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（Original article in Japanese was published for FinTech Journal on Mar. 13, 2025）
https://www.sbbit.jp/article/fj/159244
Financial institutions rely on trust, yet cases of embezzlement, fraudulent loans, and insider trading continue to emerge. Despite various preventive measures, compliance alone is not enough to stop internal misconduct. This article explores the root causes of internal crimes and the necessary steps for financial institutions to strengthen prevention.
Noticeable Scandals and Their Impact
Recent cases, such as embezzlement from safety deposit boxes by veteran employees, highlight severe reputational risks for financial institutions. Scandals not only erode customer trust but also impact financial firms’ appeal in employment rankings. Although banks allocate resources to address misconduct, their effectiveness remains questionable.
How Financial Institutions Respond to Internal Crimes
Japan’s Financial Services Agency (FSA) mandates banks to report misconduct within 30 days, but ineffective internal controls can allow fraud to go undetected. Many institutions publicly disclose scandals, with a typical protocol, including apologies, commitments for cooperating with law enforcement, incident details, accountability measures, and preventive steps.
Common Elements in Fraud Prevention Strategies
A review of multiple cases shows three key areas of preventive measures:
- Strengthening Corporate Governance – Establishing independent audit committees, enhancing board expertise in legal and financial crimes, and improving whistleblower systems.
- Enhancing Risk Management & Internal Controls – Creating independent risk departments, conducting frequent internal audits, and implementing regular compliance checks.
- Cultivating a Compliance Culture – Enforcing ethical standards, mandatory compliance training, and revising incentive structures to promote long-term sustainability.
Why a Shift from Stereotype Notion Is Needed
Even with strict governance, internal crimes persist. Institutions assume employees are trustworthy, yet fraud cases indicate that some individuals will inevitably exploit the system. The focus should shift to early detection and rapid response, ensuring misconduct is addressed swiftly to minimize damage.
Internal Fraud Detection based on Evil Human Nature
Given the limitations of manual audits, financial institutions are turning to AI-powered fraud detection to maintain fair oversight:
- Fraud Detection Systems – AI analyzes employee transaction patterns in real time, flagging unusual activities.
- Employee Activity Monitoring – AI detects suspicious log activity and alerts management.
- Access Control Management – Restricts unnecessary data access and prevents external data leaks.
AI-Powered Initiatives in Japan
- Mitsubishi UFJ Bank introduced AI-driven AML (Anti-Money Laundering) checks.
- Mizuho Financial Group’s Blue Lab developed “AiHawk Filter”, an AI audit system detecting fraud risks in emails and documents.
The Reality: Fraud Can’t Be Eliminated, Only Minimized
Despite various preventive measures announced by financial institutions, internal fraud cannot be entirely eradicated. The most practical approach is to detect fraud early and minimize losses. Moving forward, financial institutions must reduce reliance on manual monitoring and accelerate technology-driven fraud prevention efforts.
