Banks & Consumers Lose Billions to Fraud & Money Laundering Every Year. The FRAML Concept Lets You Fight Both Fires at Once.
Data from the Federal Trade Commission (FTC) revealed that Americans lost an estimated $12.5 billion to fraud in 2024; 25% more than in 2023. At $5.7 billion, investment scams dealt the greatest damage in terms of dollars lost, though impersonation scams and eCommerce fraud were the #1 and #2 most common fraud categories, respectively.
For financial institutions, however, the problem hardly stops there. In the wake of fraud comes money laundering, which happens when fraudsters shift illicitly-obtained funds back and forth between a complicated web of bank accounts in an attempt to “clean” and conceal the origins of their money.
Could an integrated approach that merges together fraud prevention and AML initiatives help financial institutions tackle both with greater ease? Let’s find out.
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How Much of a Problem are Fraud & Money Laundering?
According to NASDAQ and Verafin’s 2024 Global Financial Crime Report, $3.1 trillion worth of funds were laundered illegally through the global financial system in 2023. That figure represents between 2% and 5% of global gross domestic product (GDP).
U.S. regulators, meanwhile, levied fines totaling $4.3 billion on financial institutions accused of falling short of their anti-money laundering (AML) obligations.
Despite this intimate connection between fraud and money laundering in the wild, most banks have fairly disjointed and siloed anti-fraud and AML functions. Fraud analysts and AML experts often perform duplicate work, collect datasets individually, and investigate cases independently… all without collaborating.
What is FRAML?
- FRAML
FRAML is an acronym that stands for “fraud and anti-money laundering.” FRAML isn’t a tool or a tactic. Instead, it’s a unified strategy that combines your fraud detection, prevention, and resolution efforts with initiatives that help you stay in compliance with anti-money laundering (AML) regulations.
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In other words, FRAML integrates the work, goals, and processes carried out by your fraud prevention team with that of your compliance team, who is typically in charge of AML efforts.
What’s interesting is that your risk and compliance teams often have the same overarching goals. Both teams want to stop bad actors from perpetrating illegal activities using your infrastructure, and both wish to remain in the good graces of regulators.
Yet, a traditional approach that siloes the two functions leads to incomplete (and sometimes duplicate) data collection efforts that often result in half-baked customer risk profiles that fall short of optimally combatting either fraud or money laundering threats.
This is exactly why a FRAML strategy can be so powerful. Combining these two approaches means your risk and compliance teams can work together to share data, analytics, insights, and tactics in pursuit of common or adjacent goals.
Key Components of an Effective FRAML Strategy
A robust FRAML strategy should combine the best practices of both your risk and compliance teams. The dynamic should be egalitarian; neither team should report to the other, and both teams should be interdependent on one another. In addition, your fraud and AML teams should have access to the same tools and data warehouses.
To ensure that things get off on the right foot, your FRAML strategy should involve, at a minimum:
Why Integrate Antifraud & Anti-Money Laundering Activity?
The biggest reason to integrate your fraud and AML efforts is because your risk and compliance analysts can be more effective when working together than when going at it alone.
In traditional setups, risk and compliance teams do not collaborate with each other; they operate independently. This leads to fragmented risk views and results in lost insights that could be generated if personnel from both teams simply had the opportunity to cross-pollinate findings, ideas, and approaches.
A FRAML approach, which integrates anti-fraud and money laundering efforts by unifying databases, risk scoring systems, and case management platforms, can solve this problem.
Implemented correctly, a FRAML strategy can result in more accurate fraud detection and prevention, reduce criminal fraud and friendly fraud chargebacks, eliminate wasted efforts and lower operational costs, enhance customer trust and satisfaction, and boost compliance.
That’s because data warehouses, when shared amongst risk and compliance teams, can lead to more precise risk scoring systems and more accurate anomaly detection machine learning models. This, in turn, leads to more accurate detection systems that can help both fraud and money laundering teams identify and stop threats earlier.
Compliance & Regulatory Considerations
A well-structured FRAML strategy can help you meet your compliance obligations with greater ease.
To be clear, this is no trivial challenge. The regulatory landscape is complex, and frameworks such as the Bank Secrecy Act (BSA) in the United States and the global standards set by the intergovernmental Financial Action Task Force (FATF) all impose rigorous and varied anti-money laundering measures on financial institutions. As a general overview, these directives mandate that financial institutions implement and carry out customer identification programs (CIP), ongoing customer due diligence (CDD), and enhanced due diligence (EDD) procedures for higher-risk profiles.
Like all regulations, these directives will inevitably evolve over time. Banks and payment processors who wish to comply with these ever-expanding obligations will need to leverage sophisticated data analytics and integrated systems to meet their obligations effectively.
