On February 16th, the Institute of International Finance (IIF) submitted a response to the Basel Committee on Banking Supervision Discussion paper on “Digital fraud and banking: supervisory and financial stability implications.”

This discussion paper provides a high-level assessment of the supervisory and financial stability implications of digital fraud for the global banking system. In our IIF response we commend the Basel Committee for undertaking work on the important subject of digital fraud which is being committed at a greater scale and scope than ever before. This is in large part due to the rapid advancement of digitalization and new technologies which provide both benefits and risks to financial institutions and the provision of financial products and services more broadly. At the same time, digital fraud should be seen as fraud enabled by digital means, rather than as a wholly new phenomenon.

While digital fraud is overall an extensive category of activities, we understand and support the Committee’s decision to focus primarily in this discussion paper on retail (as opposed to wholesale) and external fraudsters (as opposed to employee fraud.) Retail clients and households are the most vulnerable, and most likely to be taken advantage of by fraudsters using the latest technologies, as they are likely to be less able to manage their security than larger organizations and businesses. Small- and medium-sized enterprises are also relatively vulnerable, however, and thus should most likely receive more emphasis in the discussion paper analysis going forward.

For all these reasons, it is important that banks work closely together with law enforcement agencies, government authorities, regulators, and cross-sectoral partners, especially telecommunications firms, to help make customers and individuals aware of how to detect and protect themselves against digital fraud. It is also important not to view these issues in isolation or strictly through the prism of prudential policy. Fraud is a multifaceted, global problem which requires an integrated approach to solutions throughout its lifecycle. This should critically include prioritizing the prevention of fraud whilst also improving efforts to deprive criminals of their illicit resources through more effective asset recovery measures. The BCBS should be aligned in this work across the international standard setting bodies, and in particular with the Financial Action Task Force (FATF) and the Committee on Payments and Market Infrastructures (CPMI).

Beyond responding directly to the three broad sets of questions posed in the discussion paper, the IIF also provided seven over-arching considerations in the following areas:

• Fraud is a complex, cross-sectoral phenomenon, and the chain of fraud comprises many other relevant stakeholders
• The fight against digital fraud and scams requires coordinated cross-sectoral effort
• Liability should be more appropriately distributed and should consider all parties involved in the chain 
• Recognizing that “Digital Fraud” can occur across borders
• The importance of relevant public-private information sharing and coordination
• Closer collaboration and coordination between jurisdictions, and with standard-setters
• Developing guidance around all aspects of fraud

Ultimately, there also needs to be increased focus on fraud and scam prevention. As recommended by the FATF and others, jurisdictions should promote awareness and vigilance against fraud and scams through public education and financial/cyber literacy. Collaboration with the private sector on prevention strategies is also an important area that will build capacity in the system by developing a more coherent front-end response to fraud and scam deterrence.