Is inter-bank collusion really that untraceable?

Over the past few months, eComms became a necessity – and an imperative for business continuity. The challenge for financial firms is that many of these eComms solutions fall outside the compliance surveillance operations. As a result, these tools could potentially enable interbank collusion and have the power to amplify the risk for negative outcomes as detailed in the 2019 report here by the Federal Reserve.

The volume of written communications is staggering. Daily messaging tallies are grossly underestimated and not fully understood because nobody is accurately measuring every message exchanged on Slack, WhatsApp, Zoom, Instagram, Microsoft Teams, WeChat and so on. A suggested baseline is provided by SWIFT who tracks the securities and treasury markets for financial tracking patterns with payments. In June 2020, they recorded nearly 38 million daily messages.

So, the question becomes, how do you design solutions that thwart interbank trading and collusion – and how do you design those solutions to operate effectively at today’s scale?

A step forward with Symphony

Conversations are now secure and captured (a regulatory requirement) with tech solutions such as Symphony (A Shield partner). Such solutions were designed for banks and readily enables quotes and trades directly within the platform. In effect, it’s easier than ever for banks to engage in inter trading and for bankers and brokers to collude to manipulate trades and markets.

The company stated that it manages the exchange of more than 75 million messages each month. But those messages are not yet proactively monitored, hence the risk of interbank trading and collusion is still omnipresent. It’s an innovative solution that enables rapid communication and collaboration, securely sends messages and captures those messages. Thwarting illicit interbank trading before it happens is the next step in the evolution of eComms and eCollab tools for financial services to fully meet regulatory compliance requirements.

A complete view that goes beyond interbank lending is what’s needed now. Exposure to non-bank borrowers and other asset classes including derivatives also need to be monitored. The authors of the 2019 Federal Reserve Board report highlight how, “Despite being small, the effects of individual shocks on bank profits margins are important.”

Take, for example, the 2012 LIBOR Scandal. Bankers from multiple financial firms were colluding in a scheme to manipulate the London Interbank Offered Rate (LIBOR), essentially to fix rates towards competitive advantage and monopoly. It was an elaborate series of “small shocks” that, when summed, had a huge impact on the market. The scheme purportedly began even earlier than 2003 as reported but took nearly a decade to be discovered. Today, with enhanced monitoring of conversations between bankers and hence, between financial firms, such collusion can theoretically be detected as it happens.

The Panoramic view Concept of Surveillance

Advancing technology forward in innovative ways to creatively solve complex problems is what software developers and companies do. Here, artificial intelligence (AI) is particularly useful and valuable if fully leveraged. Auditing historical communications is useful and often leads to the identification of illicit behaviors and/or illegal financial transactions. However, retroactive analysis in the form of an audit does not have the potential outcome of preventing illegal trade. Only proactive surveillance can offer this advantage. And, that surveillance needs to be comprehensive and holistic – encompassing all eComms and eCollab platforms simultaneously to get the full picture.

This type of actor-based surveillance looks at who made the trade, with whom, when, from which system, what was traded, how much, did the trade fall within his/her/their approval rights and so on.

By doing so, Compliance Officers can see the big picture of the trade. AI-enabled proactive scanning coupled with the existing lexicon-based surveillance can instantly flag a potentially illegal or unauthorized trade that is in progress or about to happen.

The Future of Proactive Surveillance

For nearly a decade, banks have been incorporating integrated, proactive surveillance into their daily operations. Beyond active video monitoring the actions and behaviors of staff, behind-the-scenes digital monitoring has also been gaining traction – at least for the past couple of years. But it’s still aspirational given all of its advantages and not yet mainstream: there’s a lack of sophisticated technology. However, that is changing with the efforts of innovative RegTech vendors.

Going forward, spikes in activity between banks with respect to eComms and changes in engagement patterns around specific trades or activities can now easily be detected. Additionally, connections can soon be drawn between conversations and market activity on a real-time, on-demand basis which will go a long way towards thwarting interbank trading and collusion. Technologically, we are almost there…