In banks' battle against deepfake fraud, we need all hands on deck

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Recently, a Hong Kong-based employee of a multinational firm was tricked into paying out $25 million to fraudsters using deepfake technology to pose as the company's chief financial officer in a video conference call. While fraud has been an issue in the financial services sector from time immemorial, the industry is facing a 21st-century threat unlike any other: deepfake fraud. The incident in Hong Kong serves as a clarion call for the industry to equip itself with the tools, technologies and processes, bolstered by proactive regulatory and congressional actions, to ensure that deepfake fraud does not overwhelm global financial institutions or the economy as a whole.

Deepfake technology, which uses artificial intelligence and machine learning to create hyper-realistic but fabricated audiovisual content, has evolved from a novel tool in entertainment into a potent weapon in the hands of fraudsters and nefarious actors. The recent deepfake videos of Taylor Swift that spread across social media show the darker potential of this technology. In the banking sector, where trust and security are paramount, the implications of such deepfakes are profound.

The banking industry's vulnerability to deepfakes is not just a matter of potential financial loss, which in itself is substantial, but also a matter of trust. The foundational trust between banks and their clients, painstakingly built over decades, faces erosion by the sophisticated machinations of deepfake technology. Traditional security measures are increasingly inadequate in detecting these advanced forms of fraud, making the task of distinguishing real from fake a daunting and paramount challenge.

In this context, know-your-customer processes become more than just regulatory compliance mechanisms; they emerge as essential safeguards. Know your customer involves verifying a client's identity at the time of account opening and periodically thereafter, especially during major transactions. This critical step, which must be radically enhanced in the era of deepfakes, helps detect and prevent fraud. Banks are required to ensure that their clients are genuinely who they claim to be, which is increasingly challenging in the new digital age.

The evolution of know your customer into electronic know your customer harnesses technology for more efficient and accurate identity verification. In regions like India, where electronic know your customer has become widely implemented due to the prevalence of digital IDs, the process incorporates AI and biometrics, significantly bolstering defenses against deepfakes; liveness detection in facial recognition systems, for instance, can differentiate between a live person and a deepfake. The financial services industry must maintain its technological edge over digital gangsters, and electronic know your customer is a step forward in this effort. 

With an estimated $1.6 to $4 trillion laundered annually, the stakes for financial institutions in maintaining robust know-your-customer protocols are astronomically high. Enhanced due diligence, part of the know-your-customer process, requires a deeper analysis for high-risk clients, vital in the era of deepfakes. Noncompliance with these procedures not only risks heavy penalties but also severe reputational damage.

Regulatory bodies must also adapt to this new threat by updating know-your-customer guidelines to specifically address deepfake risks. International standards, such as those set by the Financial Action Task Force, or FATF, should reflect these emerging challenges.

Moreover, it is imperative for Congress to take decisive action in establishing robust legal frameworks that will unequivocally hold individuals accountable for perpetrating deepfake fraud. The rapid advancement of technology often outpaces the development of corresponding policymaking, highlighting an urgent need for proactive efforts in Washington to reverse this trend.

Encouragingly, the recent establishment of the Bipartisan Task Force on Artificial Intelligence in the U.S. House of Representatives represents a significant step forward. Other lawmakers introduced legislation that would establish a task force focused on the financial services sector, another positive step. Thoughtful, targeted action is needed to deter and prevent deepfake fraud and stop fraudsters from undermining the banking system.

But technology and policy changes alone are not the panacea. A collaborative effort is essential in this fight against deepfake threats. Banks must work closely with technology companies, regulatory authorities and each other to develop comprehensive strategies. Educating customers and employees about the risks and signs of deepfake scams is equally crucial. Such collaborative efforts ensure a unified front against these sophisticated frauds.

Know-your-customer processes must evolve to integrate specific deepfake detection mechanisms. Techniques that identify minor inconsistencies in videos or audio files can be key. Major technology companies are already developing tools to analyze content for authenticity, which can be incorporated into the know-your-customer framework.

The threat of deepfakes in the banking industry necessitates a proactive and robust response. This response must center around strengthened know-your-customer procedures, integration of advanced technology, updating of regulatory and legislative frameworks and fostering customer and employee awareness.

As we navigate a world where seeing is no longer believing, advanced know your customer stands as a critical bulwark in preserving the trust and security fundamental to the banking industry. The Hong Kong incident is not just a wake-up call; it's a call to action.