Cost of financial crime to surge above $1.45 trillion in 2019

Companies are ramping up their spending on financial crime risk management as the global cost of inaction is expected surge above $1.45 trillion this year, our survey has found. 

Organisations are investing heavily in automated tools to manage an array of financial crime threats as they struggle to keep up with a changing risk landscape. The financial crime risk spending includes tools to prevent fraud and hacking, through to managing regulatory obligations, such as anti-money laundering and counter terrorism financing (AML/CTF) and sanctions compliance.

Our latest survey found that companies will increase their spending by half this year to detect and prevent financial crime. The top areas of new investment include cloud-based data and technology, followed by artificial intelligence (AI) and machine learning.

In 2018 we formed a global Coalition to Fight Financial Crime together with the World Economic Forum and Europol. The coalition is working with law enforcement agencies, advocacy groups and NGOs to address the risks that financial crime poses to the global financial system.

Our second annual financial crime report found that organisations are also investing in partnerships and collaboration, such as the UK's Joint Money Laundering Taskforce, Hong Kong's FMLIT and Australia's Fintel Alliance. More than eight in 10 respondents said there was some sort of existing partnership or taskforce in their country to combat financial crime. A total of 86% believe the benefits of sharing information within these partnerships outweigh any possible risks, such as the threat of confidential data leakage. 

The report, entitled "Innovation and the fight against financial crime", found that 72% of organisations have been victims of financial crime over the past 12 months. Some of the main vulnerabilities include poor cyber security, "sleeper agents" and insiders, failures when onboarding new clients and social engineering attacks. 

Risk matrix 

In our 2018 report, we found that $1.45 trillion of aggregate turnover was lost annually as a result of financial crime. This year's report found that the cost had increased over the past 12 months. 

There is also a high level of under-reporting in official figures. Only 62% of the 3,138 compliance managers Refinitiv surveyed across 24 countries claimed that all financial crimes were reported internally; a similar number said financial crimes were not always reported to the relevant external agency, such as law enforcement or regulators. 

Over the next year, companies are expected to ramp up their spending on risk management systems and controls. The 3,000-plus companies polled said they would spend, on average, 51% more to mitigate financial crime risks in 2019.

According to the report, an overwhelming majority of respondents (97%) believe that technology can significantly help with financial crime prevention. Cloud-based data and technology was the top choice, followed by AI and machine learning tools. 

Phil Cotter, managing director of risk at Refinitiv, said the results showed that financial crime risk was a priority for global companies. He said a tougher enforcement landscape was adding to the threat landscape.

"We will only win by harnessing the combined power of smarter machines and smarter humans," Cotter said. "Significant advancements in technology, facilitated by innovations such as AI, ML and cloud computing, are already underway."

Cotter said technological leaps in the area of AI and machine learning were helping organisations to identify previously hidden patterns and networks of financial crime activity.

Changing landscape 

The International Organisation of Securities Commissions (IOSCO) summit in Sydney earlier this month identified technology and financial crime compliance as two of the greatest challenges facing the financial sector. Financial crime and the threat of cyber attacks are the primary operational risks that keep compliance practitioners and regulators awake at night, the conference heard. 

At the same time, organisations that embrace technological disruption stand to benefit from new market opportunities and lower regulatory compliance costs.

The move away from face-to-face service delivery is forcing banks to think differently about customer identity and anti-money laundering (AML) compliance. At the same time, digital service delivery is opening new ways to identify and verify customers, such as through biometrics or device fingerprinting.

"Like all financial institutions we're experiencing the departure from face-to-face service models to one where the client happily self-services or interacts digitally with the brand," said Mary Reemst, managing director at Macquarie Bank.

Cathie Armour, commissioner at the Australian Securities and Investments Commission (ASIC), said in this environment regulators were having to take a more holistic view of their regulatory perimeter. AML/CTF compliance, for instance, was increasingly straying into the remit of prudential and conduct regulators as part of the focus on operational and conduct risk, she said.

Regional priority 

Earlier this month our ASEAN Regulatory Summit in Singapore heard that the risk environment across the South-East Asian region is changing dramatically. This is being driven by changes in technology, economic shifts, geopolitical trends, regulatory reform and financial crime threats.

Financial services firms need to be more adaptable and diligent than ever before to prosper in this challenging environment, the summit heard.

Mr. Nurhaida, vice-chairman of the Financial Services Authority of Indonesia (OJK), said fintech and regtech developments were being actively encouraged as one way of managing financial crime risks. This is helping to increase financial inclusion and reduce the cash economy, which is highly prone to exploitation.

Nurhaida said financial services firms were trying to find innovative solutions to speed up and reduce the cost of financial crime compliance. Organizations that could manage these risks would stand a good chance of exporting their services into other markets, he said.

"I think this is the type of evolution we will see in the market," he said. "Once a fintech is successful in one market it will be easier for them to enter other markets in ASEAN."

"Four years ago, fintech was at the early stage of development. The formal financial institutions could not deliver financial services to the 'unbanked' people and small businesses. Then fintechs came and achieved easy access and fast services through short-cutting the intermediaries process.

Tech-based financial services providers are able to respond more quickly to changing market dynamics, the conference heard.

Published 30-May-2019 by NewsRoom and Nathan Lynch, Regulatory Intelligence