Fraud and Financial Crime: Understanding industry trends and uses of cryptocurrencies

Fraud and Financial Crime: Understanding industry trends and uses of cryptocurrencies

by Michael Schidlow, Head of Financial Crime Risk Training and Emerging Risk Advisory, Global Internal Audit, HSBC

Interview ahead of Fraud and Financial Crime USA Congresstaking place March 27-28 in New York City 
Can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

In my current role I hold a number of responsibilities related to advising and training on financial crime compliance (FCC) and emerging risk subject matter. I specialize in tailoring FCC learning to global audiences In the compliance audit functions at major financial institutions.

I began my career as an attorney, working on regulatory and compliance related litigation.  In this role I learned just how much conduct plays a role in risk. The better equipped clients were (or weren’t) to understand not just the “what” of compliance, but the “why”, the more consistent and positive the outcomes would become.

I shifted my career from law to investigations, taking a role with Bank of America’s Global Financial Crimes Compliance investigation team. This role specialized on complex financial crime cases, insider abuse, and conduct related matters. One of my proudest achievements was leading my division in providing training to the first and second line of defense teams who were relied on to detect and help report potential crime.

From that role, I took a position with HSBC, heading up the FCC training and emerging risk advisory initiative for their Global Internal Audit function. This role was an amazing opportunity to expand my areas of coverage in the financial crime space.

I look forward to bringing the depth of my subject matter knowledge and passion for teaching to this event.

What, for you, are the benefits of attending a conference like the Fraud and Financial Crime USA Congress and what can attendees expect to learn from your session?

Conferences such as this are incredibly useful to learn new information, gain insight into industry trends, and of course, make new connections. It is always a positive affirmation to have an industry leader confirm an interest in a share focus area, topic of concern, or best practice for them. It is equally as engaging to have your perceptions about an area of the compliance explained in a way that an attendee hadn’t previously heard or to have a new perception brought to life. It is only by expanding your horizons at an event like this that those perceptions can in fact be challenged.

How can financial institutions use technology to enable transaction monitoring of cryptocurrencies?

In general, there could be a focus on leveraging data analytics as a means to carry out more targeted searches of structured and unstructured data. Analytics expand and expedite the capabilities of existing monitoring programs by combining and focusing data which is often splintered across multiple silos of information. This can much more readily facilitate trend spotting, validate theories, and confirm that those more traditional monitoring processes are in fact working as designed.

This is particularly relevant for cryptocurrencies as they can be used as both a currency exchange and as a commodity. Thus their risk presents compounded risks which require a more comprehensive detection and investigation strategy.

Could you provide insights on how crypto ATMs could be used for illegal funds?

The challenge with crypto ATMs could best be analogized by examining the risks of a casino or other direct-access modality. Unlike a bank or MSB where a currency exchange would be documented or a brokerage where some form of KYC would need to be executed, many if not all crypto ATMs do not require formally knowing who the purchaser of those currencies are. The controls that exist can be more readily deceived than in a brick-and-mortar financial institution. Thus as a product the combine the risk of laundering with multiple layers of anonymity in the purchase of and transfer of the crypto currency.

What’s the impact of increased exposure to digital currency exchanges through customers?

Like any other modality of money laundering and financial crime, crypto exchanges allow one more channel for potential misuse. Thus it could be suggested that controls at the institutional level could be tailored further to gage potential and actual exposure to these types of exchanges. This is a lot like trying to police a highway with no speed limit, chasing Ferrari’s on a bicycle, meaning that there is a lot of catch up that needs to be done and the criminals tend to evolve that much more quickly than the controls can manage.

How do you see the impact of Fraud and Financial Crime evolving over the next 6-12 months?

There have been a number of major enforcement actions and significant media events in the past few years which were fraud related. The enforcement actions were not centered on the fraud or financial crime themselves, as much as they were around a financial institution failing to detect it or report it. Thus, depending on the country and legal framework of that country, fraud may become more formally regulated in the way that AML, sanctions, and ABC currently are.

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X-Tech 2019