War prompts boardrooms to prioritise tackling financial crime

It has tak­en a war to trig­ger it, but anti-finan­cial crime is final­ly mov­ing up the gov­er­nance agen­da for com­pa­nies and investors.

Organ­i­sa­tions must already com­ply with a slew of reg­u­la­tions aim­ing to iden­ti­fy and pre­vent finan­cial crimes such as cor­rup­tion, mon­ey laun­der­ing and fraud. But until recent­ly, anti-finan­cial crime (AFC) was not a strong part of gov­er­nance frame­works, say experts. 

This is despite six of the 36 con­sen­sus mea­sures of gov­er­nance relat­ing direct­ly to finan­cial crime, accord­ing to data firm Clar­i­ty AI. Con­sul­tant Deloitte says com­pa­nies should also see AFC as part of their ESG strat­e­gy because it plays a crit­i­cal role in stop­ping heinous crimes such as human traf­fick­ing and ter­ror­ism.

Tom Keatinge is the found­ing direc­tor of the Cen­tre for Finan­cial Crime and Secu­ri­ty Stud­ies at the Roy­al Unit­ed Ser­vices Insti­tute, the UK’s lead­ing defence and secu­ri­ty think tank. Finan­cial crime, he says, has not typ­i­cal­ly been a focus of com­pa­nies’ envi­ron­men­tal, social and gov­er­nance (ESG) depart­ments.

The inva­sion of Ukraine, how­ev­er, has required them to con­sid­er cor­rup­tion and oth­er finan­cial crime risks more close­ly in busi­ness deal­ings. “The war has gal­vanised the gov­ern­ment and the ESG com­mu­ni­ty to final­ly pri­ori­tise AFC,” says Keatinge.

Arun Chauhan, direc­tor at Tenet Com­pli­ance & Lit­i­ga­tion and com­mit­tee mem­ber on the Fraud Advi­so­ry Pan­el, agrees. “Finan­cial crime has not been high enough on the ESG agen­da,” he says. “It’s in the mix now, but still isn’t a pri­or­i­ty.”

Investors are upping the ante, too. Anneka Rand­hawa, part­ner and co-head of the Lon­don White Col­lar team at White & Case, says: “There is a strong incen­tive to inves­ti­gate finan­cial crime from exist­ing laws. But pres­sure is also now com­ing from the ris­ing inter­est in ESG, with stake­hold­ers increas­ing­ly hold­ing com­pa­nies to account.”

Mean­while, pres­sure on com­pa­nies to fight finan­cial crime proac­tive­ly – whether as part of ESG strat­e­gy or not – has been build­ing. The recent Fin­CEN and Pan­do­ra Papers leaks shone a harsh spot­light on the scale of eco­nom­ic crime in the UK. The Ukraine war and the desire to sanc­tion crim­i­nals who sup­port the Russ­ian state added urgency to respond. This led the gov­ern­ment to fast track its Eco­nom­ic Crime Act 2022, after what many see as years of polit­i­cal foot-drag­ging.

Dur­ing the pan­dem­ic, fraud scan­dals in pub­lic pro­cure­ment and fur­lough pay­ments increased pub­lic aware­ness of finan­cial crime. Mean­while, organ­ised crime is grow­ing and enabled by tech­no­log­i­cal devel­op­ments, accord­ing to a PwC report.

There is a finan­cial incen­tive too. Com­pa­nies world­wide gen­er­al­ly lose 5% of their annu­al rev­enues to fraud, accord­ing to a sur­vey of cer­ti­fied fraud exam­in­ers – but it can be more than 10%. Asso­ci­at­ed rep­u­ta­tion­al dam­age can also dam­age their share prices. Chauhan says even if com­pa­nies can save 1% or 2% by pre­vent­ing fraud, it is worth the invest­ment.

