Financial crime risk management or FCRM refers to the process of protecting an organization’s finances from criminal or fraudulent activity. Managing financial crime risks involves looking for suspicious activity and evaluating and developing the institution’s processes to minimize the risks of financial malfeasance.
This blog covers the main aspects of the prevalence of financial crimes, regulations, ways to manage the risks, and more.
Financial Crimes: The Ever-Evolving Domain
A recent survey conducted by PwC reported a total loss of US$42B, including a loss of reputation and market share, due to financial crimes in 2022.
As criminal activities soar incessantly, here are the prevailing financial crimes institutions need to be aware of:
An activity to deceive an organization for financial gain. For instance, a fraudster may send false invoices to a company, which get unduly paid due to a lack of due diligence or deception.
b) Bribery & corruption
An act where members of an organization harm it for personal financial gain. For instance, an account manager may enter into deals with related parties (like friends or family) even if the partnership is unsuitable for the company.
c) Money laundering
Money laundering reportedly accounts for 2-5% of the global GDP. It is an act of obfuscating actual sources of money generated using illegal activities like drug trafficking, arms dealing, etc. and projecting them as legitimate sources. Criminals may launder money through an organization’s legit cash flow transactions using techniques like layering and smurfing.
Further, financial crimes also include cybercrime, terrorist financing, insider trading, tax evasion, identity theft, and more.
Financial Crime Compliance Landscape
The US has enacted several regulations with specific guidelines to bolster financial crime risk management. The Financial Crimes Enforcement Network (FinCEN), the bureau of the US Department of Treasury, is responsible for administering these regulations and imposing the obligations.
Here is an overview of these regulations constituting the financial crime compliance landscape:
a) The Bank Secrecy Act (BSA)
The Bank Secrecy Act is a federal law in the United States that obligates financial institutions to document and report financial transactions of more than $10,000 to the FinCEN.
As per the BSA, financial institutions need to maintain records and report transactions that exceed the threshold value and appear suspicious. Also, they should implement internal policies and procedures to ensure compliance with the law.
b) The Patriot Act
The Patriot Act, aka USA PATRIOT ACT, was enacted in response to the September 11 terrorist attacks. The Act grants more authority to law enforcement agencies for combating terrorism.
It bestows additional powers to authorities to conduct enhanced surveillance, wiretapping, access bank records and business transactions, share intelligence, and take more actions to curb financial crimes.
c) Know Your Customer (KYC)
Know Your Customer is a standard requirement, which is a part of the US Patriot Act. Its components include Customer Identification Program (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD).
KYC norms demand that financial organizations ascertain the identity of customers with their detailed financial information before transacting business with them. Moreover, KYC also obligates banks to determine the nature and purpose of financial activities undertaken by the customer.
How Does Financial Crime Risk Management Help?
There are several ways FCRM can help institutions take appropriate steps for managing financial crime risks:
a) Meet Compliance
Financial institutions are subject to various laws and regulations that obligate them to implement measures to prevent financial crimes. As enforcement actions are on the rise, FCRM can ensure that an organization complies with these requirements and avoids potential fines and reputational damage.
For example, FCRM tools can help automate repetitive tasks involved in financial reporting. Since financial institutions need to make extensive reports for financial regulators, such tools can help save several working hours.
b) Risk Management
Financial crimes pose significant risks to an organization’s financial health and reputation. By identifying and mitigating these risks, FCRM helps protect the business interests and ward off future crimes.
For example, FCRM tools such as machine-learning-based transaction monitoring programs can help financial institutions detect suspicious transactions with speed and accuracy. Since the detection happens quickly, it can also help preempt a financial crime. Such tools can also detect suspicious transactions more accurately than humans.
c) Foster Trust
FCRM helps build trust with customers, investors, and regulators by demonstrating that an organization is taking appropriate steps to prevent financial crimes. This can improve an organization’s reputation and enhance its ability to attract and retain business.
For example, FCRM tools can help an organization take data-driven decisions and streamline the customer experience.
Best Practices for Financial Crime Risk Management
Here are some of the best practices to strengthen the FCRM program:
a) Implement a risk assessment process: This aspect involves identifying, analyzing, and prioritizing potential financial crime risks faced by the organization.
b) Develop a financial crime risk management policy: This should outline the organization’s approach to managing financial crime risks, including its stance on compliance with laws and regulations.
c) Establish a risk management framework: This should include processes for identifying, analyzing, and responding to financial crime risks and ongoing monitoring and review.
d) Implement controls to mitigate financial crime risks: This may include measures such as customer due diligence, transaction monitoring, and employee screening and training.
How to Conduct a Financial Crime Risk Assessment?
Regular risk assessments are crucial to the well-being of a financial organization. These risk assessments ensure that the systems to prevent financial crimes are working as expected. The three steps involved in financial crime risk assessment include:
a) Identify Risks
Every institution is unique and comes with its unique vulnerabilities. This first step requires them to assess their systems and determine the potential security risks and vulnerabilities. For example, common risks include forgery, embezzlement, and identity theft.
b) Plan to Counter Risks
This step involves creating a plan that can effectively counter all the risk areas. The plan should consider the organization’s unique needs and business context. For example, a financial organization operating multiple branches around the country should consider training customer-facing employees to understand the financial crime symptoms. This step can help reduce the risks.
c) Regularly Test Crime Prevention Systems
Make sure the tools and systems are up-to-date and work according to the design. Technology is constantly evolving, so deploying the best and latest tools is also an essential part of this step.
Orchestrating an Effective FCRM Approach
Financial crime risk management is necessary for any financial institution. Not only because regulations demand it but also because the financial health and reputation of the organization are at stake.
As criminals devise more sophisticated methods and tools, the fight to prevent financial crimes must also utilize the latest tools and approaches to managing financial crime risks.
As a strategic partner, Anaptyss can help financial institutions transform their risk management and compliance capabilities with tailored guidance and domain-centric consulting.
Manager - AML Compliance