Financial Crimes – The Journalist Ari Bussel Interviewing Nathan (Netaniel) Segal

In California most people are aware of – and many have fallen victims to – the EDD Scam, some two billion dollars of taxpayers’ money stolen thus far.  Due to the Global Pandemic, many people rely on unemployment and extra benefits for survival, and the system works as follows: Debit cards “filled with money” are mailed to the designated recipients - people who qualify and need the money to pay rent, purchase groceries, pay for health insurance, etc. Except either before the card arrives or even when the card is physically with the intended recipient, someone withdraws the money.  Is it an inside job?  Why has the EDD not change its contract with Bank of America?  How does Bank of America fight this massive fraud?  Why was the default changed from mailing checks to mailing electronic-debit cards?  What measures have been put in place to prevent the almost instantaneous emptying of such cards not by the intended recipients?

The fraud is so vast and extremely sophisticated, and the victims stand helpless. EDD contracts with Bank of America to mail debit cards rather than checks. The victims then are referred by EDD (“it is not us”) to BofA (“it is not us” either) to file a report and air their grievances. A police report has to be filled up. The victim needs to prove they are who they say they are (i.e. I would have to prove I am really Ari Bussel, since someone else presented himself at a bank’s branch to the branch’s satisfaction and strict adherence with guidelines and withdrew the money.  Now, Ari is that really you, or was the other person the real Ari?). The money is a necessity, and yet it is unavailable.  And at the end of the year, the victim will have to pay taxes to the Internal Revenue Service on said amount.

This has become such a lucrative business that one of its offshoots is stealing mail to look for these debit cards. In the picture below, taken from a security camera in my building, a very well trained thief breaks in, and in less than two minutes steals the mail from all the mailboxes. He was looking for one thing only - EDD debit cards - everything else was thrown away unceremoniously in the alley behind the building.  Entire areas in Beverly Hills, West Hollywood, Los Angeles and neighboring cities have been hit by this operation targeting snail mail.

I sat with Nathan (Netaniel) Segal, a financial solutions expert who works with financial institutions to identify and close such vulnerabilities, to learn more about financial crimes during major crises. Segal enjoys a strong reputation for his expertise in financial risk management and regulations and has developed and implemented systems to monitor financial crimes.

Segal: “Unfortunate circumstances can happen anywhere, anytime, oftentimes without any warning. If we look at the Great Pandemic, for instance, remote work became sustainable and more efficient and forced companies to speed up any digitization roadmaps from ideas to reality in a very short period of time. In the ensuing chaos, the financial industry had to keep up with the shift and industries that still relied on numerous physical identity checks and offline transactions entered unknown territory when forced to go digital into e-Commerce with e-Payments to maintain business transactions.

 “This is not the first time the financial industry had to speed up transformation. Risk management became an important aspect after the 2008 crisis, and new regulations in banking strengthened the corporate governance within financial institutions.”

According to Segal, the digital transformation became a fertile soil for making money illegally, and the possibilities are almost endless. Financial Criminals are not targeting institutions by armed robberies anymore. They have become much more sophisticated and operate in areas of money laundering, identity theft and market manipulations, to name a few.

“Money Laundering is the attempt of criminals to integrate illegal money into the legal financial system. It is most commonly used by criminals like drug cartels or by terrorists to fund their operations. The digital transformation and the fact that more and more financial services are now managed by FinTech companies or other non-bank companies like PayPal or online payments platforms enabled a new channel for placing and layering illegal money for integration into legal financial systems. In this respect, while in the past banks had to maintain a robust AML compliance activity, this process is now applied also to the e-payment financial industry.

“Identity theft may become the biggest challenge when dealing with financial transactions during big data era. This is a very big area that includes credit card fraud, email phishing and cyber fraud.

“Market manipulation is an illegal activity of the trading desk that can influence the price of a stock. For example, ‘wash transactions’ or ‘parking transactions’ are used to deceive investors and interfere with proper trading by affecting the price of the stock. Trade Surveillance Methods must be applied to all entities that have access to trading in the stock exchange.”

I asked Segal to explain what are FinTech companies. “FinTech’s are the digital-first companies that have to work on protecting customer information, yet their motivation is on customer acquisition than anything else. This means that at times there can be gaps that need to be addressed in their cyber security. Also, they can fall under different jurisdictions, because usually they are partnering with a bank and 'renting' the license for financial use. This split between customer users and banking / financial institutions is a gap that needs to be explored further.

“The FinTech industry now serves more and more banking services - from payment to loan services. These activities require the same standards of regulation as those the banking industry has – AML, CFT etc., and therefore we witness raising awareness to develop risk and compliance departments to monitor fraud and suspicious activities.”

In the era of bigger government, can government regulations help, I ask Segal.  “The government and regulatory bodies require maintaining regulations for sustainability of the financial market in any market shock along with rules to avoid any financial crimes activities. One important area in risk regulation practice is data governance and risk management. Data governance dictates the processes and standards in place to ensure the security and validity of data. As governments put more pressure on reporting and verifying accurate data, proper data management is integral to any risk management strategy.”

Segal says a proper data governance plan will track data throughout the organization using data lineage and other verification tools. “This ensures data integrity and provides the proof needed to report back to any required overseers or supervising parties. Implementing these standards can help prevent the recurrence of something like the 2008 financial crisis by protecting against fraud or false data. With increased accuracy and data reporting, the financial industry benefits as a whole. These regulations ensure that financial institutions take the proper precautions to filter out inaccurate or fraudulent data thus helping protect their financial assets.

“Data has quickly become one of the most important resources in the 21st century, and this remains true within the financial industry. Banking regulations require strict regulation and management of data, which is where governance comes into play. Data governance is a set of standards and processes that establish reliable management throughout the organization or enterprise. The collection of accurate and reliable data is integral to risk management. Regulations now require the validation of much information gathered by banks, and a thorough data governance process tracks and logs the data journey through an organization.

“Cyber security plays an important role in keeping the Data Warehouse (DWH) intact and safe. DWH has become integral to the daily operations of these institutions due to the importance of accurate data reporting.”

I am alarmed:  The potential for fraud is so high and the scope of such fraud is so extreme, that a concerted team effort is required.  But can we expect it?  Consumer awareness must be raised.  The industry as a whole must invest in processes and develop systems to recognize, counter and prevent wrongdoings, and the government and its regulatory bodies should provide oversight and guidance.  To prevail, only cooperation will help minimize the tremendous costs involved, costs that we all end up bearing.  The consequences of not doing enough or not cooperating could be devastating.

Segal agrees:  “The Great Pandemic has opened the door for massive digital transformation and created new opportunities to businesses and overall lifestyle changes and new marketing cultures.  However, with it, new financial crimes and fraud activities rose accordingly. The regulator, financial institutions and FinTech companies should focus on developing new framework to create awareness for all kinds of financial crimes and the manners to confront them.