Prepare a comprehensive risk assessment
Before launching a new financial product or service, conducting a thorough risk assessment is crucial. Identify potential risks, vulnerabilities, and AML deficiencies and assess the likelihood and impact of different fraud scenarios. For example, many banks and credit unions looking for a competitive edge are considering implementing FedNow services. First, they must evaluate whether their institution is prepared to insert AML risk management procedures into the transaction process to match the speed FedNow can offer. This step sets the foundation for effective risk management by understanding the unique challenges associated with the product.
Establish clear policies and procedures
Once a new banking product is approved, develop thorough policies and procedures to mitigate any risks identified in the risk assessments. Procedures should address both detection and reporting methods. Staff should be well-trained in procedures and understand the importance of fraud detection to the bottom line.
Implement robust fraud detection software
Investing in advanced fraud detection software is a cornerstone of fraud mitigation. These systems utilize cutting-edge technology to analyze patterns, anomalies, and unusual behavior. By employing state-of-the-art technology, financial institutions can stay one step ahead of fraudsters, ensuring a proactive approach to safeguarding their new products. Adequate staffing is also essential, as fraud alerts must be worked quickly to protect against hard dollar losses while complying with funds availability requirements.
Introduce proactive risk management
A dynamic risk management strategy ensures that new financial products are shielded from evolving fraud schemes. A proactive approach to risk management involves continuous monitoring and adjustment. The Office of the Comptroller of the Currency (OCC) has said examiners will focus this year on identifying and assessing risk management related to products and services (including those with third parties and especially those involving complex technologies like artificial intelligence) to safeguard against operational, compliance, reputation, and financial risks.
Regularly update risk assessments based on emerging threats and changes in the financial landscape. In addition, strong internal controls are critical to ensuring that fraud mitigation and detection procedures are followed in practice. Quality control processes and internal audits ensure that all steps are followed to avoid those unexpected losses. In a recent statement to the American Bankers Association, Acting Comptroller of the Currency, Michael Hsu, pointed out that “the responsible approach to innovation is…by progressing in tightly controlled stages where the risks can be identified, measured, and managed at each stage. This takes discipline and time. In short, responsible innovation plays the long game.”
Integrate case management systems
Efficient fraud case management is essential for investigating and resolving incidents. Integrate case management systems that streamline the process of tracking, analyzing, responding to, and reporting fraud cases. A well-organized case management system facilitates collaboration among different departments, leading to quicker and more effective resolution.
Educate staff and clients
Human error remains a significant factor in fraud incidents, so it is imperative to stay current on trending fraud scams, particularly those that exploit the elderly, the lonely, or the less-than-tech-savvy. Educate both staff and clients about fraud typologies and potential fraud risks. Provide training on recognizing phishing attempts, social engineering schemes, secure password practices, and, for staff, the importance of reporting suspicious activities promptly. An informed and vigilant community is a powerful deterrent against fraud.
