A new survey of financial institutions by ComplyAdvantage, a leading financial crime and fraud risk detection firm, showed that 100 percent of UK financial compliance professionals are re-evaluating their approach to financial crime risk. For many, this will result in “de-risking” or restricting their client and business relationships to minimise the likelihood of onboarding criminals. While the approach appears effective, it may also make it harder for legitimate consumers and businesses to access financial products like loans.
Proportionate risk management is an essential compliance strategy, but de-risking occurs when firms adopt blanket policies that, in practice, push criminals into less regulated territories. De-risking can also undermine the wider financial system, as it disproportionately affects groups like humanitarian organisations and charities that rely on financial services to support vulnerable people worldwide. The Financial Action Task Force, the global standard-setter for anti-money laundering regulations, has said de-risking “should never be an excuse for a bank to avoid implementing a risk-based approach.”
In addition to the universal plans among financial compliance professionals to re-evaluate their approach to financial risk, the survey also showed that:
- 62 percent of UK compliance teams surveyed said they are preparing for a rise in financial crime.
- 69 percent of UK financial institutions plan to hire more compliance professionals, significantly higher than the global average of 58 percent.
Commenting on the findings, Vatsa Narasimha, CEO at ComplyAdvantage, said: “During the 2007-9 Great Recession, financial institutions reported a significant increase in the level of financial crime. Our survey shows firms – driven by the expectation of an economic downturn – expect it to rise this year too. However, the digitalisation of business and transactions since 2008 – accelerated by the coronavirus pandemic – means the financial crime landscape looks very different today. With new fraud and money laundering tactics emerging all the time, agility and investment in the latest risk detection technologies have never been more critical.”
The survey also showed cybercrime, investment scams, and identity theft are the top offences UK firms are screening for, indicating they are priorities for financial institutions. While most financial crimes will be fuelled by the economic downturn, investment fraud, in particular, often runs counter-cyclically to the economy. As easier methods of accessing finance dry up, the temptation to resort to bogus schemes offering apparently “market-beating” returns increases. In the UK, fraud represents 40 percent of reported crime, but just two percent of police funding is dedicated to combating it.
No end in sight for sanctions on Russia
The survey also showed Russia remains the hotspot UK firms are most concerned about heading into 2023. 54 percent of firms chose the country, with China selected by 42 percent and Afghanistan third with 35 percent.
As the results imply, a stalemate in the Ukraine war is the most likely scenario to emerge, with new sectoral categories of sanctions possible. Western powers are also expected to ramp up the enforcement of existing measures. Overturning sanctions is likely a critical Russian condition in end-state negotiations.
45 percent of UK financial institutions told ComplyAdvantage they changed their business model in response to Russia’s invasion of Ukraine, with 57 percent implementing asset freezes and 54 percent implementing an onboarding shutdown in the country. Just three percent said the invasion had no impact on their business.
Narasimha added, “It’s clear that compliance and sanctions teams realise how significantly the war in Ukraine can – and will – impact their businesses. This will continue in 2023 with further changes to the lists of Russian sanctions designations. But the sanctions landscape is larger than Russia, so firms must prepare for measures that may arise in response to geopolitical events occurring in other countries. As western governments focus on improving private sector implementation and taking enforcement action, a laser focus on sanctions in the year ahead will be critical.”
Extremists being financed through crowdfunding platforms
Attention is also turning to crowdfunding platforms and how they are being used to finance extremist groups. When asked if they had seen a change in attempts to use decentralised finance platforms to finance extremist political groups over the last 12 months, a whopping 91 percent of UK financial institutions reported an increase. For 45 percent of firms, this increase was rated as “significant.”
Andrew Davies, Global Head of Regulatory Affairs at ComplyAdvantage, explains: “It’s clear that many crowdfunding platforms have been caught short by the surging demand for their services. Crowdfunding, in conjunction with cryptocurrencies and social media, increases the risks of terrorist financing by allowing bad actors to utilise the reach of crowdfunding platforms and crypto asset technologies to gain support from followers and receive funds. Crowdfunding platforms should ensure they have appropriate anti-fraud and money laundering solutions. Banks and other providers working with crowdfunding organisations should perform enhanced due diligence before agreeing to a partnership, or they risk being exposed to financial crime risks and the bad publicity that comes with these.”
About the survey
In October 2022, ComplyAdvantage surveyed 800 C-suite and senior compliance decision-makers across the US, Canada, UK, France, Germany, Netherlands, Singapore, Hong Kong, and Australia. 100 respondents were located in the UK.
All respondents currently work in financial services, with 50+ employees and total assets of over $5 billion.
Those who responded to the in-depth survey are represented by the following sectors: financial institutions (e.g., banks), wealth and investment management, capital markets, money service businesses, crypto exchanges, and insurance.
ComplyAdvantage is the financial industry’s leading source of AI-driven financial crime risk data and fraud detection technology. ComplyAdvantage’s mission is to neutralise the risk of money laundering, terrorist financing, corruption, and other financial crime. More than 1000 enterprises in 75 countries rely on ComplyAdvantage to understand the risk of who they’re doing business with through the world’s only global, real-time database of people and companies. The company identifies thousands of risk events daily from millions of structured and unstructured data points.
ComplyAdvantage has four global hubs in London, New York, Singapore, and Cluj-Napoca and is backed by Goldman Sachs, Ontario Teachers, Index Ventures, and Balderton Capital. Learn more at complyadvantage.com.