Financial crime is an ongoing challenge for banks and financial institutions. Financial crime is defined as “crime for profit”, meaning any offence that involves using information related to the financial market dishonestly, for fraud or misconduct, or protecting already obtained or handling the proceeds of a crime/s for your financial gain.

There are three main types of financial crime:

• Fraud
• Money laundering
• Terrorist financing

What does financial fraud mean? – this is when someone steals money or other assets through misleading, deception or criminal activity.

What does money laundering mean? – the act of disguising illegitimate money (those gained from criminal activity) so it can be introduced into a legitimate financial system and appear to come from a legitimate source.

What terrorist financing mean? – this is the provision of funds to individuals, groups or organisations for the purposes of committing terrorism, similar to money laundering by concealing the transfer of illegitimate funds into a financial system.

What is financial crime risk?

Financial institutions are not allowed to accept any proceeds of criminal activity and must implement systems to ensure that all client money is legitimate.

The financial crime risks for banks and financial institutions are huge. In 2021, over $9.5bn of fines were issued due to not adhering to anti-money laundering regulations, and the associated reputation risks, negative publicity and loss of goodwill are equally as massive. All of which are possible when a bank or financial institution fails to manage the risk of financial crime, making money laundering risks to financial institutions high on the agenda.

What is financial crime compliance?

Financial crime compliance is the process in which financial institutions meet and act in accordance with the policies and regulations set out by relevant authorities or governments. For example, by implementing governance structures and financial crime strategies to reduce financial crime.

Financial crime governance and regulations governing anti-money laundering of financial institutions, for example, have become stricter, with governments issuing greater fines or punishments for financial institutions allowing financial crime to take place. The number of financial crime regulations which financial institutions must adhere to is also increasing. They must adhere to every regulation in every country in which they operate, across every operation. Hence managing financial crime risk and remaining compliant with financial crime regulations has never been more important for financial institutions.

Criminals are continuing to invest money and time into beating the system and using technology to better obscure money from illegal activity, but financial institutions are struggling to keep up, thus putting them at greater risk.

2022 and beyond is forecast to be even more challenging with Russian sanction largely impacting the financial sector. What financial institutions need is to not only focus on the costs for remedial measures, but also improve processes and operational controls for managing financial crime risk in the future.

What is financial crime prevention?

Financial crime prevention involves reducing the number of financial crime incidents, as well as identifying early issues and risks by implementing effective operational controls.

For example, Anti-Money Laundering (AML) includes global and local policies, laws, and regulations that are designed to prevent financial crimes, in particular, money laundering.

How to prevent financial crime?

To achieve financial crime threat mitigation, financial institutions are required to follow AML procedures to actively monitor and report financial crime.

Know Your Client or Know Your Customer (KYC) is a type of AML procedure used to determine the true identity of a client and the type of activity that is normal and expected, and detect client activities that are suspicious and unusual.

KYC is similar to Customer Due Diligence. What is customer due diligence? – a set of internal controls which enable financial institutions to verify a customer’s identity, predict with relative certainty the types of transactions in which the customer is likely to engage, and assess the level of criminal risk they present.

Enhanced Customer Due Diligence may be required for additional measures aimed at identifying and mitigating risks posed by higher risk customers, such as a Political-Exposed Person (PEP), who have more opportunities than ordinary citizens to gain assets through illegal means like bribe-taking and money laundering. Enhanced Customer Due Diligence should provide more certainty that the customer and/or beneficial owner is who they say they are and that the purposes of the business relationship are legitimate; as well as increasing opportunities to identify and deal with concerns that they are not.

AML is closely linked to Counter Terrorist Financing, which is the practice identifying and stopping banking or financial activity being used to finance terrorism, as criminals hide funds by preying on weaknesses in the financial system. Counter-terrorist policies have been created to prevent terrorist financing and detail that financial institutions should monitor and keep a record of customers transactions, so they have enough information to ensure that their customers are not involved in financial crime.

“AML/CFT controls, when effectively implemented, mitigate the adverse effects of criminal economic activity and promote integrity and stability in financial markets.” - International Monetary Fund

Management Information (MI) provides senior management with sufficient information to understand the financial crime risks their bank or financial institution is exposed to, in order to effectively manage these risks.

Examples of MI include:

•  An overview of the financial crime risks to which the firm is exposed, including information about emerging risks and any changes to the financial institution’s risk assessment
• Legal and regulatory developments and the impact these have on the financial institution’s approach
• An overview of the effectiveness of the financial institution’s financial crime systems and controls
• An overview of staff expenses, gifts and hospitality and charitable donations, including claims that were rejected
• Relevant information about individual business relationships

Why is financial crime prevention important?

The estimated amount of money laundered globally in a single year is 2-5% of global GDP, which is equivalent to $800 billion-$2 trillion US dollars.

Also, it is estimated that fraud alone results in $258 billion losses every year to UK consumers, businesses and the public sector, and money laundering costs the UK more than $136 billion a year. Combined, these figures are equivalent to 14.5% of the UK’s annual GDP.

The amount of criminal funds that are either channelled through the UK or facilitated by UK structures, “can reasonably be said to run into the tens of billions of pounds, and probably the hundreds of billions” - The UK Treasury Select Committee

Read more on top Anti-Financial Crime strategies and best practices for banks & financial institutions here

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