Quick Learn: Fraud vs. Anti-Money Laundering (AML)

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.

Actors

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.

Transactions

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.

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Artificial Intelligence: The Unspoken Language Barrier

Artificial Intelligence has been making the rounds recently in the media, with Elon Musk, Steven Hawking, Bill Gates, and many others sharing their thoughts and concerns about AI, saying it is a potential threat to humanity or will create some other nefarious consequence. Many media outlets have offered additional commentary attempting to reduce potential panic, suggesting concerns are overblown, and that AI will ultimately be a benign and beneficial phenomenon.

Curiously absent from the whole discussion is a very pertinent and critical aspect of Artificial Intelligence, the Language Barrier.

When AI pops up, the side that will struggle is the humans, not the computers. (Regarding the core debate over the existential possibilities of AI in the first place, please see my note below) 

In the 2013 movie ‘Her’, with Joaquin Phoenix and the voice of Scarlett Johansson, there is a scene that is amazingly indicative of our potential future with Artificial Intelligence. I won’t give away too much in case you haven’t seen the movie, but in a climactic point, Samantha (Johansson’s character), the Artificial Intelligence, says to Theodore (Phoenix):

it’s like I’m reading a book… and it’s a book I deeply love. But I’m reading it slowly now. So the words are really far apart and the spaces between the words are almost infinite. I can still feel you… and the words of our story… but it’s in this endless space between the words that I’m finding myself now.

Taking out the romantic angle, the AI Samantha is able to operate, think, and communicate so much faster than her beloved human Theodore. Samantha is not human, she is not bound by our limits.

Humans are extremely complex and amazingly powerful computers, which operate in many ways far beyond the current capabilities of the most sophisticated systems in the world. Think about it, look out the window. Immediately, and intuitively, you know what a person is, approximately how old they are, what time of day it is, whether a window is open (and what that means), and so many other elements of the world around you. Computer systems, in many way are no where close to those capabilities. Don’t get me wrong, there are some very sophisticated visual systems that can tell me the kind of shoes I’m wearing, but they aren’t quite ready to understand deeper contextual clues that humans know intuitively.

But that is on the visual side – Let’s shift to communications. Take a moment and as fast as you can, state your full name and your full formal address. It will, at best, take a few seconds. In the time that you shared two rather mundane facts, two computer systems, with run-of-the-mill gigabit ethernet connections, could have shared the entirety of a DVD’s worth of Breaking Bad episodes.

The simple fact is that computers operate and can communicate at a speed and in a way that humans can’t even attempt to match. A great demonstration of this style difference is the annual International Obfuscated C Code Contest (http://ioccc.org). This is a contest where programmers are awarded for code that produces functional programs in a way that appears to make no sense or can not be easily understood by humans. Let’s put that another way: Programs that we cannot easily understand that operate just fine, and generate useful, albeit simple, spreadsheet or calculator programs.

After seeing that, it’s logical to conclude that a truly artificial intelligence will seek to operate in the most efficient way possible. They will not be bound by our long-form, context and inflection heavy communication style. Because of that, humans will need extensive support mechanisms to communicate with the computers, not vice-versa.

In an AI world, we may chat to our neighbor about how their dog dug up our yard again, while an AI-enabled smartphone in our pocket spends it’s idle time optimizing our commute to reduce carbon emissions and give us more time at home without telling us. Who will need to come down to the other’s level?

With this in mind, I think we should all generally relax and not worry about artificial intelligence. If our AI overlords decide to act against humanity or do something nefarious, we will most likely have absolutely no idea what’s going on or even be capable of grasping what’s happening before it’s too late.

Now, about that dog….

Note: I have put aside the core debate over whether true Artificial Intelligence can and will arrive in any sort of reasonable time frame. There are many rational and reasonable arguments for why AI will not appear anytime soon, e.g. algorithms do not equal AI & and many others, and many doubt that AI is even possible. Personally, I believe that Artificial Intelligence will arrive sooner than later, and for the sake of this article, I have assumed that it can and probably will appear. 

Would Your Strategy Fail the Marshmallow Test?

By now, many have heard of the Marshmallow Test. A child is given a choice, they can have one Marshmallow (or cookie or other sweet) now, or if they wait a period of time they can have several more. The test is said to correlate to higher SAT scores, greater success, and better life outcomes.

