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According to Nasdaq, money laundering reached $3.1 trillion globally in 2023, funding human trafficking, drug trafficking, and terrorist financing. Losses from fraud, meanwhile, reached $485.6 billion. Moreover, financial regulators have been hit with 80 fines in H1 2024, totaling over $263 million or a $62 million increase from the same period the previous year. Amid this, financial institutions need to educate and protect themselves against increasingly sophisticated – and expensive – fraud.
Enigma chatted with Luke Raven – an expert in AML, compliance, and financial crimes – about how financial crime has changed over time in Part One of this two part series. We continue our conversation here on the unique strategies FIs have implemented to prevent financial crime, the rise of no-doc loan scams, and moving beyond ticking boxes in KYB and KYC compliance.
This interview has been edited for clarity and length.
Should FIs think about their KYB process within the context of meeting regulatory requirements - ticking the box on a standard set of data collection – or can compliance processes be more? Can FIs build better AML processes without creating more customer friction?
I care the most about financial crime, but that's why I will never be the CEO of a bank, because CEOs have to balance a lot of things. It doesn't make sense to have a whole product suite that you've spent millions of dollars to develop, a whole marketing campaign that you spent millions of dollars to roll out, and then you say, well, yeah, but we're only going to allow 5% of people to come on board that are willing to go through a higher friction onboarding process. I care deeply about financial crime, and I can sit in this space and say, “that's not even going to stop your bad guys, not your sophisticated bad guys, anyway.”
You need to balance business and compliance. And a lot of the time in the past, we've got that wrong and just focused on all business, no compliance. Instead, you need to have something where you can check the boxes, allow people on, and understand that KYC and KYB are the first step in a long process of weeding out bad guys.
So if you can turn away bad guys at the start, that's fantastic, but KYB is less around that, and in my view, and more around understanding applicants so that you can then apply appropriate monitoring to that customer. If you learn more at KYB, you'll have much less friction throughout that relationship, and you can even place customers appropriately to lower risk and spend less money on monitoring them.
Have you seen more institutions getting creative with their KYB processes to address unique vulnerabilities (using alternative data such as revenue over time, etc.) vs. ticking the box? Do you have examples?
What I've seen, and I'm really excited by, is a new kind of trend: iterative KYC/KYB. For example, let’s say I – Luke – am a business owner. So first we box check: we know that Luke owns the company, it’s a company that sells wooden statues at the market, and we know Luke isn’t sanctioned. Then you wait and see, because a lot of the time, it's gonna be fine and you don't need to really worry about that customer. But then you would monitor the gross payments volumes processed through the account and do a more in depth review (after unusual behavior). That, to me, is a great way of layering on friction, but only when it's necessary, because it means that your upfront customer doesn't necessarily have those later layers of friction, and we only apply it as it becomes understood to be necessary It makes more sense to do due diligence iteratively.
We’re seeing a rise of no-doc loans scams on Tiktok – where users are suggesting taking advantage of low friction KYB/KYC processes. What are your thoughts on banks offering no-doc loans and their viability for financial institutions?
Start with the fact that Tiktok is just an absolute breeding ground for scams, right? So a lot of the time what you'll see on there isn't real. But there are exciting things banks can do with technology or with a voracious risk appetite. You can do things that you can't do with a conservative risk appetite or less impressive technology.
My job as a compliance person is never to sort of say what we should or shouldn't do from a product perspective. But look at something kind of analogous: Buy Now, Pay Later. As an industry a little bubble that sort of popped up… and it was essentially a no-doc loan, because it had nothing to do with credit worthiness and there were no credit checks. The whole idea with afterpay and buy now pay later was that it's going to change the world. It's going to eat debit and credit cards alive. Afterpay was supposed to be this massive, disruptive thing. But right at the moment, it's born a bunch of competitors that went out of business. It's still a tiny percentage of the lending ecosystem as a whole.
So my question (for no doc loans) would be, why? Is the business case there? Because often these flashy fintechs will will launch, and the idea is like and they get amped up. Everyone loves it. VCs have a huge part to play in it. I think that the growth isn't there for these yet. But the stuff that makes me impassioned about these things is financial inclusion. You've got that broad risk sitting right next to financial inclusion. It's a worthwhile endeavor. It's worth it's worth looking at.
Enigma offers third-party data on businesses to help FIs understand businesses’ financial health before they even apply. Can alternative data like financial products that reduce friction or increase inclusion safer?
I really do think so. The same startup that I learned about the iterative KYB approach had something really interesting where they would serve an underbanked segment of the market, get comfort over time, and then they would sell that data to banks. The banks
banks found that the loans they initiated with the backing of that company that had taken a chance on them had significantly higher repayment rates. I don't think anyone should underestimate the transformative power of this kind of thing.It is very, very much possible. I think that some tremendous percentage of the world is still basically unbanked in terms of lending services and it's more of a data problem than anything.
Enigma offers third-party data on businesses to help FIs understand businesses’ financial health before they even apply. Do you think this has value for a FI’s KYB process?
That's a huge competitive advantage for a business to have. I think it's a tremendous advantage to have KYB done automatically as opposed to partially automatically and as opposed to manually. It's just nuts the amount of money that we spend checking boxes when there are fantastic, vendor driven solutions in market that banks can rely on.
Enigma also partners with companies like Alloy to serve as one data point of many to automate KYB in what we describe as a data waterfall. What are your thoughts on combining multiple solutions in KYB.
I like the waterfall approach. Waterfall is an interesting way of putting it – I've never thought of it that way before. Some of my favorite businesses are aggregators, and I think that it's a really efficient way to launch and test. Because at the moment, if I want to test a reg tech provider for transaction monitoring or a data source for KYC/KYB on my own, I have to go and build a process and or an API integration, probably both.
Whereas I can be more experimental if I have (a waterfall provider) that can say let's run both of these (sources) in parallel, and I'll just switch off whichever one's less performing. I think that that's the kind of experimentation and technology adoption that banks need to look at if they want to remain competitive.
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Learn more about how Enigma can help your institution combat financial crime – with lower overhead and more automation – or check out Part One of our conversation with Luke Raven.