INSIGHT: The good and the bad of detecting money mules – FCA publishes its findings on UK banks

BRITAIN’s Financial Conduct Authority (FCA) today (Thurs) published its review of the preparedness of UK banks to tackle money mules.

The authority said the fight against economic crime and fraud in the United Kingdom is intensifying with the launch of the national Economic Crime Plan 2 (2023–2026) and the accompanying Fraud Strategy.

Financial services firms, particularly payment account providers like banks and e-money institutions, are at the forefront of this battle says the FCA. Lenders must adopt a proportionate and risk-based approach to safeguard their platforms and customers from exploitation by criminal organizations.

Meanwhile, the UK Home Office (justice department) is expected to unveil a comprehensive money mules action plan in the coming weeks. This report is aligned with the objectives of this action plan, aiming to guide financial services firms in fulfilling their responsibilities in tackling the issue of money mule activity.

Summary of Findings

Economic crime, particularly fraud, accounts for a substantial portion of all crime in the UK, representing 40% of reported incidents. The ease with which fraudsters can move the proceeds of their illicit activities through money mule accounts continues to pose a significant challenge.

Today’s review primarily focuses on the systems and controls that financial firms, particularly those operating payment accounts, have in place to detect and prevent money mule activity. The evaluation encompasses controls at customer onboarding, monitoring, and reporting.

The findings reveal that several financial firms are taking proactive steps to address the challenges posed by money mules. They are implementing various measures and innovative technologies to detect and deter fraudsters from using their services for unlawful gains.

Some of these measures include facial recognition systems, device profiling, and geolocation technologies. However, there is considerable variation in the degree of commitment among firms, with some needing to do more to address the problem comprehensively.

This includes adopting more proportionate checks during onboarding, enhancing their monitoring systems to identify mule behaviors, and closely scrutinizing both inbound and outbound transactions.

Most firms leverage the National Fraud Database as part of their onboarding checks, and they actively share information with relevant authorities through lawful gateways.

Nevertheless, some firms are not reporting identified mule accounts promptly, leading to delayed notifications to other institutions.

Additionally, some institutions in receipt of fraudulent funds are not responding swiftly to alerts from notifying organizations. Timely reporting and cooperation between institutions could significantly contribute to the disruption of money mule networks.

With the current cost of living crisis, customers may find themselves susceptible to providing their account details for money mule activities under influence or pressure, says the FCA. Therefore, firms are urged to improve their communication strategies and awareness initiatives to keep customers informed about the latest threats.

Based on findings, financial firms are expected to adopt a proactive and proportionate approach to address money mule activity.

This involves enhancing controls during onboarding, improving transaction monitoring to detect suspicious mule-related activities, and optimizing reporting mechanisms for swift action.

Furthermore, firms are encouraged to raise consumer awareness about the risks associated with becoming a money mule to protect individuals from involvement in criminal activities. These measures are crucial for firms to reinforce their controls in line with the recommendations provided.

Firms must establish proportionate systems and controls to manage the money mule problem and associated risks. Regulatory authorities are prepared to employ their full range of tools, including enforcement action, against firms failing to maintain proportionate and adequate systems and controls.

The good and the bad

While some firms have taken significant steps to combat money mules and have implemented various measures and advanced technologies, several areas need improvement. We identified both good practices and areas that require attention.

Systems and Controls

• Many firms have recognized the risk of money mules and have adopted technology to calibrate their systems according to risk, taking a risk-based approach. Innovative solutions, such as facial recognition, device profiling, and geolocation, are being used to flag suspicious activities.
• Most firms are investing in machine learning systems to reduce risks associated with static rules-based systems, which are more susceptible to bypass by fraudsters. Combining machine learning with tactical rules and behavioral biometrics can provide a robust and adaptive fraud detection system.
• Many firms use the National Fraud Database for onboarding checks, helping them access valuable insights and data to detect and prevent mule activity.
• Firms engage in lawful data sharing and collaborate with external bodies to discuss intelligence and emerging threats, sharing findings and preventative measures to combat specific fraud typologies.
• Some firms provide dedicated training for staff on financial crime and fraud, ensuring that staff are up-to-date with new criminal typologies.

Areas That Need Improvement

Governance, Management Information (MI), and Risk Assessment

• Firms that report more mule accounts than their peers often lack senior management oversight and MI reporting to address the risk and assess the impact of interventions.

Systems and Controls: Onboarding

• Some firms undertake relatively few checks at onboarding and rely on subsequent monitoring to identify suspicious mule-related activities. Robust controls during onboarding should be in place to detect potential red flags and identify potential money mules.
• Some firms do not capture essential information during onboarding, increasing the likelihood of false positive transaction monitoring alerts.
• Some firms neglect further investigation into the use of virtual addresses, potentially enabling fraudsters to exploit this vulnerability.
• Firms must review customers using a single device to access multiple accounts to ensure there is a valid explanation for this practice.
• Some firms onboard multiple customers using the same physical address, necessitating further due diligence checks to ensure there is a reasonable and valid explanation for this.
• Some firms send cards to customers without verifying if the card has been activated, missing a straightforward check to confirm the customer’s residence.

