Financial crime — the next big thing

Regulation & compliance

2 min read

There is a ‘tectonic shift’ underway in the financial services sector’s approach to fighting financial crime. Not just in the UK, where the FCA have established an AI taskforce for financial crime, or in the EU, where a package currently being approved will trigger the largest overhaul of AML/CFT regulation in European history, or in the US, where $37bn of fines have been imposed on banks since the financial crisis, but globally. Global fines for anti-money laundering breaches have been rising sharply, surging more than 50% last year to almost $5bn — an escalation that has put financial services companies across the world on high alert for future non-compliance.

In the UK, when the FCA fined Santander UK £108m in December 2022, it was the latest sign of the UK regulator taking banks to task over their failure to prevent anti-money laundering breaches. The FCA has previously taken action against three other UK lenders over their lax anti-money laundering procedures - HSBC, Standard Chartered & Natwest.

In the wake of fines, companies usually put more resources into compliance and monitoring, but remediations are often quite poorly enforced and monitored. And for individual firms, resolving AML/KYC legacy problems can be all-consuming. In addition to the fines, regulators expect to see (often costly) remediation plans.

The investor community is also paying attention. Investors’ tolerance of banks’ AML shortcomings is very low; indeed, some ESG-focused investors have said they view errant financial institutions as “uninvestable” – another headache for management.

There is a consensus forming amongst the C-suite that preventing and managing financial crime risk is not just a question of hiring more people – technology, governance and organisational transformation are also critical, and can be powerful tools in helping management reclaim their autonomy under the lens of intense regulatory scrutiny.

What does this mean in practice? And what does it mean for reporting?

In our experience of reviewing hundreds of board packs, we typically saw financial crime reporting relegated to coverage in the second and third lines of defence – but not so anymore. The regulators are expecting a financial crime framework to be front and centre in first line reporting and in the narrative of how the business tells its story. Transparency and accountability need to come through in reporting all the way up to the board.

Conduct risk is another big area linked to financial crime. Done well, you can use your board & management reports to flag conduct risk and financial crime indicators, by spotting inaccuracies and inconsistencies across the reporting lifecycle. Sentiment analysis (with smart AI) around reporting can also spot cultural risk ‘bad apples’ sooner, another early-warning indicator tool against financial crime.

All this means that financial crime has shot to the top of the list of what is on board members’ minds for 2023. It is the buzzword in FS globally at the moment, yet banks are really struggling with how to get on top of it. However, time is running out - as we can see from the scale and pace of the increase in fines, it’s where the lighthouse beam of global regulatory scrutiny is going next.

Does your reporting give you the insights you need to protect your board? If not, Board Intelligence can help:

  • The Financial Crime module of our reporting platform Lucia sets out a series of reporting frameworks - from regular financial crime reports through to risk, conduct, and culture reporting - to give you the breadth and depth of reporting needed to spot risks sooner. Get in touch to request a demo.

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