Financial Crime

Financial Crime: How Financial Institutions Can Reduce The Risks And Strengthen Compliance In The Digital Economy

In the digital age of banking, concerns about financial crime are not uncommon. PwC’s Global Economic Crime and Fraud Survey 2020 reported that 47% of companies experienced fraud in the past 24 months.[1] Although it is necessary for financial institutions to continue moving forward with digital transformation, they must take into account the risks they face along the way. This is why it is crucial for banking companies to take the requisite steps to mitigate these risks with digital banking compliance.

Over time, the growth of financial crime has evolved alongside the advancement of trade and business technologies. As the transition of value moved from barter to financial instruments, and relationships between traders become increasingly remote and reliant on intermediaries, the potential for abuse of enabling mechanisms that underpin effective trade has expanded. Digitalization has accelerated this increase in the volume and velocity of financial crime attacks. Leaders of the financial industry are increasingly concerned about the growing complexity of financial crimes, including money laundering, cybercrime, fraud, tax evasion, terrorism funding, bribery and even internal threats from employees.

Along with the increased reach of financial crimes and rising regulatory liabilities, banks additionally face the need for more comprehensive and cohesive risk mitigation and compliance strategy. Compliance ensures that banking firms comply with the laws and regulations, keeping their credibility and reputation in check. In addition, any banking organization must have a compliance department to ensure that its policies and equipment are adequate to mitigate any risks.

Banks Face Challenges on Several Fronts

Keeping up with accelerating regulatory change is proving difficult for banks, but non-compliance can be even more expensive. Costs include monetary fines, remediation, termination of the business line and temporary or permanent limits on the sale of certain products, not to mention the unquantifiable effect of investor dissatisfaction and damage to the brand’s reputation. Banks have heavily invested in strengthening the security and meeting compliance requirements; however, such efforts are undermined by their piecemeal approach to dealing with financial crime. Risks such as money laundering, cybercrime and fraud are traditionally managed independently by various organizational functions. Each has its own tools, systems, processes and compliance mechanisms, with minimal communication between them.

This fragmented approach has resulted in duplication of data, technology and effort, resulting in increased costs. Estimates of the annual global cost of financial crime vary from US$1.45 trillion to US$3.5 trillion.[2] This wide range is as much a function of the difficulty in defining financial crime as it is in assessing its impact. Without integrated data from multiple channels and geographies, it is even more difficult to recognize suspicious activities or obtain a unified view of organization-wide risk. The challenge for banks is to improve their ability to detect, deter and report the financial crime while managing spiraling regulatory and compliance costs.

Steps to Follow

While banks have made substantial investments in risk and compliance management, a fragmented approach to financial crime has had little progress in risk reduction and meeting regulatory needs. It has only resulted in amplifying violations and money spent on regulatory compliance. It is clear that banks need to refresh their approach in handling financial crime and regulatory compliance. Banks need to follow six main measures to stay ahead of the ever-changing criminal and regulatory landscape

  • Conduct a risk assessment on the basis of products, services, geographies and clients of the bank and to better understand the threat environment.
  • Integrate the efforts of the different disciplines involved in the mitigation of financial crime  across the organization for the detection of synergies and overlaps in people, processes and technologies; this will help reduce redundancies and streamline procedures.
  • Enhance the availability and accuracy of data to support real-time transactions and advanced analytics.
  • Apply advanced analytics to a holistic view of the risks and the entities that cause them; this will help to discover complex and subtle threats, as well as emerging ones, both early and effectively.
  • Foster a culture of high ethics and integrity by setting standards for accountability, developing controls and policies, working closely with regulators and increasing awareness among employees.
  • Participate actively in the industry-wide initiatives undertaken to mitigate risk and improve compliance.

Looking Forward

Fast-evolving financial crime and regulatory uncertainty affect banks of all sizes and warrants a proactive approach. Large banks with several lines of business must concentrate on integrating various crime prevention disciplines and building a culture that supports data-driven decision-making. Banks should consider recruiting former law enforcement intelligence officers and military officers with expertise in analytics to proactively detect patterns in transactions involving terrorist organizations. Small banks should implement technology and expertise from companies that specialize in cybercrime. This should be done to reduce high costs of procuring, maintaining and upgrading technology, as well as attracting and retaining people with needed skills, while also gaining flexibility in offering new products and services and entering new business areas.

Improving collaboration through managed services like Anti-money laundering (AML) and Know-your-customer (KYC) within the banking industry, as well as with regulators and law enforcement agencies, will result in targeted initiatives to deter crime, strengthen compliance, alleviate talent restraints, contain costs and tackle other challenges.