Financial fraud is a serious problem that leads to enormous annual losses for fintech organisations and global security. According to a review by the Association of Certified Fraud Examiners, companies lose about 5% of their annual revenue to fraudulent actions on average.
Fintech expert Sergey Kondratenko reminds that users also fall victim to illegal financial operations and lose their funds. In 2023, the amount lost to financial fraud was $485 billion, with $386 billion due to payment fraud. In this structure of financial crimes, $6.8 billion was stolen when fraudsters bypassed identification protocols and impersonated other users.
In this publication, the expert proposes clarifying what financial fraud means, how its consequences affect fintech companies, and what methods effectively combat this illegal phenomenon.
Sergey Kondratenko: Ways to Detect Illegal Financial Operations
Illegal financial operations are financial activities that are carried out in violation of legislation or rules established in the financial sphere.
According to Sergey Kondratenko, these operations may include various types of fraud, money theft, money laundering, tax evasion, money legalisation, terrorism financing, and others.
The expert reports that there are certain signs of committing illegal financial operations that should be particularly noted. In his opinion, these include unusual transaction patterns, sudden changes in account activity, and discrepancies in financial reporting. Understanding these indicators is critical for a timely response.
Unusual Transaction Patterns
“In the context of financial activity, sharp fluctuations or spikes in transaction volumes can be a warning signal,” comments Sergey Kondratenko. “For example, a sudden increase in the number of transactions over a short period or abnormal patterns in transaction amounts and frequency can indicate potential financial manipulations. This is especially relevant for companies, such as payment systems, with high transaction volumes.”
Sudden Changes in Account Activity
Many companies have multiple accounts for various operations, and sudden changes in the activity of these accounts can raise suspicions. For instance, a sharp increase in operations or transfers on an account that is usually characterised by a steady flow of transactions may indicate unauthorised activity or fraud. Regular monitoring of account operations helps detect and prevent such sudden changes before they lead to significant financial losses.
Discrepancies in Financial Reporting
Companies rely on the accuracy of their financial reporting for decision-making and reporting. Differences in reports, such as unexplained discrepancies between declared and actual figures, can be a signal for alarm. For example, unexpected adjustments in financial reports or inconsistencies in accounting records may indicate attempts to manipulate data and, consequently, a sign of financial fraud.
Sergey Kondratenko is convinced that businesses should have reliable internal control mechanisms and undergo regular audits to detect and correct any violations in financial reporting.
Strengthening Control: How Financial Institutions Build Barriers Against Money Laundering – Sergey Kondratenko
The importance of effective money laundering prevention is becoming increasingly clear in the modern world. Countries with a robust legal framework for combating money laundering (AML) implement strict measures, including fines and administrative sanctions for entities unable to provide effective AML programmes.
Expert Sergey Kondratenko reminds, that according to global AML standards, to meet the requirements, avoid sanctions, and maintain reputation, financial institutions need to implement and enhance three key aspects:
- KYC (Know Your Customer) Processes
This includes thorough verification of clients’ identities, analysis of their business activities, and assessment of the legality of funds used in transactions. Introducing advanced verification methods is particularly important for clients with increased risk, such as politically exposed persons or major private individuals. KYC obligations are often defined by national or international rules, such as AML directives in Europe.
- Implement and use other AML Screening procedures
Including sanctions screening, checking PEP lists, adverse media screening where necessary, etc.
- Transaction Monitoring and Reporting
Plays a key role in identifying and marking suspicious financial operations for further investigation. The use of rule-based and behaviour analytics, detection of unusual activity, and real-time monitoring allow for the identification of suspicious patterns.
- Cooperation and Information Sharing
Financial institutions are required to report suspicious activity through special channels to the relevant authorities if there are reasonable grounds to believe that money laundering is taking place. Therefore, Sergey Kondratenko believes that collaboration between governmental and private structures is one of the key factors in effective money laundering prevention. This also requires international cooperation and information sharing between different countries and regulatory bodies to successfully counter the global problem of money laundering.
Sergey Kondratenko: Identity Verification and KYC as Effective Ways to Prevent Financial Crimes
KYC (know your customer/client) is a mandatory procedure for verifying a client’s personal data, usually conducted by financial institutions.
Sergey Kondratenko explains that as part of this procedure, documents confirming the client’s identity, such as a valid ID, utility bills with an address, insurance numbers, and others, are required.
The expert says that the standard KYC procedure consists of three important stages:
Customer Identification Program (CIP)
This initial stage involves collecting and verifying key data about clients. In the banking sector, this process is often carried out directly when registering a client. In other areas, such as cryptocurrency exchanges, KYC starts after registration, considering differences in requirements.
Customer Due Diligence (CDD)
“This stage may be prompted by an additional need to assess deeper aspects of the client’s biography. The aim here is to assess potential risks. If the client has been involved in financial manipulations in the past or attracted the attention of law enforcement, this information will be revealed during the CDD,” explains Sergey Kondratenko.
Ongoing Monitoring
Continuous updating of client data allows the system to closely monitor transactions that may raise suspicions. In case suspicious actions are detected, the exchange may temporarily freeze the account and notify regulatory and law enforcement agencies of the identified problem.
According to Sergey Kondratenko, this structured KYC process represents not only protection of the interests of fintech companies. It also serves as an important tool in preventing financial crimes and ensuring transaction security.