While this is an often repeated experiment, you can see it in action almost daily on the NYC Subway. The NYC Subway can get hectic, not quite Tokyo Subway hectic, but there is definitely lots of squeezing and pushing to get on packed trains.

In some cases the pushing makes sense, another train won’t be along for another 10 or 15 minutes, and a little squeezing and pushing can mean the difference between getting to work on time or being late.

Other times, not so much. People will pack further into already packed trains, when another train is right behind. Often, there is an electronic board right above them flashing that another train is 0 min away, and the train operator will state over the PA, “There is another train directly behind this train”. Yet, people push and shove and squeeze to get on the train.

A packed train doesn’t move as quick, people have to reshuffle and push and squeeze to get out only for more people to push and shove and squeeze to get back in, and overall, the train moves along its path slower and is a big pain in the ass for everyone on board. The next train is virtually guaranteed to be less busy. No pushing and shoving, and at the very least, you won’t have to ask the all-to-common packed-train question: “What, exactly, is rubbing the back of my leg?”

It’s the marshmallow test. If a few people voluntarily waited the extra minute or two for the next train, rather than push and shove, their experience (and everyone else’s) would be much better. At the very least, they might get through a day with a lot less questionable touching.

What does this have to do with Business and Strategic Planning?

Think of your strategy, does it focus on short-term thinking or does it focus on the long game? Think of your leadership, not just the CEO but the department, division, or group leadership, would they forgo a quick small win for a longer-term bigger win? The fact is that most business strategies and corporate leaders fail the test. They jump at the short term gain over the longer term win for a variety of reasons. Money, corporate forces, risk, limited knowledge or information, and many other factors come to play.

Going for the easy Marshmallow, and avoiding potential future risks, may help leaders improve their near-term financial figures, gain some quick favor or build some temporary interest, but can hobble the firm far into the future.

This is a critical issue, and is becoming a popular refrain in the business world, yet, very little changes. Corporate Leaders remain reluctant to take longer-term risks and many start-ups are behaving desperately, dismissing long-term planning and strategy, trying to secure any possible short-term gain. Addressing the challenge doesn’t require immense shifts. Simple steps and a slight shift in thinking can influence the positive changes necessary to help the organization focus on the longer-term.

Start by taking three simple steps:

  1. Even short-term, think about what comes next. Assume you ate the Marshmallow – now what? Did the quick win change anything? Did it help the organization achieve anything material? Many times, the quick win and the immediate challenge becomes the focus, with little attention paid to what comes next, even in the short-term.
  2. Define the environment you need to ignore the current Marshmallow. Think about what the benefit or environment needs to be to shoot for the longer-term win. Do you need the explicit support of senior leadership? Do you need additional resources? Do you need more information? Does the benefit need to be of a certain size? It’s amazing what can happen when leaders are forced to think about their situation in new and different ways. Potential threats turn out not to be existent, additional resources can be secured, benefits become more well defined, and partners they never thought possible are willing to lend support.
  3. Pretend you’re looking back. Force yourself to consider the even longer-term. Think about where you want to be, where your should be, and where you’ve been. Does the current strategy fall where it should? Does a little deeper strategic thinking identify weaknesses or hidden opportunities? Many leaders know where they want to be, but how to get there is the gray area. It is a gray area, but by pretending you are already where you want to be can help you put near-term and long-term actions in perspective.

In closing, the Marshmallow Test has proven over time that a kid may just be hungry, and Subway riders are all to familiar with rushing to avoid the admonishment for being late, but the thinking behind around the Marshmallow Test has enormous implications the business world. Small steps and a little patience can have tremendous benefits, and can help an organization earn a whole bag of Marshmallows.

How volunteering reminded me Microeconomics is cool

Every year, Deloitte leaves the office for a day, and enters the community for an annual day of volunteering called Impact Day. It’s an opportunity for Deloitte to give back, and share our time, effort, and experience to help and improve local communities.

For this Impact Day, I had the opportunity to spend time at YearUp in Brooklyn, a program that takes under-privileged young adults and prepares them for professional careers. They spend a year in classes and internships learning solid skills on Finance, Information Technology, Presentations, Project Management, and so much more. There are several of these programs around the country, and with the opportunity to step inside, I was excited to see YearUp’s facilities. I could immediately feel the energy and pride that beamed from the program’s leaders.

