Is the cost of getting compliance wrong truly becoming an issue today?
Beyond the scandalous headlines as a result of the Pandora Papers, financial firms are now realising non-compliance with financial crime regulations can have material, detrimental impact on their operations if they do not take simple, fundamental steps to improve their compliance processes.
At our recent webinar, The Pandora Papers and the cost of getting compliance wrong, Pawneet Abramowski (Founder & Principal, PARC Solutions LLC), Howard Wimpory (KYC Transformation Director, Encompass) and I discussed the Pandora Papers, and findings from the Financial crime compliance: The cost of getting it wrong whitepaper (produced by our partner, financial crime agency Themis), to understand the implications of non-compliance in today’s increasingly regulatory heavy environment.
We have seen penalties on banks in the past. But is it different this time? In a survey of financial services sector professionals conducted by Themis in 2020, three major concerns were highlighted: direct financial loss (which represented a major concern for 36% of respondents), reputational damage and the associated customer loss (32%), and regulatory fines (15%). What is interesting here is the regulatory fines, while a concern it was not the highest, which suggests a change in attitude today.
The Pandora Papers have been revelatory beyond the names of prominent and wealthy individuals highlighted. Certainly, more to come based on the breadth (14 offshore centres) and depth (11.9 million confidential files and 2.94 terabytes of data). Many of the individuals (typically high net worth) and corporates may have not conducted illegal money laundering activities per the jurisdictions they operate in – but the question of what is right versus what is legal will no doubt continue to be debated.
Despite the best efforts of banks and regulators, we still do not have a strong grip on compliance issues. There is constant evolution (aka turnover) at financial institutions resulting in valuable intrinsic knowledge walking out the door. No surprise then that we see repeat offenders despite the ongoing fines dished out by enforcement agencies.
So, what will drive material change? We are now seeing a ‘change in the script’ of how banks tackle compliance issues today. Environmental, Social and Governance (ESG) issues are currently top of mind. Will this be the additional lever here? It’s no longer just about avoiding fines or writing off fines as a cost of doing business. It’s about being positive on issues that can drive value for society. While ESG issues have not been as prevalent before, we now have an opportunity for material change through compliance. In the past we used to think of financial crime as a ‘victimless’ crime. With ESG and any negative impact on the environment, this is no longer the case.
It’s also important to recognize the detrimental impact of fines on banking. Even in the Pandora Papers, not all individuals and institutions are committing financial crime. Banks that have been called out have remediated their operations and subsequently are exiting these businesses as a result of increased compliance costs. There are also truly legitimate reasons for offshore companies.
So, what are the practical steps that banks can take?
Clear tone at the top
It’s okay (and positive) to escalate. You need to know the truth, no matter how uncomfortable. Middle management can struggle to be heard, primarily because it is not welcome news. Senior managers need to know and act on this information – there needs to be open dialogue along with proposed solutions.
Make management information (MI) available
Especially in relation to cycle time, quality and inventory – to achieve balance between these areas. Focus needs to be on what we are discovering (quality) rather than how many cases we are resolving in x period of time (cycle time).
Examine the three lines of defense model
Risk is owned by the front line, overseen and advised in the second line and internally audited by the third line. There needs to respect and good communication across all three lines. But avoid ‘group think’, this is not helpful in meeting the end goals.
Technology is key
In the past analysts have been too burdened with data gathering. Focus needs to shift to analysis and automation of data gathering. Controls need to be well designed.
Ensure the right information gets to the board
Adding a strategic advisor is helpful, to provide a broader context to compliance issues, while fighting the immediate fires. Providing a mechanism for confidential, strategic conversations to help avoid those repeat penalties. Focus needs to be on meaningful analysis versus fighting the curse of ‘false positives’.
To find out more, watch the full webinar and read the whitepaper.