Transaction Monitoring

• Some firms focus primarily on outbound transaction monitoring and lack adequate inbound transaction monitoring systems and controls, potentially leading to delayed detection of mule accounts.
• Common mule characteristics, such as high-value payments into a new or dormant account, are not being detected as frequently as they should be.
• Machine learning models are increasingly relied upon but may require time to adapt to new customers or those with limited transaction history.
• Some firms lack an understanding of the criteria behind machine learning alerts.
• Some firms take too long to implement changes to their transaction monitoring rules, potentially increasing fraud rates.
• Some firms record poor narratives and rationale when handling alerts, making it difficult to track the investigative process.

Reporting

• Firms should report mule activity quickly and efficiently through relevant reporting systems, allowing other firms to be notified if the same mule is seeking to open accounts with them.
• In some instances, Suspicious Activity Reports (SARs) were not raised promptly or not raised at all.

Resourcing

• Some firms would benefit from dedicated resources to actively investigate mules, not only to detect and monitor mule accounts but also to work on notifications from other firms in a timely manner.

Use of Intelligence, Industry Engagement, and Data Sharing

• There is a lack of data sharing between some firms that are not part of similar UK reporting or data sharing initiatives.

Communication and Awareness

• Customer education about money mule risks needs improvement, given the potential susceptibility of customers to providing their account details under influence or pressure.

Training

• Some firms need to enhance the effectiveness of fraud alert investigations to ensure that staff members have a clear understanding of their roles and responsibilities in combating fraud.

Next Steps

Payment account providers are expected to assess their organization’s arrangements, systems, and controls in light of these findings. It is crucial for firms to take a proactive approach in identifying and addressing any identified weaknesses in their anti-fraud systems and controls. They must maintain proportionate and adequate systems and controls to mitigate the risk of money mules. Regulatory authorities are prepared to employ their full range of tools, including enforcement actions, against firms failing to maintain proportionate and adequate controls and thereby allowing their services and customers to be exploited by fraudsters.

Who This Applies To

The findings of the review are relevant to Money Laundering Reporting Officers (MLROs) and industry practitioners working in financial crime and fraud roles within payment service providers and electronic money institutions, which encompass banks, building societies, and payment firms.

Money Mules

Firms must consistently adapt their detection and monitoring methodologies, with a focus on identifying money mule activities. Additionally, they must actively engage in educating consumers about the inherent risks involved in becoming a money mule to protect individuals from involvement in criminal activities.

A money mule refers to an individual recruited by criminals to facilitate the transfer of illegally obtained funds. Money mules play a pivotal role in the process of cashing out the proceeds of fraudulent activities, either knowingly or unknowingly.

Unknowingly involved money mules are often deceived by fraudsters who present seemingly legitimate opportunities or plausible explanations for their actions. They are unaware of their involvement in illegal transactions, believing they are working for a legitimate company or helping someone in need.

In contrast, knowingly involved money mules are fully aware of their participation in criminal activities and assist criminals in money laundering or fraudulent schemes. Their motivations may include financial gain, resolving financial difficulties, or choosing to engage in criminal activities voluntarily.

What FCA Looked At

The review focused on Payments Service Providers and Electronic Money Institutions, encompassing well-established as well as newer entrants to the market.

The examination concentrated on the systems and controls these firms have in place to detect and prevent money mule activity, particularly concerning the cashing out of the proceeds of fraud. This assessment covered all aspects of firms’ responses to money mules, including controls during onboarding, monitoring, and reporting.

Reasoning

Fraud represents the largest crime type in the UK, with reported cases increasing in recent years. In the year ending December 2022, there were an estimated 3.7 million incidents of fraud, accounting for over 40% of all reported crimes.

The prevalence of fraud undermines market integrity, consumer confidence in financial institutions, and the stability of financial markets. In line with the 3-year strategy for 2022-2025, measures are being implemented to reduce and prevent financial crime, with particular emphasis on combatting fraud.

Fraudsters increasingly rely on interconnected money mule accounts to transfer and conceal the proceeds of their illegal activities. These transactions can traverse various financial institutions or be converted into cash or cryptocurrencies, making it difficult to trace the money trail.

The role of money mule networks in enabling fraud is growing, with more than 39,000 accounts linked to mule activity reported by firms in 2022. Beyond the financial impact, there are significant risks to the public, as individuals are often lured into providing mule accounts under false pretenses of low risk and easy money, leading to severe personal and emotional consequences.

Research source: https://www.amlintelligence.com/