If you read the headlines, you’d think the UK is starting to prioritise financial crime. In fact, despite anti-money laundering fines globally surging 53% in 2022, the UK bucked this trend, with fines falling to $188.2m from $436.5m the year before. Granted, this is just anti-money laundering, a fraction of the grand total that financial crime adds up to, but despite an increased number of fines issued, the total value fell, thanks to a new focus on individuals over corporations. Now, while many believe this is cutting the evil off at the head, it still doesn’t address the true issue – how systemic wider financial crime is in UK financial services.
Flying under the radar
Financial crime is so problematic that even the Government can't quantify how much it actually costs us per year. What we have is an estimate – to the tune of $2 trillion globally – yet that was calculated before the pandemic. Considering everything that's happened since, many of us would bet on the fact that number has grown.
The issue remains that it largely flies under the radar for many. Its underground nature means it rarely comes into focus, and for too long a blind eye has been turned, prioritising more consumer-facing issues, despite financial crime's devastating impacts.
The Intelligence and Security Select Committee in its July 2020 report on Russia1 noted that London is considered a 'laundromat' for corrupt money. Considering London's status as a highly regulated and best-in-class example, how is it that it's become a hotspot for criminals to move their money and coerce others out of theirs?
A legacy problem
Sadly, we’re not helping ourselves. The UK’s financial setup is haunted and hampered by legacy technology knee-capping any meaningful transformation. The result? Manual checks and balances being relied upon to spot needles in haystacks.
Most criminals are skilled in leaving behind as few traces as possible, meaning identifying any financial crime – be this fraud, money laundering or corruption is difficult. Therefore, spreadsheets holding watch lists are labour intensive and rely on the human eye to spot anomalies. Terrorism is a prime example. Bad actors are now more sophisticated – funding lesser amounts to commit smaller acts instead of the big attacks we conjure to mind more readily. Small incomings and outgoings are normal for the average bank account, so are hard to spot when all appears normal. The experts looking at this are skilled and do a fantastic job, but in this day and age we should be looking to automation as much as possible, given computers are more skilled in this area, and can do it much quicker.
The C-Suite dilemma
What worries me is that C-Suites don’t seem to consider technology upgrades as a priority – productivity and geopolitical responses are more pressing according to KPMG’s 2022 Banking CEO Outlook2. They seem to take the view that the issue that costs our economy billions of pounds each year is something that can be fixed at a later date. While issues like productivity and geopolitical responses are of course imperative, they're also short-termist in their outlook. Digital transformation or better technological output could instantly boost the former, for example, yet it's perceived as an expensive, radical overhaul.
The cost of not investing
There’s no denying transformation costs are very expensive, and take time to bed in. However, firms can only battle on with equipment which doesn’t communicate for so long. Eventually, the bullet must be bitten, and 2023 makes sense as the year it happens. We're entering into a difficult financial period – yes, the balance sheet hit will be extensive, but then it can start paying for itself when the economy starts to grow again. When there’s a raft of mortgage applications, isn’t it better to have a functioning API system that can speed things up? Or be able to risk-profile customers on a more consistent basis other than when they’re first onboarded? For a start, this would help with growing customer value by improving personalisation, but it could also start to spot anomalies sooner, flagging up potential concerns and perhaps actioning the issue before it goes any further. A single customer view could be possible, with incomings and outgoings analysed and the manual work removed.
Humans can’t catch everything, and just by adding in this extra layer of scrutiny, the UK might be able to start turning the tide against financial crime.
Take your marks!
May 2021’s Dear CEO letter from the FCA3 should have sounded the starting gun on this issue. It outlined a number of areas retail banks are falling short, despite observing good practice and effective control frameworks. The FCA is trying to change the situation – while there is a general consensus it won’t be stopped instantly and its approach of looking favourably on those who admit to any issues and taking more severe action against those who try to cover it is working to a degree. However, carrots and sticks only go so far.
Human skill and machine efficiency for the win
Firms need to start spending more on technology. This is the only way to solve the issue. People costs continue to rise, yet they could do a much better job if they were helped by the technology stacks they rely on. Phasing in more automation means humans can be relieved of manual checks and go on to more strategic work – consulting when potential cases have been identified, for example. Machines work at speed and with no breaks, allowing a more effective approach to the issue, and they don’t leave businesses, removing experience and knowledge from the business each time.
Rising to the challenge
There’s no denying the next year or two are going to be very difficult. Balance sheets are under pressure due to rising costs and continued inflation. Of course, this means transformation projects are hard to justify. However, it needs to be done. The question of how long firms limp on for with legacy systems is up to them, but for every year wasted their challenger bank peers move further ahead, gaining market share and customers with personalised portfolios.
The problem will remain until it’s tackled properly. Be this legacy systems preventing efficiency, or financial crime eating away at profits. Yes, financial institutions have had a tough 12 months, but that doesn’t mean problems that should be dealt with can be put back in the cupboard for another 12 months, when the problem is even worse.