Financial Crime in 2017 - a milestone year for challenge and change

Posted: 20th December 2017

At the beginning of 2017, we asked a number of Non-Executive Directors and Company Secretaries to tell us what was high up on their agenda for the year. The area that topped the poll was financial crime risk, with nearly 70% of respondents citing this as their main concern. It was not surprising to industry spectators like myself, because 2017 was anticipated to be a year of significant change. Firms were likely to face challenges on a scale that they have not seen for the last decade.

The amount of changes that occurred in 2017 has been constant throughout the year with changes to regulation, legislation and the emergence of new trends. These changes, which have acutely impacted the financial crime landscape, are likely to have a significant impact on firms for many years to come. Here, we walk through the past 12 months and take a look at some of the regulatory highlights that will impact firms in years to come.
 

SPRING / Summer 2017

• January: The Serious Fraud Office (SFO) continued their strong stance on anti-corruption, with significant penalties issued – including Rolls Royce, which paid a £671m settlement for bribery, highlighting the importance of managing intermediaries effectively overseas.

• April: The Policing and Crime Act 2017 came into force, which made changes to sentencing, enforcement and implementation of sanctions violations. The new civil powers introduced monetary penalties up to £1m, or 50% of the estimated value of the funds or resources; both increasing the penalties and lowering the burden of proof. Currently, a new bill is in progress at the House of Lords regarding Sanctions and AML – it will ensure that the UK can impose, update and lift sanctions when we leave the European Union.

• May: CIFAS’s Fraudscape Report stated that identity fraud had reached the highest levels ever recorded, with almost 173,000 cases reported - 88% of which being enabled online, further blurring the line between fraud and cyber risks for firms.

• June: The Wolfsberg Group released their principles around AB&C via their framework guidance. They recommended that an independent body should review a firm’s compliance framework and carry out periodic controls to ensure that their risk assessment is robust to mitigate corruption.

• On 26th June, we saw an overhaul of AML regulations with the Fourth EU Money Laundering Directive, which came into force in the UK with the Money Laundering Regulations 2017. Some fundamental changes were made relating to written risk assessments, customer due diligence, employee screening, training, record keeping and,  policies and procedures.

  Although many firms had prepared well for the changes, some have been slow to react regarding their efforts to get their ‘house in order’ - leaving them more open to risk. They will need to be mindful of the regulator’s future expectations, and the remainder of time they have left to respond to the past year’s developments.   

autumn / winter 2017

• September: The Criminal Finances Act (CFA) came into force on the 30th September, and made the failure to prevent the facilitation of tax evasion a new criminal offence - a much-needed law following the aftermath of the Panama Papers leak of 2016. It will prevent UK firms facilitating tax evasion of both UK and foreign taxes overseas.
  
  Firms that are found to be facilitating the evasion of taxes will have only one defence - by showing that that they have ‘reasonable procedures’ in place to prevent tax evasion. Firms that leverage their existing controls and learn the lessons from the Bribery Act is a smart strategy to stay ahead of the new requirements.
  
  Later that month: Other key changes were applied within the CFA with regards to Unexplained Wealth Orders, which orders PEPs or individuals suspected of serious crime, to explain their source of wealth. This highlights the importance of thoroughly ensuring that sources of wealth are captured effectively when onboarding customers.

• October: The CFA provided new law enforcement tools that will impact firms. There were changes to the Suspicious Activity Report (SAR) regime to allow law enforcement more time to investigate SARs and these new powers were welcomed by the authorities. However, now there is a new challenge of managing the risk of ‘tipping off’ during the extended moratorium period, which is now a maximum of 217 days.

• November: Headlines reported on the Paradise Papers, which leaked confidential documents relating to offshore investments and placed tax evasion and avoidance back at the top of the agenda. The fallout of the leak is likely to gather momentum in the coming year.
  
  Also in November: The Annual Fraud Indicator, a yearly benchmark to assess the impact of fraud, indicated that fraud is costing the UK £190 billion - with the majority (£140 billion) lost in the private sector. Cyber-enabled fraud has accelerated the scale and reach of fraud in general - and sophisticated methods are becoming ever more common.

• December: CIFAS (a fraud prevention service in the UK) highlighted an increase in money mule activity by genuine account holders, laundering the proceeds of crime; younger people being the primary targets for this activity, due to a general lack of financial services knowledge and vulnerable students by being short of cash.  This trend is likely to continue, with rising levels of cybercrime and fraud allowing criminals to ‘cash out’.
  
  Also in December, the UK Anti-Corruption Strategy 2017-2022 is released. As part of the strategy, a new economic crime minister and economic crime centre will be introduced.
  
  The strategy’s purpose is to improve the global business environment and encourage UK companies to open ‘barriers of corruption’. However, there has been no significant update on the offence of corporate liability of economic crime in the report. Despite this, there are certainly changes ahead in the anti-corruption space.

in summary

This year has seen an abundance of new and amended regulation and legislation. The FCA recognises the efforts made by industry, but they have also noticed many areas are still in need of development.  The ongoing ‘price’ of being compliant is estimated to cost the financial sector in the region of £5billion per year. Therefore, firms are looking for new innovative ideas, processes and controls to reduce costs through technology or smarter and effective processes.

Firms should ensure their identification and assessment of financial risks encompass all of the varying aspects, including (but not exclusive to): AML, sanctions, tax evasion, AB&C, fraud, cybercrime and data protection.

They also need to understand the overwhelming loss that is being caused to industry and their customers, but also recognise and react to trends and changes – it’s those firms which will be able to protect themselves robustly, and thrive commercially, next year. One of the main trends to look out for will be that fraud and technology as an enabler. Keeping abreast of these new typologies requires a focused and working knowledge on how technology can be manipulated and abused. 

In a nutshell, financial crime legislation and regulation will continue to overlap and entwine – with the pressure on firms not likely to let up during 2018.

Firms should review their processes and controls and act now to mitigate the risk. At a high level, taking a ‘holistic’ view of the financial crime risk landscape will ultimately lead to the most effective management of risk within firms.