Does Combining Fraud and AML Help Banks Fight Crime?

Fighting financial crime has become an uphill battle for banks. Bank compliance staff are spending more time investigating alerts and filing suspicious activity reports, according to a study by the technology firm Unit21, “The State of Fraud
and AML.” At the same time, fraud continues to multiply.

That’s led some to consider whether the resources banks dedicate to fraud and anti-money laundering functions should be combined. The concept may be gaining traction, but skeptics worry the trend could lead banks to devote insufficient resources to AML compliance.

Seventeen percent of banks have combined fraud and AML compliance in some fashion, either merging the two into one larger team or sharing resources, according to Unit21’s study. Among those who implemented this new structure, 38% did so within the last year. The technology firm says combining the two functions can yield better data sharing and communication, faster response times and more efficient workflows. Unit21 conducted the survey of 369 fraud and compliance professionals from June to September of 2024, focusing on banks, credit unions and fintech companies.

“Fraud and AML is financial crime,” says Karen Leiter, a principal in the financial services group at the audit and consulting firm CliftonLarsonAllen (CLA). “They’ve lived on these parallel paths without a lot of overlay in a lot of different institutions for a long time.”

Fraud has exploded in recent years, with criminals exploiting newer digital channels and checks alike. AML activity has also been on the upswing: 58% of bank respondents reported an increase in suspicious activity report filings, according to Unit21, and 35% reported greater time spent on alerts. Regulators have issued more consent orders around AML deficiencies as well, with board oversight commonly called out as a weakness. Bank leaders naturally want to achieve greater efficiencies where possible, and compliance may feel like an ever-increasing cost with little obvious return on investment.

Whether or not a bank decides to combine the two compliance functions, boards should stay on top of fraud trends, suspicious activity reporting and the resources devoted to investigating financial crime.

Both fraud and money laundering are types of financial crimes that often result in a suspicious activity report, but it’s important that boards understand the differences between the two, says Sarah Beth Felix, founder and president of Palmera Consulting. Fraud encompasses a range of schemes, such as check fraud, payments scams or identity theft, and detection typically means looking for deviations from norms in transaction data. The ultimate goal in fraud prevention is to protect both the victim and the financial institution from losses.

Money laundering may involve fraud but at its core, it aims to disguise the source of money obtained through criminal activities, such as drug sales or human trafficking. Money laundering may be more complex and time-consuming to investigate, and the stakes are larger in scope: compliance with U.S. law, and the safety and stability of the financial system and society at large.

Many banks would benefit from an organizational structure that brings fraud and AML under one C-level position responsible for reporting on financial crimes to the board, Felix says. The two functions may also work together. But too often, a combined structure means taking resources from AML and reallocating them to fraud, she says. “I do not think that fraud and money laundering should be blended into one.”

The board can improve its oversight of financial crime detection in a number of ways. Ask senior management about the types of fraud reported by financial institutions in its area, says Leiter. That data is freely available from the Financial Crimes Enforcement Network. She also recommends the board pay attention to consent orders against other banks. When fraud and AML weaknesses are flagged, study those orders and question whether those deficiencies may be an issue at your own institution.

If the bank decides to combine fraud and AML, it should do so thoughtfully. Look at the policies and procedures for both functions and figure out where the overlaps are, and be prepared to invest in additional training, says Ben LeClaire, a principal with Plante Moran. “It’s not enough just to do a title change and expect them to job shadow and figure it out,” he says.

Finally, Leiter says it’s important to consider succession planning in both functions. “As people are retiring, who’s replacing them? Do they understand the depths of [the Bank Secrecy Act]?,” she asks. “Are you putting enough money into educating them on what they need to in order to run your program effectively?”