Taking a proactive approach to tackling financial crime

Sarah Gore Lang­ton is chief com­pli­ance offi­cer at finan­cial ser­vices firm IG. She says her com­pa­ny has been increas­ing AFC efforts for the past five years. “We have respond­ed to a grow­ing shift in expec­ta­tion that firms not only meet reg­u­la­to­ry oblig­a­tions but take a proac­tive stance in stop­ping crim­i­nal behav­iour at source.

“We see two focus areas. To ensure AFC con­trols are as holis­tic as pos­si­ble and to use data sci­ence and oth­er tech­nolo­gies for smarter and quick­er analy­sis of sus­pi­cious behav­iour.” An exam­ple of a holis­tic approach would be to con­sid­er the risk of oth­er crimes while assess­ing bribery risk.

Dan Hart­nett, direc­tor, third-par­ty risk intel­li­gence, at tech­nol­o­gy and data com­pa­ny Refini­tiv, says com­pa­nies are also under grow­ing pres­sure to address finan­cial crime risks in sup­pli­ers due to the increased com­plex­i­ty of sup­ply chains. “This neces­si­tates well-designed due dili­gence pro­grammes, and increased trans­paren­cy through risk assess­ment of third par­ties,” he says.

Ways to increase trans­paren­cy include mak­ing it sub­ject to inter­nal audit, and digi­tis­ing and cen­tral­is­ing due dili­gence data to ease access. Keatinge says one prob­lem with inte­grat­ing ESG and AFC activ­i­ty is that, in most finan­cial insti­tu­tions, they are in silos – despite both rely­ing on detailed under­stand­ings of client activ­i­ty. Com­pa­nies could exploit clear syn­er­gies by merg­ing these silos, he says. Box-tick­ing is anoth­er prob­lem.

“For too long AFC has been about com­pli­ance, rather than dis­rupt­ing finan­cial crime,” he says. “This is chang­ing as banks take an intel­li­gence-led response that deliv­ers results for soci­ety, not just reg­u­la­tors.” This requires com­pa­nies to rede­ploy resources, and reg­u­la­tors to sup­port inno­va­tion, which, he says, they are not typ­i­cal­ly keen to do.

“Per­haps reg­u­lat­ed insti­tu­tions should be required to pro­duce an annu­al finan­cial crime state­ment detail­ing activ­i­ties and pro­ce­dures. The Mod­ern Slav­ery State­ment trans­paren­cy require­ment has dri­ven up stan­dards in ESG and allowed ana­lysts to com­pare organ­i­sa­tions’ approach­es. AFC could learn from that,” he says.

Chauhan adds that there is lots of best prac­tice guid­ance freely avail­able from reg­u­la­tors, trade and pro­fes­sion­al asso­ci­a­tions, pro­fes­sion­al firms and oth­er bod­ies. So com­pa­nies have no excuse for poor prac­tice.

Dev Ode­dra, direc­tor of Min­er­va Strat­a­gem Con­sult­ing, says proac­tive human engage­ment is crit­i­cal to boost­ing AFC efforts. Many com­pa­nies focus so much on fol­low­ing reg­u­la­tions, they lose sight of their goal to detect and pre­vent wrong­do­ing. 

“Reg­u­la­tion doesn’t stop finan­cial crime – you do,” he says. “You can know all the laws, but they often don’t stop the crime.”

This year, Trans­paren­cy Inter­na­tion­al said repeat­ed efforts to strength­en cor­po­rate rules have not improved anti-cor­rup­tion scores – many West­ern coun­tries’ rat­ings have fall­en. Mean­while, many banks and sup­port­ing firms help crim­i­nals main­tain illic­it net­works, said the group.

To stop such crimes, you need a deep­er under­stand­ing than that required by reg­u­la­tion, says Ode­dra.

“For exam­ple, the rules tell you to cross-check against sanc­tions lists. But if you read the news care­ful­ly, you know many cur­rent­ly active crim­i­nals are not on any sanc­tions list – or you might spot oth­er details that help iden­ti­fy a sus­pi­cious trans­ac­tion.”