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.
Financial crime has not been high enough on the ESG agenda. It’s in the mix now, but still not a priority
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.”
