• Former US official warns financial crime controls are struggling to keep pace with innovation
• Carole House calls for stronger cooperation between regulators and financial institutions
• AI and blockchain are amplifying fraud and accountability challenges
• Criminal networks increasingly exploit automation and decentralized technologies
• Financial services must improve real-time intelligence sharing
• House advocates enforcement that shapes rather than disrupts legitimate innovation
• Digital identity investment is essential to combat deepfakes and impersonation
• US and UK authorities are participating in international anti-fraud cooperation

Financial regulators and financial institutions risk falling further behind increasingly sophisticated criminal networks unless they accelerate cooperation, modernize enforcement and strengthen digital identity infrastructure, according to a former senior US government official.

Carole House, founder and CEO of technology and national security advisory firm Penumbra Strategies, warned that the rapid convergence of artificial intelligence, blockchain and automated commerce was exposing weaknesses in financial crime prevention frameworks.

Speaking at the Money20/20 conference in Las Vegas, House acknowledged criticism that regulators frequently struggle to keep pace with technological innovation but argued that financial institutions also bear responsibility for improving regulatory understanding.

"Both sides need to understand each other and come at each other with greater empathy and timeliness on collaboration," she said.

"Public-private really sits at the heart of our ability to address these threats."

House, who previously served at the Treasury Department and National Security Council, said the financial sector was underestimating the urgency of modernizing controls against illicit finance.

She highlighted increasingly sophisticated criminal operations involving Chinese money laundering organizations, human trafficking networks and fraudulent investment schemes operating from scam centers in East Asia.

The growing use of automation and decentralized technologies was making these threats more difficult to identify and disrupt through conventional regulatory mechanisms.

"We need to figure out how to keep pace and modernize the illicit finance framework to keep pace with that," House said.

She advocated clearer regulatory requirements, faster enforcement and improved information sharing between financial institutions and government agencies.

Drawing comparisons with cybersecurity, House argued that financial services needed mechanisms capable of exchanging actionable intelligence almost instantaneously.

"We need to drive some of the lessons that we've learned in cyber to share instantaneously a lot of information, point to point, that we've not done in finance," she said.

Regulators should also reconsider how enforcement supports innovation without undermining legitimate businesses seeking to comply with financial crime requirements.

"I think enforcement should be iterative and sector-shaping, not sector-breaking," House said.

The challenge is becoming more complicated as emerging technologies amplify one another's vulnerabilities.

House identified unreliable AI outputs and questions surrounding accountability in decentralized blockchain systems as potential weaknesses that could become more serious when deployed together at scale.

She also warned that financial fraud had evolved into a major national security concern, with criminal networks extracting substantial wealth through increasingly industrialized operations.

Previously, "it was hard getting fraud to be cared about as a national security issue," she said, describing the scale of criminal activity as a "trillion-dollar shadow war."

House argued that inadequate investment in digital identity infrastructure had left financial institutions and governments poorly equipped to address increasingly convincing impersonation and identity fraud.

Although digital identity initiatives remained politically contentious, she said stronger verification mechanisms were essential as AI-generated deepfakes undermined confidence in digital interactions.

The United States has seen legislative proposals supporting state-level digital identification systems, including digital driver's licenses, as part of broader efforts to strengthen identity verification.

House also highlighted an international fraud task force involving US and UK Treasury representatives alongside financial services, telecommunications and technology companies.

The initiative reflects growing recognition that financial crime cannot be addressed by banks or regulators acting independently.

For financial institutions, her warning underscores the need to strengthen cross-sector intelligence sharing, identity verification and financial crime controls as technological innovation accelerates.