Category Fraud/Crime

Financial crime is of increasing concern to most financial services institutions: PwC Global Head of Financial Crime

21 July 2015 PwC

Financial crime is growing and not reducing. This is despite the well intentioned focus by regulators and financial institutions alike. “The burden on regulated institutions is growing and the need to improve the effectiveness and cost efficiency of prevention and detection systems within them continues to be a major effort,” says David Grace, Global Financial Crime Leader for PwC.

Grace was speaking at a financial crime breakfast conference held in Johannesburg recently at which he shared insights on global developments in financial crime with some of South Africa’s leading financial services institutions, and how PwC is responding to them globally and regionally.

Financial crime can have a long lasting effect on a company’s brand and seriously damage its reputation. Grace points to examples where the UK and US regulators have sanctioned major banks and financial institutions that exceed billions of dollars for breaching policies and legislation.

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 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.

Globally, financial institutions are also facing a severe financial crime expertise talent shortage. There are not enough skilled people to detect financial crime. Furthermore, organisations do not have sufficiently effective technological solutions and systems required to uncover improper and unlawful activity. The unintended consequences of financial crime are directly impacting the bottom line for many companies. The G20 is trying to address some of these issues and other challenges facing financial services institutions.

“New rules and stringent enforcement of existing legislation and regulations are also assisting in protecting customers and reducing the impact of financial crime. However, good intentions can also have negative and unintended consequences,” says Andrew Clark, EMEA Regional Financial Crime Leader for PwC.

The typical response to increased regulation by financial institutions has been to de-risk. “Rather than trying to manage risks more effectively, organisations are reducing their risk appetite. As a result, firms are moving out of some markets which are seen to be more riskier than others and are terminating some business relationships in an attempt to reduce their exposure to regulatory censure,” he explains.

Clark says this has had an effect on certain groups such as charities and other non-government organisations struggling to receive funds that they require in order to provide aid to those less fortunate.

The effect is also spilling over to firms that do business with banks, such as money service businesses, as banks impose bans on doing business with them as a result of the increased risk. Furthermore, emerging markets are increasingly being cut off from the global correspondent banking network.

He says that significant improvement is required in this area. Financial services organisations must reduce the risk of financial crime in an effective and proper manner. They must get to know their customers and manage the risks.

In addition, systems need to 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 services organisations run the risk of letting them stray into a state of unintentional non-compliance. Allowing this to happen can pose a big risk, as regulators impose hefty penalties and orders on banks. This is a concern for both banks and their auditors.

The banking system is not the only way in which money laundering and other illicit activities can take place across borders. Trade-based money laundering - the use of international trade to move value across borders in the form of goods or commodities to disguise the origins of the criminal proceeds - is commonly used by money launderers to move billions in illicit funds across borders. However, detecting trade-based money laundering can pose a significant challenge for law enforcement officials. But if big data analytics are used correctly they can be an effective tool to detect trade-based money laundering and other forms of illegal financial activity, says Vickas Agarwal, a PwC Leader in the Advanced Risk & Compliance Analytics practice. “Financial institutions can develop a single view of a customer’s risk by using big data technology rather than having separate databases in different lines of businesses spread across different jurisdictions.”

PwC has been working with banks and other financial services organisations checking on whether their programmes, systems and processes are working effectively.

Roy Melnick, who leads PwC South Africa’s Anti-Money Laundering and Counter-Terrorist Financing division, says South African accountable institutions need to adopt a risk-based approach to manage money laundering and terrorist financing risks. This comes in the face of proposed amendments to South Africa’s anti-money laundering law – the Financial Intelligence Centre Act (FICA). “The new laws will not only strengthen South Africa’s fight against money laundering and terrorist financing, but also go a long way to ensuring that South Africa’s legal framework aligns itself with global anti-money laundering and counter-terrorist financing standards.”

Current measures employed by accountable institutions to identify and verify their customers will need to be revisited and potentially enhanced. This will almost certainly lead to changes to existing measures employed by institutions such as the manner in which high risk clients are managed; more onerous beneficial owner requirements; and the manner in which clients such as politically exposed persons are identified, verified and monitored.

Organisations are faced with an increasingly challenging anti-money laundering and counter-terrorist financing regulatory environment. Non-compliance with the laws can result in reputational damage as well as financial penalties for businesses, concludes Melnick.


Quick Polls


How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?


Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now