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INSIGHT: How Legal Teams Can Keep Up with Regulators Using Fraud Analytics

July 24, 2019, 8:00 AM

In commenting on the Securities and Exchange Commission’s 2018 priorities, Stephanie Avakian, co-director of the SEC’s Division of Enforcement, noted the SEC has in the recent past “brought a number of cases … many of which were found using technology and advanced analytics.” Avakian also emphasized the SEC’s continued efforts to “identify those uses of advanced analytics that can be scaled more broadly, and that can be used in targeted ways to identify misconduct.”

The SEC is not the only regulator with its eye on forensic analytics. the Financial Industry Regulatory Authority, the Department of Justice, and other government agencies are also aggressively investing in and integrating advanced analytics into market surveillance programs and examination tools as they work to uncover and prosecute fraud.

As regulators continue to lean in to forensic analytics technology to support enforcement actions, legal teams should be ready to respond in kind to enforcement requests. But what is preventing many legal teams from fully taking advantage of everything analytics has to offer for regulatory inquiries and how can they keep up?

Analytics Teams Aren’t Tapped for Responding to Regulatory Requests, But Should Be

If government agencies are doubling down on analytics to prosecute regulatory violations, one would think the analytics teams at companies playing defense would be involved in the regulatory response. Perhaps surprisingly, analytics teams are more likely to be involved in a limited capacity that does not involve analytics for regulatory response efforts and many times lack domain expertise in the field of forensic or enterprise risk management.

As regulators apply fraud analytics to more company filings and other data sources in the public domain, urgency grows for legal teams to work with data scientists to provide the appropriate level of documentation and reporting as required by regulators, and even assist in the development of legal defenses.

Furthermore, as technology advances continue to enable new and innovative ways for regulators to identify and investigate financial crime, legal and analytics teams will feel the heat to uncover and stymie potential legal violations before regulators come knocking.

A solid first step to remedy the disconnect with analytics teams could be for legal departments to establish an open line of communication with their analytics counterparts and agree to a strategy and road map for implementing an analytics-based approach for regulatory compliance efforts.

Confusion on Fraud Analytics Capabilities is Prevalent, Should be Addressed

There is often a difference in understanding between the broader organization and legal, risk, and analytics teams when it comes to fraud analytics capabilities.

Business professionals outside of legal, risk, and analytics teams likely don’t understand the full capabilities of analytics functions. Or, company stakeholders closer to fraud analytics use may not be doing enough to communicate the capabilities and effectiveness of these tools to non-analytics stakeholders, such as finance departments.

These challenges can have important ramifications on regulatory response mechanisms, in particular, the ability—or lack thereof—of general counsel and their in-house teams to deliver on time-sensitive, data heavy requests from the C-suite and board during active investigations.

To mend the gap, it is critical that legal, risk, and analytics teams work together to help others throughout the organization understand the full strengths and capabilities of fraud analytics tools and how to leverage them in a way that demonstrates urgency and value to the business as whole.

Often, analytics pilots undertaken for fraud prevention and detection can be executed following an Agile methodology by teams combining professionals from legal, risk and analytics functions to help demonstrate return on investment to broader leadership teams in a short span of time.

Legal Teams Want Predictive Analytics, But Face Talent, Resource Issues

Companies are eager to keep pace with regulators and match their efforts when it comes to the use of advanced analytics in an effort to mitigate fraud. However, perhaps due to some of the challenges detailed in this article, there are still organizations with no plans to use predictive analytics.

There is a very clear talent and resourcing issue which could complicate some organizations’ efforts to go full-steam ahead on fraud analytics and scare others away in the long-term. While companies make their decisions to engage externally for specific competencies in this domain, it is important to rethink the profile of talent that will be required for future of the business. For example, technically-inclined lawyers are a good talent pool to recruit and retain.

Talent may be the biggest hurdle that organizations will need to address in the near-term to move their fraud analytics capabilities to the next level. It will likely require a concerted and organized recruitment strategy focused on individuals with deep data science and analytics experience, as well as organizational training to help business functions throughout the company understand how and when they can and should be using analytics.

That said, some organizations may choose to accelerate their fraud analytics transformations through strategic use of third-party advisers to help mitigate the talent challenge.

Proactive Risk Management

Predictive analytics can be used to analyze all of an organization’s data, enabling legal teams to identify hidden infractions, as well as unknown or emerging risks. Identifying nefarious, anomalous behavior sooner can help legal teams to better prevent and detect ongoing illicit schemes that can result in regulatory fines and reputational damages.

At a time when leaders in most organizations demand constant technological advancements, those who demonstrate their proficiency with predictive analytics can provide deeper, more meaningful business insights that can go beyond legal boundaries, positioning legal and compliance organizations to advise business line leaders on proactive risk management.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Shuba Balasubramanian is a Deloitte Risk and Financial Advisory principal, Deloitte Transaction and Business Analytics LLP. She has nearly 20 years of experience in leveraging advanced analytics to provide deep insights to her clients through innovative and transformational solutions that help them address their most pressing issues on enterprise risk management.