pre-holiday shopping period, an average of 5,300 new, malicious e-commerce websites per week were recorded from October to December, according to a report published by Check Point Research.

These scam websites were set up to resemble legitimate e-shops, often spoofing the appearance and branding of popular online shopping destinations, such as Amazon and Michael Kors. Customers would arrive by clicking through fraudulent emails or advertisements. They would get tricked into buying something, believing it was a legitimate product from a legitimate shop, at which point the criminal would acquire their card details and not ship them anything. Others tried to lure customers in through social media and hijacked accounts of friends and family.

This type of scam obviously targets consumers, in an attempt to steal their credit card details. However, a rise in this type of fraud also affects businesses, in several ways.

Here is how:

-Many of these stolen credit cards are later being used on legitimate e-shops, causing chargebacks. Each chargeback costs a business an estimated 2.60-3.20 times the price of the products lost, even if not believed to be the fault of the business.

-Chargeback ratio increases for stores where stolen cards are used. This incurs higher bank fees and even potential blacklisting of the merchant.

-The general drop in the trust of affected consumers in online card-not-present transactions can take a toll on the market in general.

-Extensive fraud brings reduced buying capacity for affected consumers, which affects commerce on a macro scale.

-Major rises in online fraud can make merchants overcautious, increasing false positives and declines for those who manage their own rules – and thus increasing customer insult rates.

-Customers who file a chargeback are more likely to do it again within two months, often at a new retailer (at a rate of 40% per Chargebacks911).

Fraud Trends 2022: Criminals Are Getting Bolder

It’s obvious that fighting fraud on a larger scale is of benefit to every company involved in the online economy rather than solely the persons or companies affected by individual cases. And, to that is added the obvious increase in fraud targeting merchants directly, with 75% of organizations across the world reporting an increase in fraud attempts over the past two years, per a 2022 report by MRC.

The good news is that it’s not only the fraudsters who are getting more sophisticated. Fraud prevention technology and methodology has progressed by leaps and bounds in recent years, reflecting the exponential increase in fraudster activity. As elaborated in a writeup on e-commerce fraud by SEON, fraudsters no longer only target stores dealing in luxury items and electronics. Every business can be a target, no matter whether it sells physical or digital goods. In fact, some of the most common methods of attack have been with us long before the internet; they’ve just been updated.

But which types of fraud are on the rise in 2022? Merchants are well advised to be on the lookout for the below, as well as always consult with their fraud vendors and/or analysts as soon as they notice any suspicious activity.

1. Return Fraud

Return abuse is an umbrella term that encompasses different methods, including ‘wardrobing’ – when customers buy clothing with the intention of wearing it once or twice and returning it – and receipt fraud – when someone falsifies receipts in order to return merchandise for a profit.

Return fraud may be an old avenue for criminals and amateurs alike, but it is still on the rise. According to Shopify, in the US, approximately 10.6% of all merchandise bought in 2020 was returned. That goes to show how important it is for businesses to be able to tell fraudulent from genuine returns. Per the same source, reducing returns overall could save the entire retail industry up to $125 billion a year.

The prevention of return fraud starts with efficiency in inventory management and sales records. The more accurate and organized your records, the less likely it is for an attempt to be successful. Some stores put new policies in place, such as weighing returned items. But it also has to do with accurately evaluating risk by assessing the intentions and legitimacy of shoppers using methods such as digital footprinting and device fingerprinting.

2. Triangulation Fraud

A little more complicated but equally popular with contemporary fraudsters, triangulation fraud actually has a very low barrier of entry, meaning it could be set up by criminals of varying skill and experience levels.

Triangulation fraud involves three parties: a legitimate customer, a legitimate e-shop and a fraudster.

1. The fraudster creates an e-shop website or adds fake products on eBay, Amazon Marketplace or similar platforms.

2. A buyer tries to buy from a fake online store, giving the fraudster their card details.

3. The fraudster buys the same product from a legitimate online store using a stolen credit card, and provides the legitimate buyer’s shipping address.

4. The buyer receives the item from the real store, but soon notices other charges on their card (as the fraudster has stolen their details).

5. The buyer starts a cashback process with their bank.

6. The legitimate merchant is hit with the chargeback, both losing the item and the money it costs.

Chargebacks are a very common pain point for businesses. As Zoho explains, they can be linked to actual mistakes by the shopper or merchant, but they also often accompany fraud. For example, a card owner charged for a fraudster’s transactions will request a chargeback, while some shoppers will use the chargeback process itself to keep both their money and the product (friendly/first-party fraud).

Although shopping and payment platforms such as Shopify and Stripe may have some built-in tools to stop fraudsters, these are not adept at catching triangulation fraud in particular. For this type of more sophisticated scheme, dedicated fraud prevention solutions are more suitable, deployed by the merchant to protect their own as well as their customers’ interests.

3. Account Takeovers

An ATO, or Account Takeover, is simply when a fraudster acquires access to an existing account belonging to a legitimate customer. This can be done through various methods such as phishing, brute-forcing and cross-site scripting.

What is making all the difference in 2022 is that the stakes have been raised. A few years ago, taking over someone’s account allowed a criminal to use it to conduct further fraud, perhaps to sign up somewhere, but there was rarely anything worthwhile within – always depending on the type of account hijacked.

Today, however, the public is increasingly encouraged to save their payment card details online: on their accounts on e-shops like Amazon and TK Maxx, in their browser profiles, in digital wallets made possible by open banking protocols, and on other digital accounts. As a result, a successful ATO is much more likely to yield usable credit or debit card details, which the criminal may use in the same store or elsewhere.

In their writeup on this phenomenon, NordVPN stresses how major breaches even in high-trust companies such as British Airways, back in 2018, have resulted in customers’ card payments details being stolen. Certainly, the size and reputation of a company is no guarantee that consumers’ card details are safe.

And, of course, the reputation of a company suffers greatly once it has been involved in such an incident. The public is already concerned about sharing personal information such as their full address and phone numbers – and payment details have so much more potential to cause harm. It does not matter whether the blame lies with the company, as in the British Airways example above, or perhaps with the customer, in the case of someone using a very weak account. The results are still detrimental to the business.

What’s more, the criminal may attempt to use (or test) the stolen cards on the spot, bringing more cashback troubles for the already unfortunate merchant.

There are simple steps to take as the first line of defense, like asking (or forcing) one’s customers to use multi-factor authentication, which is much more complicated to hijack. In the merchant’s backend, to mitigate against such an attack, end-to-end anti-fraud solutions deploy technologies such as machine learning, online footprinting via reverse email and phone number lookup, behavior analytics, velocity checks and device fingerprinting. Gathering hundreds of different data points, a fraud prevention platform gauges the level of trustworthiness or risk for each individual user and transaction, keeping out bad actors.

Key Takeaways

Overall, e-commerce fraud is clearly on the rise in 2022 – and beyond, according to predictions. Fraudsters are eager to take advantage of every opportunity and become early adopters of new technology, though they will also adapt and tweak tried-and-tested methods to get the upper hand. Sophistication is central to this challenge: As online fraudsters become increasingly sophisticated, so ought we.

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About the Author

Gergo Varga has been fighting online fraud since 2009 at various companies – even co-founding his own anti-fraud startup. He’s the author of the Fraud Prevention Guide for Dummies – SEON Special edition. He currently works as the Senior Content Manager / Evangelist at SEON, using his industry knowledge to keep marketing sharp, communicating between the different departments to understand what’s happening on the frontlines of fraud detection. He lives in Budapest, Hungary, and is an avid reader of philosophy and history.