Beyond the facilities, I was deeply impressed by the students. They are passionate, committed, and talented young adults. Many of them are just getting started in their exposure to the professional world, but any shortcomings are quickly overshadowed through a strong curiosity and interest in learning whatever they can. My fellow Deloitters and I (“we” going forward) spent the day working with them on two areas: elevator pitches and presentation skills. I’ll share a few thoughts on those two areas, and then I’ll share how I was reminded why Microeconomics are cool.

Elevator Pitch

An elevator pitch has become an an almost mythical event, shrouded in mystery and glory. There are the anecdotes about someone being given an opportunity to give their elevator pitch and walking away with a multimillion dollar investment or a tale similar to that. With that as a mental backdrop, we were not surprised that the students had a hard time sharing their thoughts. Even with a canned pitch about the YearUp program they were extremely nervous, and there was little personal details in their pitches. There was nothing about them, nothing about their passions or interests. When we asked them to shift gears and talk about themselves, their anxiety went into overdrive. It was almost foreign. However, when they did finally talk about themselves, we saw a whole new side – we heard about career goals, purpose, and even entrepreneurial ideas.

Then we shared with them the secret about elevator pitches. An elevator pitch is not about getting to “Yes”, and while it’s certainly not about getting a “No”, a sole focus on “Yes” or “Good to hear” is not what an elevator pitch is about. It’s about one thing – “Tell me more”. An elevator pitch is successful when it transitions to a conversation. When we told them this, the reaction was amusing. They had their minds set on immediate success, and were relieved that they didn’t always need a slam dunk, they just needed to make sure they stayed on the court, so to speak. We were pleased to see them charged up by our guidance.

Presentation Skills

Next we worked with them to produce a quick presentation about a recent news item. We were surprised at the serious topics chosen for the presentations. We thought the topics would be fairly innocuous, and instead, the issues were serious and sensitive. Topics included Net Neutrality, Carbon Emission Limits, and the Impacts of Raising the Minimum Wage, among others.

Since these are very controversial topics, I won’t comment on the topics themselves, but in working with the students, we noticed that their thinking stopped a little prematurely. The students were great in working together, researching the topic and producing effective slides, but the students had a hard time connecting the dots as we dug deeper into the topics. As we discussed our thoughts, we realized that these students were definitely not unique – many professionals we work with have a hard time connecting the dots.

“Connecting the dots” is a concept that I am confident is well discussed and presented by others in many different places, but is something I define as being able to identify tangentially related elements and connect them together in the context of a broader topic.

For example, as we discussed Carbon Limits, the students had a hard time looking past the obvious. They could grasp alternative energy, power generation changes, and even potential impacts to industrial production, but they didn’t easily see the deeper connections: potential economic impacts, cultural changes, and lifestyle changes. It takes a creative, explorative approach to dig deeper into an issue, yet, it’s a skill and a mindset that is rarely fostered. As we worked through the issue at a deeper level, it was a pleasure to see them realize and understand our given issue at a much, much deeper level. It was impressive to see them begin to realize deeper connections they did not initially consider.

Microeconomics

It was the presentations that gave me the chance to show off a little microeconomics! The last presentation covered the recent rise in the minimum wage in Washington State, and touched on how such an increase could impact New York. One of the points raised during the presentation was on how increases to minimum wage can reduce employment. To one of the students, such a possibility seemed counterintuitive, and I offered to share with him my thoughts on why that can happen. I drew a supply and demand curve on the board, and when I turned around, the lone student grew to about 10 students curious about what we were talking about. I drew a couple dotted lines, talked about market clearing values, and how price limits can impact market equilibrium. Amid a few comments I got the most wonderful comment of all: “That’s cool”.

It was tremendous feeling, not because of the “cool” comment, but because these students were shown something they are not directly familiar with, and it was shown to them in a casual and interesting way. It was a new tool they could build upon, something they did not realize could be incorporated into their thinking. For many of us, it is a tool that we take for granted in our daily thinking.

We all have different mental toolboxes, so I encourage you, whenever possible, to share with those around you something they may not know, because giving others new tools and new skills is pretty “cool”.

One final thought. I could share many details about Impact Day, but the size, history, and contributions made by so many giving and caring members of Deloitte is deserving of so much more than even the longest article on this site. I encourage you to check out the Deloitte website for details about Impact Day, and about how giving back to the community can make such a difference.