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What is the cost of getting financial crime compliance wrong?

By Dr Henry Balani | Mon 1 November, 2021
the cost of getting it wrong

Non-compliance with anti-financial crime regulations means material impact on more than just the bottom line.

The Financial crime compliance: The cost of getting it wrong whitepaper produced by our partner, financial crime agency Themis, and sponsored by Encompass highlights this one logical, inescapable conclusion.

Financial institutions need to take note here. All too long senior managers have underestimated or downplayed the impact of anti-financial crime regulations on their businesses. A significant survey of financial services sector professionals, conducted by Themis in 2020, highlighted three major concerns: direct financial loss (which represented a major concern for 36% of respondents), reputational damage and the associated customer loss (32%), and regulatory fines (15%).

The impact of non-compliance on banks and financial institutions

In 2020, there were US$2.2 billion of regulatory penalties. With almost US$1 billion in the first half of 2021, we are on track to exceed the 2020 numbers. This is not in itself new news. There have been larger penalties in the past. In 2014, the US Department of Justice fined a European bank US$9 billion for sanctions violations. Indeed, the financial services industry is, unfortunately, used to these penalties as a ‘cost of doing business’ as profits trump other matters.

We are seeing a material negative impact in multiple areas including stock prices, senior management’s reputation and career paths. Financial institutions have even ended up closing as a direct consequence of non-compliance. The findings show that since 2019, across seven banks, average stock prices fell 21% after six months following a regulatory announcement of a probe. The same research also highlighted customer and investor loss from reputational damage as a major concern. At one northern European bank, 28,000 customers left as public confidence dropped following money laundering allegations. Investor loss is also damaging, with one Australian hedge fund closing due to a phishing scam. Back in 2013, the US government forced the closure of Wegelin, Switzerland’s oldest private bank for helping Americans dodge taxes through secret accounts. Other private banks have taken note and have since complied with customer reporting requirements.

The cost to senior management

Senior management ignore anti-financial crime compliance at their peril. In recent years, regulators have adopted a more targeted approach. Senior management can face criminal charges, in addition to personal reputation damage and financial loss.

In the UK, fines levied on individuals responsible for anti-financial crime failures have trebled in recent years. Under the UK Senior Managers and Certification Regime, individual fines can reach up to 40% of their income. Truly a concern, especially if they are unaware of non-compliance in their firms.

In the US, updates to the Bank Secrecy Act in 2019 have seen penalties increase for non-compliance with individual fines of up to US$500,000, ten years in prison, or both. With today’s greater emphasis on Environmental, Social and Governance (ESG) issues, society is less forgiving when non-compliance is viewed through the ESG lens. Especially when criminals commit offences that impact sustainability and other social programs.


Financial crime compliance - The cost of getting it wrong

How to get it right

When it comes to compliance, we need to start with getting the tone at the top right. Leaders need to ensure their teams make the right decisions that conform with both the intent and the requirements of regulation. Setting the tone and following the rules requires active engagement and education.

Implementing an open and transparent culture is also key. Staff should be able to highlight potential issues without fear of reprisal or intimidation. They need to be fairly compensated and motivated to go the extra mile. Anti-financial crime policies, systems and controls need to be clearly understood and enforced.

The proposed strategy for compliance, as described above, looks logical and continues to be implemented amongst financial institutions. Rather than the ‘stick’ of penalties, senior management need to appreciate there are ‘carrots’ to complying. Robust anti-financial crime controls confer a distinct competitive advantage and provide an opportunity for firms to attract a loyal customer and investor base. Regulations work and positively contribute to bank stock valuations – as demonstrated in my research on the impact of the Fourth Anti-Money Laundering Directive (4AMLD) on bank valuations.

A solid case is made for financial crime compliance. Indeed, the cost of getting it wrong is simply too high.

Author: Dr Henry Balani

Dr. Henry Balani is Global Head of Industry and Regulatory Affairs at Encompass. He is a noted industry thought leader and commentator on Regulatory Compliance issues and trends affecting the financial services industry. As a published academic, Dr. Balani also lectures on international business, economics, and regulatory compliance courses globally. Dr. Balani holds a Doctorate in Business Administration from the University of Wisconsin, an M.B.A. from Northern Illinois University in the USA, and a B.S. in Economics from the London School of Economics.

LinkedIn Profile | Dr Henry Balani

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