Fighting financial crimes in digital fast payments systems

Financial crimes exert enormous direct costs on society, fueling a wide range of criminal activities such as fraud, trafficking, illegal arms trade, and terrorism.

These crimes also include corruption, which diverts funds meant for public investment or social programs, further straining societies.

In addition to illegal activities, seemingly legal practices like tax avoidance, transfer pricing, and profit shifting undermine public service delivery.

At the heart of these illicit activities lies money laundering, which conceals the origins and intended recipients of illicit funds, masking the amounts transferred, and legitimising their use.

The challenge with financial crimes is their covert nature, making them difficult to track. The United Nations estimates that up to $2 trillion is laundered annually, a staggering sum that highlights the scale of the issue.

The rise of digital payment systems has revolutionised financial transactions, increasing efficiency but also raising the risk of financial crime. Fast payment systems, which have gained popularity, represent a significant risk.

These systems, including mobile money and cryptocurrencies, are characterised by features such as real-time or near-real-time execution, round-the-clock service availability, and use in low-value retail payments. These innovations are part of a rapidly growing global trend, with the World Bank reporting that 100 jurisdictions now use fast payment systems, many scaling up implementation plans.

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Fast payments create environments that facilitate anonymity and reduce the time available for transaction checks, making it difficult for regulatory authorities to prevent illicit activities. Real-time settlement and immediate access to funds mean that proceeds can be moved quickly, often beyond the reach of law enforcement.

This provides a significant advantage to criminals engaging in digital fraud, money laundering, and identity theft. The speed of transactions increases the volume of these crimes, making detection and prevention even more challenging.

Cryptocurrencies, another area of concern, offer real-time payments with the added complexity of masking the identities of transacting parties.

Despite their public transaction blockchains, the anonymity they provide makes it easy to launder money, with high volatility and lower liquidity posing additional risks.

While digital fast payment systems have revolutionised trade, both domestically and internationally, they also present an array of opportunities for illicit activity.

The systems’ efficiency is attractive to criminals, but it also complicates efforts to track and prevent financial crimes. To combat these challenges, robust infrastructure and innovative solutions are essential to stay ahead of criminal activities.

One valuable lesson from mobile money systems is the need for a holistic approach to addressing vulnerabilities across individuals and systems. There’s a trade-off between the efficiency of fast payment systems and their susceptibility to financial crime.

The more efficient these systems are, the more attractive they become for illicit activity. On the other hand, implementing stringent controls such as daily transfer limits could reduce the efficiency of these systems. Therefore, each jurisdiction must balance regulatory measures with the need for system efficiency.

To combat money laundering and fraud in digital payments, a strong legal and regulatory framework is essential. Close coordination across stakeholders, regulators, and law enforcement agencies is critical to success. One way to strengthen this framework is by implementing sandbox environments that allow for the testing of new innovations, helping identify vulnerabilities before they become a threat.

Furthermore, security certifications for payment systems ensure a minimum level of security standards is maintained across all institutions.

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Real-time transmission of transaction messages must also be secure and verifiable. Leveraging data analytics and artificial intelligence can help predict fraudulent activity and detect patterns that indicate potential criminal behaviour. In addition, educating the public about digital literacy and security is vital in reducing the risk of identity theft and fraud.

Protecting digital identities is another key factor. By enforcing unique registration of identity cards to digital wallets and implementing strong verification systems, the risk of identity theft can be reduced.

Furthermore, the implementation of data privacy legislation will protect users’ personal information, ensuring it isn’t intercepted for illicit purposes.

The security of vulnerable nodes in the payments infrastructure, such as cash-in and cash-out locations, must also be prioritised. These locations, where electronic currency is converted to physical cash, are often targeted by criminals.

Additionally, ensuring transparency in the cost of services builds trust and helps reduce fraud. A comprehensive complaints system with clear turnaround deadlines can also help address fraud incidents effectively.

In conclusion, while innovations in digital payments offer immense benefits, they also present significant challenges. To prevent financial crimes from proliferating in the digital space, it is crucial to strike a balance between efficiency and security.

By implementing robust regulatory frameworks, improving digital literacy, and leveraging technology to detect and prevent fraud, we can create a safer, more secure digital payment landscape for all.

Dr Thegeya is the author of “Combating Financial Crime in Digital Fast Payments: Insights from Mobile Money Systems" commissioned by Friedrich Naumann Foundation for Freedom