Payment processors in particular may need to implement more stringent controls. This is because their infrastructure is uniquely exposed to layering, the second stage in money laundering in which fraudsters make a large number of transactions to obscure the true origin of their funds. Regulators today are increasingly focused on all the links through which illicit funds may pass, and failure by one or more financial institutions to carry out KYC procedures upstream will not exempt downstream payment processors from incurring penalties.
In practice, this means that both financial institutions and payment processors will need to maintain well-documented audit trails and file regulatory reports on a timely basis. Specifically, audit trails should be automatically logged and easily accessible within a unified FRAML system, and must be readily accessible to internal auditors and external regulators during examinations.
As mentioned previously, financial institutions also have the obligation to file Suspicious Activity Reports (SARs) with FinCEN. A FRAML approach can enhance this reporting by allowing banks to provide richer and more holistic context for each filed report based on intelligence gleaned from both fraud prevention and AML monitoring.
FRAML Challenges & Limitations
Change is difficult, but you can’t implement a new system in a cavalier manner. Instead, you need to bring in a unified system that is capable of breaking down silos without entirely dismantling existing data sources.
Security is another risk, too. An integrated system is exposed to more points of failure, and a single data breach or instance of unauthorized access could imperil the information available to both your fraud and AML teams. You’ll need to strike another delicate balance here in which you balance ease of access and the user experience with security concerns.
Finally, your FRAML strategy cannot be static. Fraud and money laundering tactics are constantly evolving, and you must constantly and proactively reinvent your best practices to avoid obsolescence. In other words, the components that underlie an effective FRAML strategy may be wholly inadequate tomorrow. You should be prepared to maintain and invest in your systems on an ongoing basis.
Best Practices for FRAML Implementation
Combining your risk and compliance functions under a unified and cohesive FRAML umbrella will require careful planning, technical integration skills, and a commitment to continuous improvement. You can maximize your chances of success by considering the following best practices:
Tip #1 | Establish a Steering Committee
A cross-functional steering committee, along with executive buy-in, can help garner support for the FRAML strategy among both your fraud and money laundering teams. This committee can also oversee the strategy’s implementation and suggest iterative changes if necessary.
Tip #2 | Implement a Phased Rollout
Don’t launch all components of your FRAML strategy simultaneously. Instead, fully integrate data sources and analytical capabilities before unifying case management and workflows.
Tip #3 | Invest in Cross-Functional Training
During and after implementation, you’ll need to expose fraud analysts to money laundering tactics and AML investigators to fraud schemes. Ongoing, scenario-based training and a change management plan can help further break down silos and encourage knowledge sharing.
Tip #4 | Future-Proof Your Technology
A unified data warehouse is just the start. Your FRAML system will also need to be agile enough to incorporate emerging technologies like artificial intelligence (AI) or machine learning tools so that you can maintain the upper hand against emerging threats.
Tip #5 | Improve Continuously
Successful implementation is not an event. Instead, it’s a continuous process. Regularly audit your system, continuously evaluate it for operational effectiveness, and establish feedback channels between analysts, data scientists, and leadership to refine rules and processes.
Need Help?
Confused? We can help.
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FAQs
What does FRAML stand for?
FRAML stands for “fraud and anti-money laundering.” It’s a strategy that entails combining your fraud prevention and anti-money laundering (AML) efforts under a single unified umbrella. This results in more cohesive data sharing, and can allow fraud and risk teams to work together collaboratively to achieve their shared goals.
What are the three types of anti-money laundering?
The three types, or stages, of anti-money laundering are placement, layering, and integration. Placement occurs when illegitimately-earned proceeds are introduced into the financial system. Layering then happens when these funds are shifted back and forth between accounts so as to obscure their origin. Integration, the final stage, occurs when laundered funds are reintroduced into the economy as “clean” funds.
What are the benefits of FRAML?
FRAML integrates your fraud and risk initiatives, allowing you to better combat financial crime. Specific benefits include faster fraud and money laundering investigations, more accurate detection systems, lower compliance and monitoring costs, and more robust risk management.
What are the red flag indicators for suspicious transactions?
Suspicious transactions typically raise one or more red flags. Be on the lookout for seemingly duplicate transactions, unusual deposit, withdrawal, or purchase patterns, or complex ownership structures. Transactions originating from high-risk locations or involving politically exposed persons (PEPs) should also raise red flags.
How to catch money laundering?
To catch money laundering, you’ll need to use a multi-layered approach. At account creation and onboarding, carry out customer due diligence (CDD) and know your customer (KYC) procedures to ensure that accountholders are who they say they are. Once onboarded, use transaction monitoring software to monitor account activity for anomalies or unusual patterns. In addition, file suspicious activity reports (SARs) with authorities and escalate cases to law enforcement if you suspect fraud or money laundering.
