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As technology becomes increasingly sophisticated, so too do the tactics used by financial criminals. In November 2024, the US Financial Crimes Enforcement Network (FinCEN) issued a high-priority alert, highlighting a surge in deepfake-related financial fraud. The alert outlines several common fraud schemes involving deepfake AI, provides financial institutions with warning signs, and reminds them of their reporting requirements under the Bank Secrecy Act (BSA).

With fraudsters now leveraging generative artificial intelligence (AI) to bypass traditional safeguards, the financial sector must be prepared to adapt, respond, and stay ahead of rapidly evolving threats.

What Are Deepfakes and Why Are They a Threat?

“Deepfake” content refers to synthetic content produced by generative AI that is often difficult to distinguish from unmodified or human-generated output. Deepfakes can include falsified documents, photographs and videos that appear real without closer examination, particularly when presented to busy consumers.

Not all AI content is malicious, and ahead of a hearing on December 2, 2024, the House Financial Services Committee introduced a resolution acknowledging the growing role of AI in the financial services industry and pledged to consider this when drafting new legislation. FinCEN’s alert is part of the Department of Treasury’s broader effort to provide financial institutions with information on the opportunities and challenges that may arise from the use of AI. According to FinCEN, suspicious activity reporting (SAR) by financial institutions regarding deepfake media has increased significantly since early 2023. Financial institutions are increasingly identifying fake identity documents, forged passports, and manipulated customer data, all designed to circumvent Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.

This trend poses serious challenges for maintaining financial services compliance, especially as regulations tighten and enforcement actions become more rigorous across global jurisdictions, including the UK. In this blog we highlight what’s happening, why you should care, and what your next steps could be.��

Regulatory Landscape: Compliance and AI in Financial Services

Although FinCEN operates under the US Treasury, its alerts often set the tone for global compliance standards. Meanwhile, in the UK, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are also closely monitoring developments in AI and fraud prevention. The direction is clear: regulatory bodies are ramping up scrutiny and expecting firms to proactively identify emerging risks.

Legislators and regulators are also considering the broader implications of AI. In the US, the House Financial Services Committee has acknowledged AI’s growing role in the financial industry and is exploring legislation to balance its benefits and risks. This will likely influence UK regulatory approaches and future enforcement actions related to AI misuse in the financial sector.

Why Financial Institutions Should Be Concerned

Deepfake financial fraud fuelled by deepfake technology presents a multi-layered threat; compromising financial stability but also exposing institutions to legal and reputational consequences. Here’s why this matters now more than ever:

1. Financial Losses and Operational Costs

Fraudulent transactions can lead to immediate monetary losses, along with transaction reversal costs and potential compensation paid to affected customers. Additionally, patching a hole in an flimsy cybersecurity framework may end up being more costly in the long run than building a sturdy one before fraud first occurs.

2. Regulatory Scrutiny and Compliance Risks

As highlighted by FinCEN’s alert, regulators are closely monitoring industry standards for cybersecurity and fraud prevention. With heightened awareness of deepfake fraud, failure to implement adequate digital safeguards can result in non-compliance with regulatory requirements, administrative penalties or sanctions from financial and consumer protection authorities.

3. Customer Trust and Reputational Harm

Susceptibility to fraud erodes customer confidence in financial institutions. Customers trust that their personal information and assets will be protected. A breach of trust can lead to long-lasting reputational damage, especially if the institution’s response is perceived as inadequate or insufficient. The magnitude of the timeliness of mitigation efforts play a critical role in determining the extent of the reputational fallout.

Without appropriate precautions, financial institutions face significant risks, including fraudulent transactions, regulatory penalties, loss of customer trust and reputational damage.

Identifying Deepfake Financial Fraud: Red Flags and Best Practices

FinCEN’s alert outlines several red flags and countermeasures that financial institutions, regardless of geography, should consider implementing:

• Access to an account from an IP address that is inconsistent with the customer’s profile.
• Patterns of apparent coordinated activity among multiple similar accounts.
• High payment volumes to potentially higher-risk payees, such as gambling websites or digital asset exchanges.
• High volumes of chargebacks or rejected payments.
• Rapid transactions from newly opened accounts with an account with little prior transaction history.
• Immediate withdrawal of funds after deposit via methods that make payments difficult to reverse, such as international bank transfers or payments to offshore digital exchanges and gambling sites.

What are Your Next Steps?

By knowing what to look for, financial institutions have the ability to mitigate or even prevent such fraud. FinCEN’s analysis indicates that financial institutions often detect generative AI in identity documents by re-reviewing customer account-opening documents. Recommended methods include:

• Reverse image searches to confirm the real identity attached to the photo.
• Examining image metadata.
• Using software designed to detect possible deepfakes or specific manipulations.
• Phishing-resistant multifactor authentication.
• Live verification checks wherein a customer is prompted to confirm their identity through audio or video.

Financial institutions should allocate closer scrutiny to certain customer profiles or transactions if they observe characteristics such as inconsistencies among multiple identity documents submitted by the customer, a customer’s inability to satisfactorily authenticate their identity, source of income or another aspect of their profile, or discrepancies between the identity and document and other aspects of the customer's profile.

FinCEN requests that financial institutions take proactive steps to lower the rates of deepfake fraud and encourages financial institutions to reference this alert by including “FIN-2024-DEEPFAKEFRAUD” in SAR field 2 to indicate a connection to the reported suspicious activity and FinCEN’s alert.

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