Aside from a global pandemic, 2020 was a year in which many big-name, reputable financial institutions ran into regulatory trouble. Goldman Sachs (USA, Malaysia) reportedly paid billions to regulatory authorities for bribery and fraud failings, Westpac Bank (Australia) paid $900 million to settle with the Australian financial crime watchdog AUSTRAC over AML violations, SEB (Sweden) paid $107 million to its regulator for lax AML compliance, Commerzbank was fined £37.8 million by the Financial Conduct Authority (FCA) for AML issues, and the list goes on! More recently, in March of this year, the FCA brought criminal proceedings against the state-owned lender NatWest for allegedly failing to prevent money laundering by improperly scrutinising transactions linked to corporate customer accounts in the UK.
You would be forgiven for wondering how this is possible and how, despite all the rules and regulations, financial crime has become one of the world's most profitable industries, generating $2.1 trillion per year. LexisNexis Risk Solutions reported that the projected total cost of financial crime compliance in the APAC, EMEA, LATAM, US, and Canadian markets amounts to $180.9 billion annually. While several factors contribute to these costs, the more notable ones are increasingly complex regulations, data privacy limitations, and technology and labour costs.
In addition to the money spent to fight financial crimes, the report found that “Compliance teams are stressed to a degree where managers worry about retaining skilled professionals”. There is an increasing number of personal liability considerations for compliance professionals, including criminal liabilities for those in certain positions such as a firm's money laundering reporting officer. Retention of skilled compliance professionals, therefore, is also an issue faced by many firms.
Many have considered whether the problem lies in the international systems and controls governing financial crime compliance and whether these measures are effective. Is it possible for an organisation to achieve complete financial crime compliance?
On one side of the fight against financial crime, you have governments, intergovernmental organisations, international organisations, law enforcement organisations, and other national and international policymakers. On the other side, you have private businesses employing an increasingly scarce pool of compliance and finance professionals. The collective responsibility of all of these groups or individuals is to ensure that financial crime is identified, prevented, reported, investigated, and prosecuted. In this system, of course, corruption may exist along with bad actors who deliberately facilitate or participate in financial crime. However, the majority within the ‘system' are quite legitimately trying to abide by and comply with the rules.
Big-name firms and international financial institutions such as those mentioned above may survive investigation for alleged regulatory failings and breaches. But most medium and small firms will not. What chance, therefore, does this leave the “little guy”? These firms read such headlines with trepidation and fear, not to mention those new to regulation and compliance, such as estate agents, high-value dealers, and art dealers, who do not have the budget or organic skills and experience to address the expectations. How are they to achieve compliance?
Financial penalties aside, the reputational impact of an allegation of financial crime failings would likely bring a small business to its knees.
Given the increasing costs, complexity, liability and scarcity of compliance professionals, how does a small or medium-size firm achieve compliance? The “solutions marketplace” is full of automated solutions, platforms, and technology. The rise of RegTech and Fintech has promised a compliant “plugin” solution that will solve and satisfy all compliance requirements and concerns while keeping costs low and customer satisfaction high. However, these promises are often either not met, qualified, or lacking and present a real risk to small, inexperienced businesses that invest heavily in such solutions and subsequently fall short of the mark.
The stakes to small businesses are high because financial crime legislation and expectations are a demanding moving target that is constantly evolving. So, where's the best place to start? Before small and medium-size firms commit to significant spending on “all-inclusive compliance solutions”, they should seek independent expert advice to ensure these are appropriately tailored to combat their business's specific risks and expectations.
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