Updated: Jul 29, 2020

[Authore by Max Croson, 3rd year B.A. LL.B. (Hons.) student at USLLS, Guru Gobind Singh Indraprastha University.]


Throughout the evolution of human civilization, we have achieved many milestones and come a long way from just being mere apes. We have made our lives better with the use of our creative minds and transformed the world into a global village. We have developed our technological advancements which is a boon for us making our lives easier with every passing day. Although this very technology has made our lives much easier to maneuver, it has opened up new challenges and pitfalls for us by paving a way for new forms of crimes as well. The technology has given tools to criminals to execute a crime by cleverly bypassing the security protocols of the financial and banking sectors, which are quite vulnerable if not equipped with the required state of the art security features.


These crimes can also be termed as white collar crimes since they are mostly committed by persons who have higher social and economic status in the society and have much more knowledge and resources than a regular person.

· Criminal organizations, like the mafia or terrorist groups, who maneuver through the dark web and gather illicit funds for their operations by perpetrating large-scale frauds.

· Corrupt government officials, having surplus of power and resources at their disposal.

· Businessmen through tax evasion, fraud or embezzlement.

· By a customer or contractor, or a third party through misrepresentation.

Reasons for the prevalence of financial crimes in India

India is exposed to rampant financial crimes even after having strict penal provisions with rigorous punishment. For example, money laundering and terrorist financing are dealt with rigorous punishment under the Prevention of Money Laundering Act, 2002 (PMLA) [1] and The Unlawful Activities Prevention Act, 1967 (UAPA) [2] but still they are committed and conspired.

The reason is quite simple since the lackadaisical approach of the financial institutions, especially banks, createsnumerous loopholes for the criminals to fraudulently transact funds which are difficult to trace. The cases of money laundering and willful defaulters in India have increased by 10% in the recent years. If we talk about one of the cases involving financial crimes then Nirav Modi and PNB Scam[3] is one of the most important cases. This case opened up new avenues for the financial security features to be adopted in Indian banks to regulate such scams from occurring again.

Since the PNB had not linked the CBS (Core Banking System)[4] and SWIFT[5] at that time it caused the banking system crores of losses. The scam would not have even taken place if it had been done and a massive damage of unrecovered Rs.14000 crore would not have incurred. Such cases could be reduced through adoption of AI and other technology firsthand. Hence we come to the next segment which talks about the need of an AI driven mechanism in Indian financial system.

Reasons for a need of an AI driven mechanisms to prevent financial crimes in India

If we look at it roughly then it’s the need of the hour since the financial sector today has been thrown into jeopardy due to increasing financial crimes like money laundering, terrorist funding, phishing, identity theft, and corporate fraud. The growing number of such cases in the financial sector of India calls for a serious change and overhaul of the whole financial system.

Such crimes not only affect the revenue and capital of financial organizations, but also significantly impact the brand value, reputation and goodwill of the organization. Additionally, the affected organizations also have to face a number of other costs in the form penalties/fines, internal crime detection and cost of compliance against investigation. In order to combat such problems, the financial sector is pooling in resources and taking innovative measures of utilizing AI and machine learning by either tying up with tech giants or building their own AI mechanisms to strengthen their security among their servers and detect any anomaly.

Though late, the use of technology to curb financial crimes is getting more and more used in India to keep them in check. Transparency in the financial sector have been brought via linking bank accounts with Aadhaaar and making the payments and form filling of Government services through online and digital portals making it secure and hassle-free.

Now, the question arises as to up to what extent can the AI and machine learning help reduce such malignant behavior in the market and also what are the shortcomings that the financial sector in India will have to deal with, in furtherance to use of AI?

Advantages of AI in financial sector

AI can deal with large amount of data and can spot abnormalities hence, if clubbed with machine learning, it becomes a viable tool for financial sectors. If trained correctly Machine Learning (ML) can recognize patterns to consumer behaviour. Further, insider fraud can be mitigated and protect companies from their sensitive data being exposed. Adding AI gives ML an edge by making it to understand data which is unconventional and form patterns and take actions in real-time.

AI and ML can be used for predictive analysis of consumer behavior with changing trends and also predict possible anomalies that can be used to bypass the security systems.

Shifting to the use of biometrics and other identity traits with the help of AI for KYC processes of the customers reduces false positives and false negatives to occur. AI-driven compliance will ultimately have an enormous impact on how financial services will work - increasing automation, reducing manual overheads and helping prevent financial crime.

Shortcomings of the AI

Implementing technologies like AI and ML on a national basis in India is going to present a lot of challenges.

The country’s diverse language and socio-economic demographics, pose various problems and challenges to overcome, but not all challenges are external. Convincing the companies of the tangible benefits of these solutions will not work unless the companies are ready to invest the required time, expenses and effort in implementing the AI and training their workforce with its features.

As said by Rachit Chawla , CEO of Finway Capital, a Delhi-based non-banking financial company, “The biggest challenge is the scarcity of trained human resources, the existing workforce is not familiar with latest tools and applications. Secondly, the AI technology is a big threat to redundant employees in the banking sector. The mass adoption of AI may cause a grave unemployment problem in the sector.”[6]


It is to be observed that the financial sector in India is of the most sensitive areas of governance and if financial crimes are not checked with the use of modern technology and AI then the Indian economy will go through uncontrollable damage, which can cripple the economy and let the perpetrators do as they please. It can threaten the sovereignty of the country since a country is at its weakest when going through an economic recession. To prevent such things from happening preference shall be given to strengthen the security protocols with the use of AI and machine learning technologies and also the risk management, cyber security and fraud strategists shall collaborate and educate financial institutions to invest in upgrading their security arsenal so that financial independence of India shall not be threatened by any internal or external perpetrators.

[1] Punishment for money-Laundering.-Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years. [2]Penalty for being member of an unlawful association shall be punishable with imprisonment for a term which may extend to two years, and shall also be liable to fine; and (b) a person, who is or continues to be a member of such association, or voluntarily does an act aiding or promoting in any manner the objects of such association and in either case is in possession of any unlicensed firearms, ammunition, explosive or other instrument or substance capable of causing mass destruction and commits any act resulting in loss of human life or grievous injury to any person or causes significant damage to any property,— (i) and if such act has resulted in the death of any person, shall be punishable with death or imprisonment for life, and shall also be liable to fine; (ii) in any other case, shall be punishable with imprisonment for a term which shall not be less than five years but which may extend to imprisonment for life, and shall also be liable to fine.] [3] Punjab National Bank Fraud Case, 2018 [4] CBS refers to Core Banking System where all branches are inter-connected to ensure that the bank customers - regardless of their home branch - are able to operate their account and transact in any of the member branch located anywhere in the world. After the advent of this system, a customer is no more customer of a branch, but s/he becomes customer of bank. All the transactions are updated real-time. [5] When an Letter of Undertaking (LoU) is issued, the message of credit transfer is conveyed to overseas banks through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. This is a significant information as it gives the bank's consent and guarantee. [6] Kul Bhushan, Artificial Intelligence in Indian banking: Challenges and opportunities, LIVEMINT, (9th July, 2018), https://www.livemint.com/AI/v0Nd6Xkv0nINDG4wQ2JOvK/Artificial-Intelligence-in-Indian-banking-Challenges-and-op.html

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