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By Anurag JainThe impact of financial crime goes beyond pure economics as it takes enormous social and humanitarian toll on the lives it touches.
The perpetrators of financial crime are often hidden in customer or third-party networks that are extensive and spanning the globe.
In the vanguard of financial system, are we doing our bit to curb money laundering The answer seems to be, no.
According to a recent study, only 1% of the $2.4 trillion laundered through international financial systems is believed to be confiscated.
According to another study released by Thomson Reuters, the estimated cost of financial crime globally is $1.45 trillion -- 3.5% of the turnover globally.
In India alone, about 53% corporations have been a victim of financial crime in the past one year.
ImplicationsIncreasing financial crime is a worry for governments and businesses alike.
At the societal level, financial crime leads to human cost, resulting in trafficking, prostitution, and child labour in many parts of the world.
The Global Estimates of Modern Slavery, produced by the Walk Free Foundation and International Labour Organisation, estimates that over 40 million people today are in modern slavery.
According to the Walk Free Foundation’s 2016 Global Slavery Index, five countries – India, China, Pakistan, Bangladesh and Uzbekistan – are responsible for nearly 60% of modern slavery globally.
One of the many consequences of financial crime is also terrorist financing, which involves the raising and processing of assets to supply terrorists with resources to pursue their activities.
Terrorists often control funds from a variety of sources around the world and employ increasingly sophisticated techniques to move these funds between jurisdictions.
To manage their finances, they draw on the services of professionals such as bankers, accountants and lawyers, and take advantage of a range of financial services products.
At an organisation level, financial crime impacts brand value, reputation, goodwill, and revenue.
High-profile frauds and money laundering not only trigger massive monetary losses, but often lead to litigation costs due to non-compliance of several regulations.
Apart from financial damage, organisations face irreparable blow to their reputation.
The amount that banks have paid in fines and settlements since 2008 now exceed $321 billion.
In 2016 alone, banks paid $42 bn in fines, up 68% yoy.
In India, according to the RBI, the amount involved in fraud cases has increased substantially to Rs 8,646 crore, from Rs 2,037.81 crore, i.e.
an increase of 324% despite the number of fraud cases declining to 13,293 cases in 2012–13, from 24,791 cases in 2009–10 -- that is a 46% drop.
ActionsTo counter this threat, the Financial Action Task Force, an inter-governmental body, responsible for setting global standards on anti-money laundering (AML) and combating the financing of terrorism (CFT) was formed.
This is an indication of governments taking a proactive step, rather than a reactive approach towards financial crime.
However, there needs to be greater cooperation and coordination between governments, regulators and investigative agencies since the crimes themselves are not limited by geography.
Companies too are increasing investments towards compliance.
However, given the fact that financial crime will tend to grow faster as demand for financial services grows faster than income, they need to be more aggressive and leverage technology in a more efficient manner.
Leveraging technologyFinancial crime is easily one of the biggest challenges faced by corporations globally.
It is multi-faceted, multi-national and very often invisible, making it hard to identify, measure and combat.
Banks, financial services companies and public institutions, therefore, need sophisticated tools and technologies to monitor and track criminals and transactions they undertake.
Advances in technology, especially around big data and analytics, can help connect the dots and anticipate and fight financial crime.
Data, analytics and technology are the financial industry’s greatest weapon against key threats such as asset misappropriation, cyber crime, money laundering, accounting fraud, and bribery and corruption, which add up to crores in losses every year.
Connected data and big data can help speed up processes that will help spot the patterns that are evidence of crime and prevent malicious activity from taking place.
The improvement in big data technology allows organisations to consolidate their data from different systems across different lines of business in a more efficient and cost-effective manner.
This provides the organisations 360-degree view of their customer information.
The integration of risk and compliance will remove duplication and bring data and analytics together into a central and consistent environment.
Financial institutions, including national banks, NBFCs, cooperative banks, MFIs and others, must adopt latest technology to manage and mitigate money laundering or terrorist financing risks.
This includes the use of systems to identify suspicious activity, screen sanctioned entities and politically exposed persons and report transactions associated with malicious activities.
In line with regulatory expectations, financial institutions must gear up for forensic readiness, e- discovery, transaction monitoring and risk assessment.
Advances in technologies can help prevent malicious activities from taking place.
Fintech and regtech (Regulatory technology) have the potential to fight crimetech, but requires international cooperation between sovereigns, specialised agencies, regulators, IT, network operators and financial companies.
To combat financial crime, organisations must take personal responsibility and go beyond just tick in the box approach.
Let’s come together and collaborate with government agencies to take the fight to financial crime offenders and hope to win it.
(Anurag Jain is Head of Risk Business at Thomson Reuters, South Asia.
Views are his own)
