Posted: 23rd March 2017

I have spent at least 20 of my 30 years in law enforcement working closely with a wide range of people and organisations in the private sector.

In the past five years, I’ve held posts as the Head of Specialist Investigations and National Terrorist Financial Investigation Unit (NTFIU) at the Counter Terrorism Command and Head of the Metropolitan Fraud Squad.

My experience – particularly over the past three years – is that public and private sectors within the financial crime arena have come to an agreement on a common purpose. Many key players across the operating landscape have worked hard to overcome numerous legal – and, perhaps more importantly, cultural – barriers to form a basis to work together to better understand how criminals and terrorists raise, store, move and use illicit funds.

The current momentum in the mitigation of financial crime is greatly encouraging, however it remains a challenge for the private sector to move with emerging threats and incorporate the rapidly changing regulation that results. Firms’ understanding and strategy must be developed on an ongoing basis if we are to continue to fight effectively against financial crime.

With that in mind, it can be argued that one of the most acute societal threats relating to financial crime is that posed by counter-terrorist financing (CTF).

Most illicit finance methodologies are undertaken by individuals and groups who are driven by greed and self-centric issues. There is routinely hierarchy, structure and patterns to their activities, commonly involving significant amounts of money. This is not always the case when it comes to terrorism, and this poses challenges not only in the recognition of illegal activity but in getting criminal convictions.

So with this in mind, how can firms rise to the challenges of this branch of financial crime?

A different set of challenges

So why would I choose to highlight the particular risks attached to CTF as a microcosm for the private sector’s approach to financial crime?

Obviously, as the former UK law enforcement agency lead, I have a vested interest. But as I have routinely maintained, terrorist financing is different from any other strand of illicit finance.

Terrorist financing may well take place at both organisational and individual levels; but the perpetrators have a different motive which rarely relates to pure personal greed, and the activity is often inextricably linked to ‘normal’ account activity or perhaps low-level fraud or criminal activity.

Due to the low levels of illicit money involved, it is rarely straightforward to analyse financial activity and to spot funds that are used for terrorist financing. The individuals involved in terrorist funding in the UK do not generally possess the capability of those sophisticated criminals involved in fraud and money laundering.

The problem is that when it comes to comparative risk and congruent appetite for such risk, there will be no firm or MLRO who would wish to be associated with any terrorist funding through their organisation, no matter how small. The reality is that fraud, bribery and money laundering are damaging from a reputational perspective, but rarely will anyone be at significant risk of serious harm or death. Terrorist financing comes with a different level of stigma and risk entirely. It is quite a task to transpose the ‘risk-based approach’ over the detection and mitigation of terrorist financing given its innocuous fiscal (yet high societal) impact.

The key difficulty is that even if a firm has great systems, efficient algorithms, predictive analytics and talented staff to make sense of and suggest what constitutes ‘suspicious activity’, it is quite rare to establish the suspicion of terrorist financing per se, without reference to and potentially confirmation from the relevant law enforcement or intelligence agencies.

Ultimately, however, this does not represent the ceiling to the compliance officer’s ability to identify terrorist funding activity. There are an increasing number of options available to the various sectors to learn more about the methodologies, trends and ‘red flags’ routinely seen in terrorist funding cases.

Developing collective understanding

The UK Government supported the inception of the Joint Money Laundering Intelligence Taskforce (JMLIT) in 2015 and continues to encourage public and private sectors to work together at a number of themed, sanctioned forums as good practice.

Last year I delivered presentations to the Financial Action Taskforce (FATF) and the UN and across numerous sectors, marketing the good work of the terrorist financing expert group at JMLIT. I will provide more insight into this in future articles.

Similarly, the British Bankers’ Association (BBA) is finessing its Financial Crime Alerts Service (FCAS) that will assist banks and firms with warnings covering terrorist financing, as well as the other areas of illicit financing. This will enable several government agencies to issue warnings to members and help to safeguard their customers’ accounts, as well as being part of their risk-based assessment and due diligence armoury to assist with reputational decision-making.

Although the challenges inherent in countering terrorist financing remain, I believe this burgeoning collaborative work will eventually bear fruit, and that the need to manage terrorist finance and other financial crime risks will supersede the desire for firms to keep their methodologies under wraps for reasons of commercial competition.

Key Questions for the board

It is clear that there are numerous legislative, regulatory and ethical factors which force financial crime professionals to carefully consider the deployment of their often-scarce resources. Often, resource is deployed to protect the primarily profit-based objectives of the firm. However, the need to ensure a compliant, proportionate and risk-based-approach is increasingly linked to firms’ reputational success – and in a world where consumer trust plays a central role, this contributes to long-term commerciality.

The rules and parameters are constantly changing and there is a real need to be confident that – whilst all bases must be covered – the most significant threats (such as CTF) are prioritised and all staff are aware of their responsibilities in order for the organisation to maintain its reputation.

Whilst this would seem a difficult task with so many competing demands, there are real opportunities afforded by enhanced public-private sector collaboration. To complement this, endorsement must come from the top level of firms. With this in mind, there are some key questions for firms and their boards in this space:

  • What is your firm’s approach and attitude to understanding, accepting, managing and mitigating the various competing financial crime (and other) risks? For example, do senior management have insight into your transaction monitoring processes, and the sort of activity that indicates suspicious activity?
  • Do you understand the nature of these risks and how they manifest themselves?
  • Do you have the appropriate systems and processes in place to proportionately monitor transactions and collect the requisite data and information?
  • Do you have effective analytical systems and, crucially, experts to interpret and ratify the warnings raised by these systems? Reliance on technology (at least currently) must be complemented by the appreciation of context that only human oversight can provide
  • What contingency plans are in place if things don't go as expected?

Translating this to the Compliance Arena

Regardless of whether you are in the public sector or part of a regulated or otherwise private firm, you will be acutely aware that the broad ‘compliance arena’ is likely to be busier than ever.

There is increased personal and corporate risk from a myriad of pre-existing and proposed legal and regulatory requirements; and as we progress at speed toward our UK Mutual Evaluation Report (MER) in 2018, the industry and boards – via the implementation of the Senior Managers and Certification Regime – will be increasingly under the microscope.

Clearly the ability to better understand the ‘threat picture’ works really well for the public sector, as their remit is to target and disrupt those individuals and organised groups that would launder criminal funds or assist terrorists. Here, there is understandably less concern for commerciality.

However, my view is that (despite the extra resource and effort required) the private sector will benefit from being demonstrably more accountable for their approach to the most serious threats.

It is absolutely vital that businesses across the globe understand and share how to mitigate financial crime risk while maintaining their commerciality, and this is true from the detection of large frauds down to the small monetary transfers that fund terrorists. Through close collaboration – the likes of which we are seeing now – I believe the private sector can succeed.

Huntswood has released a report on financial crime risk assessments. Based on research with a cross section of firms, the report offers guidance, outlines good practice and highlights practical steps that firms can take to embed a proportionate, pragmatic and dynamic approach.

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