Financial crime is a multi-trillion-dollar business for criminal organisations. Annually, the proceeds from their illicit activity laundered through global financial networks are worth between 2-5% of global GDP. As a result of the loss and harm this is causing society, fighting financial crime has become a key priority for many governments, including in the UK.
Just to remain compliant, financial institutions have been investing heavily in their financial crime programmes for the last 20 years. At the same time, the costs of compliance have continued to rise exponentially. Despite all this investment, driven largely by regulatory pressure, it’s not enough. The value of illicit funds confiscated or disrupted is still well below acceptable levels and more needs to be done to tackle the problem.
The challenge for firms is to both create a more effective financial crime programme and drive efficiency. What may look like two competing agendas can, however, be delivered using technology and data. With a big focus by regulators and policymakers on technical compliance as well as demonstrating effectiveness in disrupting financial crime, alongside an internal agenda on cost optimisation, the spotlight on digital transformation has never been stronger, says Geraldine Lawlor, global head of financial crime for KPMG.
More mature organisations are currently moving towards data and technology-enabled process transformation. This is where the future appears to be. However, it requires some brave decisions to be made on legacy infrastructure. It also requires a move away from the silo mentality, bringing the organisation together in terms of how it views and manages this risk. For some, this may be a paradigm shift, but for others, it’s a necessity.
To support this change, the traditional limitations on data from product-led legacy systems are being overcome by tools that leverage and enrich existing data sets. This allows the data to be used more effectively. “Banks are also moving from traditional approaches to monitoring transactions to looking at networks of activity, connecting relationships and observing illicit activity across a network that was not evident at a transactional level,” says Ignatius Adjei, UK fraud technology lead at KPMG.
The focus on data is fast becoming a fundamental part of how organisations better manage their financial crime risks. Their know your customer (KYC) programme is at the heart of this. “Rather than see it as an exercise in identification and verification aligned to technical minimums, it should be viewed as the data source to manage all subsequent downstream processes that support better detection, disruption and optimisation,” says Lawlor.
The loss and harm to society needs to stop, and our economies must be allowed to prosper and grow
Another emerging theme is convergence under an economic crime lens. This covers a collection of risks; namely fraud, money laundering, counter-terrorism, market abuse, sanctions, bribery and corruption and tax evasion. It is a means by which organisations are starting to recognise that managing risks in isolation is not the answer. They need to have a new way of assessing how to deliver greater efficiency.
“We are seeing this convergence, with fraud and cyber-enabled crime moving closer to anti-money laundering, particularly around mules,” says Adjei. This is reflected in the mindset shift towards the need for greater collaboration. It’s supported by access to enriched data, information and intelligence, and enabled by better tools. As a result, firms’ ability to manage risks and threats is improving.
With the focus on innovation and cost optimisation, the role of the compliance function is also evolving. There is an increasing trend towards moving activity out of compliance and into shared services. Doing so enables firms to drive operational standardisation and convergence, leveraging common tools and management structures, and positioning for greater efficiency.
However, this transition can have its challenges, and “it is important to set clear outcomes, good design principles and agreement around how accountability, responsibility and oversight need to work,” says Lawlor. “It is, however, worth the effort, as it brings an organisation together and makes the business accountable for client risk. It also allows compliance to move to an oversight role, while driving an optimisation agenda through operations, leveraging data and technology to full effect.”
Alongside the work currently being undertaken within organisations, regulators are also playing a key role in supporting and encouraging innovation to better manage the negative effects of financial crime. As organisations start to improve the way they respond to and work with their regulators, these relationships will evolve positively. “When you start to bring them into the conversation, there becomes a real opportunity to drive a much healthier relationship where we are all on the same side. We’re part of an eco-system that is working together against the common threat: the criminal,” says Lawlor.
To further support collaboration, there has been an emergence of public-private partnerships across a number of jurisdictions, with the UK taking the lead. Reform is also high on the agenda, underpinned by the legal changes coming through under a series of economic crime bills. A key component of such reform will be the ability to share information and intelligence more routinely and to put it to use. There’s already a huge amount of work underway here. Without it, the ability to join the dots across the financial marketplace and, ultimately, disrupt criminal networks remains limited.
Success in driving down the negative effects of financial crime comes from the will of all the stakeholders to change and evolve collectively. It’s amazing what can be achieved when everyone pulls in the same direction. The loss and harm to society needs to stop, and our economies need to be able to prosper and grow. Moving forward to an environment built on collaboration, enabled by data, intelligence and the right tools, will be critical to achieving this.
For more information about financial crime visit home.kpmg/uk/en/fincrime
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