Financial Crime Regulation and Anti-Financial Crime Strategies
Version: 1.0.1
Financial crime is a huge problem and the blanket term is used to describe any crime relating to financial institutions and markets. The scale of the problem can be seen in Nasdaq’s first Financial Crime Report published in 2024[1].
The Nasdaq 2024 Global Financial Crime Report found that more than $3.1 trillion in illicit funds flowed through the global financial system last year alone. This includes nearly $800 billion in drug trafficking, nearly $350 billion in human trafficking, and more than $11 billion in terrorist financing.
What is Financial Crime?
Well, according to the FCA financial crime is:
(in accordance with section 1H of the Act) any kind of criminal conduct relating to money or to financial services or markets, including any offence involving:
(a) fraud or dishonesty; or (b) misconduct in, or misuse of information relating to, a financial market; or (c) handling the proceeds of crime; or (d) the financing of terrorism; in this definition, “offence” includes an act or omission which would be an offence if it had taken place in the United Kingdom.
Importance of Financial Crime Regulation
Unchecked, financial crime undermines market integrity and confidence. Sentiment is a key driver of confidence - markets, organisations and consumers can suffer greatly from financial crime.
Tackling financial crime requires a collective effort – from us, regulated firms, Government, law enforcement and our regulatory partners[2]. - FCA
Here are some of the biggest fines handed out by the FCA in recent years.
| Date | Company Name | Fine Amount | Regulatory Authority | Country | Financial Crime Type/Reason for Fine |
|---|---|---|---|---|---|
| 17/12/2021 | HSBC Bank plc | £63,946,800 | FCA | UK | Money laundering control failures |
| 13/12/2021 | National Westminster Bank Plc | £264,772,619.95 | Court (following FCA prosecution) | UK | Money laundering |
| 19/10/2021 | Credit Suisse International, Credit Suisse Securities (Europe) Ltd, and Credit Suisse AG | £147,190,200 | FCA | UK | Serious financial crime control failings |
The risks for financial organisations is clear. Not only is there great potential for financial risk and reputational damage but the tragic human impact as a result of drug trafficking, human trafficking and terrorist activities is tragic for individuals caught up these activities and has a wider impact on families and wider society. As we move to a cashless society the importance of putting controls in place becomes evermore important.
Role of Financial Crime Analytics
With global payments transactions in the billions and the amount of money relating to those transactions in the trillions annually the scope of financial crime has also grown. This where the financial crime analytics comes in. Analysing big data to find patterns in relation to regulatory requirements is an important step to implementing systems that can then be automated. Analysts must understand the regulations and the types of financial crime to make sure steps to detect and avoid financial crime are correctly implemented. Further to this, they must contribute to the policies and systems that are implemented. The FCA consider the tackling financial crime as collaborative process, which is correct and to do this you have to have people that understand the types of financial crime, the regulations and quality data to do their jobs effectively. I mention data here because if the data has problems or is incomplete then then the analysts can’t do their job properly. Listed below are the key types of financial crime and the key regulations that govern them.
Key Types of Financial Crime
- Fraud: Deceptive practices to secure unfair or unlawful financial gain, such as credit card fraud or securities fraud.
- Money Laundering: The process of disguising the origins of money obtained from illegal activities.
- Embezzlement: Misappropriation of funds placed in one’s trust or belonging to one’s employer.
- Tax Evasion: Illegally avoiding paying taxes.
- Identity Theft: Stealing personal information to commit fraud.
- Cybercrime: Financial crimes committed online, including hacking and phishing.
- Bribery and Corruption: Offering, giving, receiving, or soliciting something of value to influence actions.
- Insider Trading and Market Abuse: Using confidential information to trade stocks or manipulate markets.
- Forgery and Counterfeiting: Creating fake documents or money.
- Terrorist Financing: Providing financial support to terrorist organizations.
Each is significant in it’s own way and putting controls in place will vary depending on the crime you are targeting. Following the regularoy guidline is a great place to start and having teams to implement, monitor and continuously improve is key to building robust controls to manage the risks.
Key Regulations
Financial Crime Regulation in the UK
- Regulatory Bodies: Financial Conduct Authority (FCA), National Crime Agency (NCA).
- Key Legislation: Proceeds of Crime Act 2002, Money Laundering Regulations 2017.
- Recent Changes: Post-Brexit adjustments, Sanctions and Anti-Money Laundering Act 2018.
Financial Crime Regulation in the US
- Regulatory Bodies: Financial Crimes Enforcement Network (FinCEN), Securities and Exchange Commission (SEC).
- Key Legislation: Bank Secrecy Act, USA PATRIOT Act.
- Recent Changes: Anti-Money Laundering Act of 2020, Corporate Transparency Act.
Financial Crime Regulation in Europe
- Regulatory Bodies: European Banking Authority (EBA), European Central Bank (ECB).
- Key Legislation: 5th Anti-Money Laundering Directive (AMLD5), 6th Anti-Money Laundering Directive (AMLD6).
- Recent Changes: New EU AML package, establishment of EU-wide AML supervisory authority.
How to Develop a Financial Crime Strategy
There are a number of challenges to overcome and having a starategy in place will help to meet those challenges.
The key to a successful strategy is having the the right teams to lead the the project - to implement, monitor and continously evolve strategy, policies and controls. I’ll emphasis again, having the key personnel in place is paramount to the success of any financial crime strategy. This is because the right Financial Crime Analyst will have a combination of skills that include indepth understanding of the following:
Technical and Soft Skills
- Data analysis
- Transaction monitoring
- Understanding financial regulations
With the these skills they(Financial Crime Analysts) can help implement strategy, policy and controls. But to be trully effective they will also need excellent soft skills such as:
- Communication
- problem-solving
- stakeholder management
Bringing the technical and soft skills together to implement a strategy, create policies and collaborate to deliver controls and monitoriing in line with buisness objectives is the foundation of a good strategy.
Once to have the right people then the stratgey to fight Financial Crime can be broken down into three distinct areas.
- Collaboration: Working closely with stakeholders to capture and articulate business requirements.
- Innovation: Utilising advanced analytics and AI to identify and mitigate financial crime.
- Continuous Learning: Staying updated with the latest trends and regulatory changes.
The key here is to understand that this is not simply the role of a data analyst but the role of a finacial crime data analyst. The person(s) must have an interest in this area as this will require continuous learning and continuous adaption to changing regulation and criminal startegies to avoid these controls and regulations.
Summary
It’s not just about implementing strategies to create policies based on regulation and establishing controls. Rather, a longer-term vision of vigilance and adaptation is needed to meet the challenges of evolving regulations and varying international regulatory approaches. This vision must also consider technological advancements to leverage automation and AI, and invest in the teams and individuals who will drive the ongoing efforts to combat financial crime.