Financial crimes & compliance

AML perspective for banks

MAB Siddique   | Published: March 02, 2019 21:21:30 | Updated: March 06, 2019 21:29:50

Financial crimes, which cover a wide range of criminal offences, have increasingly become one of the greatest challenges to banks/financial institutions (FIs) and to governments across the world. These have become substantial threats to the economic stability and sustainable development of countries even.

The concern arises from a variety of issues that are closely related with different contexts. These crimes are often committed through the use of latest technologies that can cause major impacts on international banking and finance. Impacts can include not just monetary losses, but also reputation, brand, culture, relationships and regulatory censure.

NATURE, TYPES & SCOPE OF FINANCIAL CRIMES: Fraud and financial crimes are forms of theft. They tend to involve money or property that are gained illegally, and used in a deceptive or illegal manner to gain benefits from the proceeds. In today's complex economy, financial crimes can take many forms including money laundering, sanctions breaches, fraud, tax evasion, terrorist financing, bribery and corruption.

Financial crimes also involve electronic fraud, cheque fraud, credit card fraud, mortgage fraud, medical fraud, corporate fraud (front company), securities fraud (including insider trading), bank fraud, insurance fraud, market manipulation, payment (point of sale) fraud and health care fraud. Other financial crimes include theft, scams or confidence tricks, tax evasion, bribery, seduction, embezzlement, identity theft, money laundering, and forgery and counterfeiting, including the production of counterfeit money, consumer goods etc. Crimes can also involve other criminal acts, such as computer and network hacking, abuse of senior citizens, burglary, armed robbery, and even violent crimes such as robbery or murder. Financial crimes may be carried out by individuals, corporations, or by organised crime groups. Victims can include individuals, corporations, governments, and entire economies.

At the moment, International Criminal Police Organization (INTERPOL) focuses on the following financial crimes:  Payment cards fraud; Money laundering; Counterfeit currency and security documents and Social engineering fraud.

FINANCIAL CRIMINALS: WHO THEY ARE AND HOW THEY DO IT? Governments and INTERPOL believe that the following groups of people are committing various financial crimes across the world:

  • Organised criminals, including terrorist groups, are perpetrating large-scale frauds to fund their operations.
  • Corrupt heads of state/influential or politically exposed persons are misusing their position and powers to loot the coffers of their countries.
  • Business leaders or senior executives of financial institutions manipulate or misreport financial positions or data in order to misrepresent a company's true financial position.
  • Employees directly or indirectly steal company funds and other assets.
  • From outside the company, fraud can be perpetrated by a customer or by a person with no connection to the organisation.
  • The financial criminals are colluding with an employee (insider criminals) to commit the crimes.
  • Individual criminals with experience in past financial crimes.

WHY FINANCIAL CRIMES ARE A MATTER OF CONCERN TO THE BANKING SYSTEM? Banks, as financial intermediaries, have to be on the alert about money laundering and counter-terrorist financing regulatory requirements. Non-compliance with the prevalent laws can result in various risks including reputational, legal, operational & concentration risk. Any one of these can have a long-lasting effect on a bank's brand and seriously damage its image. In the current technological era, the number and methods of financial crimes are increasing thus increasing the concern for most financial service institutions. In countries like the United Kingdom (UK) and USA, regulators have placed sanctions on major banks and financial institutions for breaching policies and legislation. Furthermore, emerging markets are increasingly being cut off from the global correspondent banking network.

A recent example is Paris-based BNP Paribas, which is facing five year probation for violating US sanctions, resulting in a financial penalty of almost $9.0 billion. This is not the first time a financial institution has been penalised for violating US economic sanctions. However, the penalty is the largest ever imposed in a settlement with regulators.

HOW CAN A BANK PREVENT FINANCIAL CRIMES? Globally, financial institutions especially banks are facing a severe shortage in the number of professionals who are experts in detecting, handling and preventing financial crimes. There are not enough skilled people to detect financial crimes. Furthermore, banks/FIs do not have effective technological solutions and systems required to uncover improper and unlawful activities. The unintended consequences of financial crimes are directly impacting the bottom line for many banks/FIs.

Banks need to reduce the risk of financial crimes through effective and proper due diligence processes. They must know their customers in order to manage the risks involved.

In addition, the policy, procedures and control systems can be updated as money launderers continuously change their tactics to launder funds. Unless the anti-money laundering (AML) systems are regularly updated, banks and other financial institutions run the risk of straying towards a state of unintentional non-compliance. Allowing this to happen can pose heavier risk, as regulators impose hefty penalties and orders on banks.

Banks/FIs can develop customer's risk profile with the help of automated systems by using latest technology. These can be checked regularly and reviewed to make sure if the programmes, systems and processes are working effectively or not. Each activity and transaction can be checked by automated system and process suspicious transaction report (STR) with the central compliance unit. Under a risk-based approach, 'red flags' will be raised as soon as high risk transactions are detected. More precisely, bank-specific risk assessment needs to be given more priority. Qualitative improvements in areas such as client database, transaction monitoring systems, and the use of artificial intelligence (AI) in the banking system are important for enhancing the quality of these alerts about financial crimes before they occur. A culture of compliance must be set from the top down in order to safeguard banks and financial institutions from financial crimes.

MAB Siddique is a certified anti-money laundering specialist & the Head of off-shore banking unit of IBBL, Agrabad corporate branch.






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