Geopolitical uncertainty, evolving crime are banks’ top headaches

Geopolitical uncertainty and evolving criminal methodologies like cybercrime are the biggest financial crime risks firms will face in the next 12 months, according to LexisNexis Risk Solutions.

The global information solution provider’s newly published report, titled ‘Future Financial Crime Risks 2017’, also finds that legacy technology systems are preventing firms from resourcing an effective response to underlying financial crime risks.

The report is based in part on a survey of nearly 200 senior professionals working in retail banks, investment banks and asset management firms and interviews with senior financial crime professionals working in the UK banking industry. The report found that evolving criminal methodologies are still the biggest perceived future financial crime risk, followed by geopolitical events.

In a similar report published in 2015, 44% of respondents said evolving criminal methodologies were the biggest single emerging financial crime risk. In the 2017 report the same number (44%) of indicated it is the biggest single financial crime risk they currently face. However, this rises to 67% when assessing global investment bankers alone.

This year’s report identifies geopolitical changes as the second biggest future financial crime risk. Financial crime practitioners in retail banks were among the most apprehensive with regards to geopolitical change, with 37% citing it as the biggest single future financial crime risk. Additionally, 34% of investment bankers cite geopolitical events and sanctions as the biggest financial crime risk facing their organisation. However, in 2015 only 10% of professionals saw geopolitical events as the biggest risk to their organisation.

Results were mixed when financial crime professionals were asked how Brexit will impact their ability to fight financial crime; 51% agree it will have both positive and negative impacts on the ability of UK financial institutions to fight financial crime; 30% believe Brexit will have a positive impact; 14% say it will have a negative impact, with the remainder unsure.

Interviews with senior financial crime professionals found most participants citing changes in sanctions arrangements, following the election of Donald Trump, as a worry; even more so than Brexit, while sanctions against Iran and Russia were of particular concern.

“Imposing sanctions has recently been the US tool of choice when responding to an international threat,” said Dean Curtis, UK managing director of LexisNexis Risk Solutions. “Over half of these sanctions have been implemented since 2009 and the Trump administration may potentially continue to utilise sanctions in favour of costly military action.

“Financial institutions have found managing evolving sanctions policies and the introduction of new targeted sanctions tools – such as the sectoral sanction regime – to be a significant challenge, making them understandably concerned about the need to manage and update risk policies, process and controls.”

Financial institutions noted that effectively responding to underlying risks is a significant challenge and 92% of survey respondents have concerns that their organisation’s legacy technology will become a barrier to fighting financial crime over the next two years.

In addition, 87% of professionals cite disparate technology systems that don’t interoperate or process data properly as a significant challenge, while the same number also say their business isn’t able to enhance their technology fast enough to counter evolving criminal methods.

This problem is compounded by evolving regulatory environments, with increased regulations requiring investment in new technologies; 60% of respondents cited this as a root cause of cost increases.

The 2015 edition of the report revealed that one global investment bank was spending £1bn (US$1.28bn) on financial crime compliance alone. The 2017 report reveals that since then, 63% of financial institutions say their compliance costs have increased, whilst just 2% say they have decreased.

“Criminal methodologies are constantly evolving and financial institutions are struggling to keep up with their changing tactics when implementing financial crime defences,” commented Curtis. “For those tasked with combatting financial crime it can feel as if they are fighting 21st century criminals with 20th century tools. Our report shows financial crime professionals do not believe the industry is doing enough to leverage the advantages of technology to fight financial crime.

“Whilst [UK regulator] the Financial Conduct Authority (FCA) is assisting the acceleration and adoption of technology to fight financial crime through its regulatory sandbox, more needs to be done. Practitioners must adopt a more strategic view of technology to enhance operational effectiveness as regulation has rapidly evolved in the last 15 years and simply increasing staff numbers is not a sustainable approach.

“Keeping pace with criminal activity and understanding where technology has advantages over humans, in areas such as machine learning, will determine the future of many industries, none more so than financial crime prevention.”

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