A question was posed to me by someone interested in Anti-Financial Crime (AFC):
Can you summarize the difference between Fraud and AML since both are looking for suspicious activities and bad actors?
There are many subtle similarities and differences between Fraud and AML; however, I think the Actor, Transaction, Commercial Impact/Regulatory aspects provide a high-level understanding.
In general, it comes down to the nature of the relationship the “bad” actors have with the financial institution:
- Fraud: The “bad” actors in Fraudulent transactions don’t want to have a relationship with the financial entity; they want to extract the money and go.
- AML: The “bad” actors in Money Laundering transactions do want to have a relationship with the financial institution; they want to legitimize the activity through their relationship.
At a high level, the pattern of transactional behavior provides a general indication:
- Fraud: Fraudulent transactions are typically one-time events. Think of a stolen credit card, Fraudsters want to commit the act and get away.
- AML: Money-laundering transactions are less one-dimensional. A single large cash deposit may be the stereotype, but smaller incremental cash deposits is a more common scenario.
Commercial Impact / Regulatory
Fraud and Money-laundering impact financial institutions in very different ways.
- Fraud: Fraudulent transactions hit the financial institution directly in the wallet. They are not at the direction of the customer and/or involve false money/checks/documents. If a fraudulent transaction goes through it has virtually no regulatory significance, but the financial institution will bear the cost of the fraud.
- AML: In contrast money-laundering does not directly, but rather indirectly, impact the financial institution. The customer is knowingly conducting the transactions utilizing the institution’s banking services; however, the potential resulting fines, consent orders, or other regulatory punishments resulting from allowing money laundering can be costly and even put the institution out of business.
Want to learn more, please reach out!