In a world of ever-increasing regulation, scrutiny is honing in on financial crimes that include anti-money laundering (AML), terrorist financing, sanctions evasion, bribery and corruption, fraud and tax evasion. Demonstration that a financial service organisation – whatever its size or scope – is working hard to meet its legislative and regulatory financial crime obligations has become a compliance and commercial imperative.
The demands on financial institutions continue to reach unprecedented levels. Laws and regulations are constantly changing, setting ever-stricter regulatory expectations. Globalisation and geopolitical events in combination with heightened enforcement activity require an effective control framework to ensure financial crime obligations are met.
Failure to meet financial crime obligations can result in severe penalties and the impact extends far beyond enforcement action andfines. Market perception and reputation can be negatively impacted with a detrimental impact on share price and shareholder confidence. At the sharper end of the scale, business restrictions might be put in place severely impacting revenue and profit of the business or division. The seriousness of the matters impacts both corporate and personal reputation, and may even result in imprisonment for senior accountable executives.
WHY IT MATTERS
The damage to society
Financial crime has a direct link to terrorism, human trafficking, drugs trafficking and illegal arms dealing. The cost of executing the Paris terrorist attacks in 2015 was just $10,000, yet the tragic loss of life, damage to the Paris economy (an estimated $2.1 billion) and the geopolitical repercussions were catastrophic. Human trafficking is a $150 billion global industry and a third of all victims are children. Global illicit drug sales are reportedly worth around $360 billion a year, and the illegal arms trade is worth an estimated $10 billion a year.
The Ukraine crisis has brought into sharp focus the critical importance of sanctions measures to deter war and target nefarious regimes to influence a change in policy and behaviour. It is estimated the new sanctions measures imposed on Russia will stop it accessing foreign currency reserves totalling $643 billion notwithstanding the impact on its annual exports totalling $490bn, Russian residents and sanctioned parties. This however pales in comparison to the tragic loss of life in Ukraine and catastrophic geopolitical repercussions which led to the new sanctions measures in the first place. Following, the fall of the Soviet Union, Ukraine also became the epicentre of the illegal arms trade leading to $32 billion of missing funds.
Arguably every country in the world will have been affected by these crimes and addressing financial crime sits high on the political agenda. There is a social, political and regulatory imperative for financial institutions to take diligent and rigorous steps to mitigate financial crime risks in order to prevent the facilitation of the proceeds or crime, or potentially the funding or enablement of nefarious activities.
Reducing the impact on the bottom line
Fines and enforcement actions have a significant financial impact on institutions that fail to comply with the regulations. There is often a misguided perception that regulators need to find evidence of financial crime issues crystallising in order to take action, however the reality is the lack of appropriate systems and controls alone can result in a fine or enforcement action. While global firms can budget for the liability in some cases, smaller institutions or newer entrants will struggle to absorb these fines and/or allocate the appropriate funds to adequately fix the issue. The cost of remediation activity in many instances, far outweighs the cost of the fine due to the requirement to remediate the issues in an accelerated timeframe with significant internal and external resource requirements.
Reputation management
Financial institutions spend billions on marketing and communication strategies to influence how they are perceived by customers, shareholders, competitors and key decision-makers. Yet, the reputational damage of a fine or sanction for non-compliance should not be underestimated. Managing negative press and increased supervision from the regulator comes at a hefty price. The risks to personal reputations are also significant; as well as losing their jobs, or potential freedom, executives can face relentless public scrutiny fuelled by a global, 24 hour media.
Future-proofing compliance programmes
Firms need to implement an effective FCC framework and evidence a robust ‘risk-based approach’ in order to mitigate financial crime risks effectively and avoid regulatory censure. All too often tactical fixes are implemented in response to regulatory pressure or challenges with implementing strategic solutions group-wide. While the fix or solution might be ‘fit for purpose’ today, a key consideration is whether it will support evolving regulatory requirements and the future growth of the business and emerging risks associated with new products or expansion into new territories. Financial institutions need smarter, cost-effective and scalable solutions to more effectively manage financial crime risk and reduce their exposure. Plenitude’s RegTech products such as Compass and RegSight, allow financial institutions to stay on top of their obligations and effectively plan for future changes to laws, regulations and guidance.
How Plenitude can help
Plenitude’s primary focus is on firmly addressing the legal, regulatory, reputational and social imperative for financial institutions to take diligent and rigorous steps to mitigate financial crime risks. We have extensive experience of assisting our clients to proactively assess the effectiveness of their existing FCC framework and implementing the required enhancements, to mitigate the risks highlighted above. We also have supported multiple financial institutions (of all sizes and across multiple sectors) post regulatory review to advise on the response plan, and support the successful implementation of the required enhancements as part of a remediation or transformation programme.