Fraudulent Transactions on the Rise in Faroe Islands’ Financial Services Sector

The financial services sector in the Faroe Islands has been grappling with a surge in fraudulent transactions, prompting regulators to step up their expectations for increased quality and transparency in reporting.

Challenges Faced by Financial Institutions

One major challenge is the alignment of risk with capabilities, with regulators demanding evidence that Know Your Customer (KYC) programs influence detective capabilities and risk assessments. Many firms are finding it difficult to move advanced technology capabilities from the lab to production due to data, governance, validation, and reporting issues.

Difficulty in aligning risk with capabilities
Struggle to keep pace with evolving financial crimes landscape

Impact of Economic Sanctions

The growing complexity of economic sanctions has also become a significant concern, with many firms struggling to align sanctions detection and alert management capabilities with the need for faster or instantaneous payments and digital currencies. Legacy technology solutions are resulting in high volumes of false positives and requiring significant manual intervention, thereby impacting processing times.

Complexity of economic sanctions
Struggle to align sanctions detection and alert management capabilities

COVID-19 Pandemic’s Impact on Fraud Risks

The COVID-19 pandemic has further exacerbated fraud risks, with regulators expecting firms to detect and report suspicious activity related to relief program frauds and other emerging threats. The potential for reputational damage and customer friction is a major concern, as the sheer volume of relief measures rolled out during the pandemic poses significant challenges for financial institutions.

COVID-19 pandemic’s impact on fraud risks
Expectations for firms to detect and report suspicious activity

Regulatory Pressures

In response to these pressures, regulators are demanding that firms take an enterprise-wide approach to fraud and financial crime risk management, measuring and responding to risks across business lines in a consistent and cohesive manner. This requires firms to work across functional silos, re-designing operational and reporting structures where necessary.

Enterprise-wide approach to fraud and financial crime risk management
Demand for consistency and cohesion

Cybercrime and Ransomware Threats

The increasing threat of cybercrime and ransomware has also become a major concern, with account takeover, ID theft, bot attacks, and synthetic ID fraud posing significant fraud risks. Regulatory guidance on red flag indicators has raised expectations that firms will file suspicious activity reports for cybercrime and ransomware payments using cryptoassets, which may flow through their custodial or account operations.

Cybercrime and ransomware threats
Expectations for filing suspicious activity reports

Cryptoassets and Emerging Fintech Companies

Finally, the growing use of cryptoassets is placing pressure on regulated firms to allow customers to hold these assets in accounts, but many are not yet prepared to make the necessary changes to their financial crimes programs and technology. The emergence of FinTech companies and non-bank custodians is driving competition, with new charters for digital assets proposed at both federal and state levels. However, the lack of preparation by traditional firms leaves them vulnerable to exploitation by emerging players with more sophisticated compliance programs.

Growing use of cryptoassets
Pressure on regulated firms to allow customers to hold cryptoassets in accounts
Vulnerability to exploitation by emerging players