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It is time to stop wasting money on a failed and broken approach to defeating financial crime

A Future of Finance Webinar with financial service professionals, regulators and policy makers

Thursday February 24 at 2pm UK time

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The costs of financial crime are staggeringly high. The financial crime compliance officers that responded to a LexisNexis Risk Solutions survey of financial institutions in 26 markets around the world said they spent US$213.9 billion on compliance with financial crime regulations in 2020. If the main finding of a Refinitiv survey of 19 markets in 2018 still holds, and firms are spending 3.1 per cent of annual turnover on Know Your Client (KYC), Anti Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening measures, the expenditure is much higher than that figure suggests: US$1.28 trillion, in fact. Despite such vast expenditures, compliance breaches do occur, and regulatory fines ensue. According to the Kroll Enforcement Survey, between 2016 and the first half of 2021, financial institutions paid 338 regulatory fines for money laundering, sanctions breaches and bribery that totalled almost US$26 billion. These fines can be surprisingly chunky. HSBC paid US$1.92 billion in 2013 and ING US$900 million in 2018. Then there is the cost of the financial crime itself. This is much harder to estimate, but the Refinitiv survey put it at 3.5 per cent of the turnover of its respondents, or US$1.45 trillion. And this is the true absurdity: the cost of financial crime compliance (US$1.28 trillion) is now almost as expensive as financial crime itself (US$1.45 trillion). That is the reductio ad absurdum of half a century of regulatory pressure on money launderers, terrorists and other financial criminals. Since the United States passed the Bank Secrecy Act in 1970 to discourage money laundering through secret bank accounts, the financial services industry has assumed a steadily mounting burden of compliance obligations. The PATRIOT Act of 2021 added CFT to the AML requirements of the 1970 Act – and, fatefully, for the first time obliged financial institutions to implement a Customer Identification Program (CIP) to verify the identity of individuals that wish to conduct financial transactions with them. These originally American measures have over the last decade become universal. They are now embodied in the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, first published by the Financial Action Task Force (FATF) in 2012 and updated regularly ever since. More than 200 jurisdictions endorse them now. The European Union (EU) is on the sixth iteration of its Anti Money Laundering Directive (AMLD VI). Yet the chief characteristic of all these legislative and regulatory measures is that they do not work. Financial crime continues to increase. Mounting quantities of people and technology may have slowed its rate of increase but they have manifestly failed to solve the problem. Indeed, the growing volume of e-commerce, crypto-currency and digital assets business, spurred on by the Pandemic, is once more increasing the rate of increase of financial crime. Meanwhile, compliance is not only despised by the revenue generators. It has lost sight completely of its original objective of reducing crime and become an end in itself: a meaningless set of routines designed to avoid fines and reputational damage for non-compliance, by gold-plating processes, over-reporting data and tolerating embarrassingly high proportions of false positives. In short, all that 50 years of increasingly onerous legislative and regulatory measures have achieved is increased costs for financial institutions. These are, ultimately, borne by consumers, savers, pensioners and companies. They are pure transaction costs, which undermine the rate of economic growth, without even the redeeming feature of reducing the rate of crime. It is time for an entirely new approach. That approach has to switch the onus for detecting financial crime from financial institutions to consumers of financial services – both retail and corporate. It is hopeless to expect to defeat financial crime by requiring financial institutions to sift billions of financial transactions for signs of suspicious behaviour, and comb through dozens of incomplete, out-of-date and contradictory public and private databases in search of clues to the identity of recipients and initiators, before authorising transactions or on-boarding clients or clients of clients. Instead, recipients and initiators of every transaction must prove that they are who they say they are. The answer, in other words, is to oblige users of financial services to use data and technology to prove their identity, rather than oblige financial institutions to continue to invest in data and technology to prop up a failed and broken process. After all, according to LexisNexis, customer identification accounts for two thirds of the costs of financial crime compliance. By its own measure of the costs of financial crime compliance, digital identity is a US$150 billion opportunity. If Refinitiv is to be believed, it is an US$850 billion opportunity. Which is why this Future of Finance webinar will investigate one of the great and enduring business puzzles of our time: why the financial services industry is not yet sold on digital identity as the solution to the growing burden of taxes imposed on its business by both financial criminals and financial regulators.

Among the topics to be discussed at this webinar are:

  1. What are the costs of (a) financial crime compliance (b) financial crime non-compliance and (c) financial crime?
  2. What are the causes of the cost of financial crime compliance?
  3. How large a proportion of the costs of financial crime compliance are attributable to customer due diligence?
  4. How large a proportion of the costs of financial crime compliance are attributable to the volume and complexity of financial crime regulations?
  5. To what extent has financial crime compliance become merely a corporate insurance policy?
  6. Are the goals of regulators (laws, regulations and fines) and regulated (profit seeking, cost controlling) fundamentally at odds in the field of financial crime?
  7. To what extent do other regulatory initiatives (Faster Payments, Open Banking, Open Finance, customer confidentiality, e. g. GDPR) make financial crime compliance harder?
  8. To what extent do customer demands (faster transactions, faster on-boarding) make financial crime harder to detect?
  9. Established financial institutions are burdened with legacy systems, legacy processes and siloed customer databases in multiple formats. Can these obstacles be overcome at reasonable cost?
  10. Public databases are often incompatible, incomplete and inaccessible. What responsibility do public authorities have for improving data quality?
  11. What can established financial institutions learn from challenger banks and FinTechs?
  12. Has the use of technology so far (e. g. eIDV, eKYC, biometrics) made a material difference?
  13. Is hiring more people effective?
  14. What improvements have artificial intelligence (AI) and machine learning (ML) delivered?
  15. Are financial services firms too busy complying to innovate?
  16. Should financial services firms be more willing to share data with each other?
  17. Can investing in data, technology and better processes actually cut the cost of financial crime compliance?
  18. Why are financial services firms sceptical of digital identity?
  19. What responsibility do public authorities have for encouraging adoption of digital identities?
  20. Do regulated firms see the links between digital identity and Open Banking, Open Finance and Open Data?

Panellists

Moderated By: Dominic Hobson Co-Founder at Future of Finance

https://www.linkedin.com/in/dominic-hobson-49b8222/

Dominic Hobson has worked for himself for 30 years. He was one of the founders of Asset International, a transatlantic financial publishing, events and survey business, which was sold in 2009.

Since then, Dominic has contributed to the work of two data businesses covering financial markets, run a peer group network for hedge fund managers, and co-founded the Future of Finance, which hosts events on innovation in finance.

As one half of Hobson Cardew, Dominic also provides consultancy services to a number of financial services businesses and market infrastructures.