Building a Future-Proof Solution to Mitigate Financial Crime Risks

Financial crime is on the rise across the UK with a colossal 64% of businesses reporting having experienced fraud, corruption, or other financial crime between 2021 and 2022. Astonishingly, this is up 8% from 2020, and 14% from 2018! But what are the reasons for this escalation in financial crime? And what can be done to stop this upward trend in its tracks?

KYC compliance and remediation have long been a complex and time-consuming process, particularly for financial institutions that operate across multiple jurisdictions. However, mitigating financial crime is becoming increasingly more difficult across the board, especially with changing regulatory policies and the pressure of considerable penalties for regulatory errors.

There are numerous factors contributing to the ever-growing challenges associated with financial crime risks. The increasing sophistication of fraudsters is one of the biggest contributors, as financial criminals adopt new technologies and tactics to remain under the radar. Also, the rate at which technology is evolving means that this issue is not likely to diminish in the foreseeable future.

As such, financial businesses are under much greater scrutiny and are required to be reactive to the evolving landscape, forcing them to employ new solutions to mitigate financial crime risks. At FDM, we are dedicated to helping businesses navigate the new era of KYC and tackle financial crime head-on. We offer a future-proof solution to KYC resourcing issues to ensure businesses have the expertise they need to mitigate financial crime long-term.

Let’s take a closer look at how organisations can mitigate financial crime risks and carry out effective KYC remediation in the current financial crime climate, as well as address some of the most common mistakes to avoid.

What’s in this article?

• How to mitigate financial crime risks
• What are the biggest mistakes organisations make when handling financial crime risks?
• Best practices for KYC remediation in the modern-day
• How the FDM KYC PODs model can help your business meet compliance
• Summary

How to mitigate financial crime risks

Financial crime can have serious and far-reaching consequences for individuals and businesses, resulting in financial losses, reputational damage and loss of trust. On a larger scale, financial crime can even have an impact on wider society and contribute to decreased economic growth. In many cases, financial crime is also linked to other malicious, illegal activity, which can have further harmful consequences. Therefore, understanding how to mitigate financial crime risks is vital for every organisation, particularly in the finance sector.

Here is our top advice on how to migrate financial crime risks:

1. Utilising anti-money laundering (AML) technology
2. Ongoing monitoring to detect unusual transactions
3. Regular monitoring and updates to internal policies
4. Efficient protocol for communicating suspicious activity
5. Carrying out risk assessments and making this readily available

1. Utilising anti-money laundering (AML) technology

AML regulations require financial institutions to verify the identity of customers, monitor their transactions and report suspicious activities. Utilising AML technology can help you comply with AML laws and deal with the growing volume and complexity of financial transactions and savvy fraudsters. There are many AML technology solutions available, from Customer Due Diligence (CDD) and Know Your Customer (KYC) to transaction monitoring and risk scoring.

2. Ongoing monitoring to detect unusual transactions

Monitoring transactions is an important component of financial crime risk management, as it enables you to detect and respond to suspicious activity in a timely manner. Ongoing monitoring acts as an early warning system and gives you time to address vulnerabilities. This allows you to minimise the impact of financial crime and prevent it from escalating further.

3. Regular monitoring and updates to internal policies

The implementation of effective policies and procedures to prevent and detect financial crime is essential. It is critical to have policies that cover all bases, from customer due diligence to reporting suspicious activity. However, it is just as important that these internal policies are assessed and updated on a regular basis, to ensure they are up-to-date with new regulations and organisational changes.

4. Efficient protocol for communicating suspicious activity

There is no use in defining your policies if these are not communicated properly with your employees. In order to have maximum impact, your internal policies must be communicated clearly company-wide. It may even be useful to provide training to ensure everyone understands the protocol and will be able to use it when required.

5. Carrying out risk assessments and making this readily available

Conducting comprehensive risk assessments within your institution enables you to identify potential financial crime risks and vulnerabilities. Risk assessments should consider various factors, such as the types of customers you serve, the countries you operate in and the nature of your business.

What are the biggest mistakes organisations make when handling financial crime risks?

When it comes to handling financial crime risks, there are a number of common mistakes many businesses make. These errors may lead them to receive hefty fines, experience resourcing issues and more. The five biggest mistakes organisations make when handling financial crime include:

1. Avoiding issues when they arise
2. Half resolving individual problems without looking at the wider issues at hand
3. Failing to follow organisational KYC policies
4. Failing to adapt policies to meet changing regulatory changes
5. Lack of training for internal teams

If you’re looking for more in-depth information on how to prevent financial crime in your organisation and the mistakes to avoid, read our full guide to mitigating financial crime risk.

Best practices for KYC remediation in the modern-day

Know Your Customer, more commonly known as KYC, is a process used by financial institutions to verify the identity of their customers and assess the potential risks associated with them.

As financial crime becomes increasingly difficult to manage in the modern-day, following best practices for KYC is ever-more important in order to prevent financial crime, such as money laundering, financing of illegal activity and fraud.

Here are some of the key considerations you should consider when adapting to the changing landscape of financial crime mitigation, and the KYC remediation and crime prevention best practices you should follow:

Collecting the right information

The KYC process typically involves collecting data about customers, such as their name, date of birth, address, and government-issued identification documents. However, for financial institutions, it can be beneficial to collect additional information, such as the customer’s source of funds and business activities, in order to add an extra layer of security. This enhanced due diligence (EDD) process is necessary for customers that pose a higher risk. And remember to revisit your customer details after the KYC remediation process is complete, to ensure that they are up-to-date and you can monitor any changes in risk.

Keeping up to date with recent updates in regulations

Financial crime regulations are updated frequently for many reasons, such as to keep up with changing criminal tactics, emerging technologies and public pressure. As such, it is in every organisation’s best interest to keep up to date with all of these changes to ensure that you remain compliant.

For example, updates to the Anti-Money Laundering Guidelines for Art Market Participants in July 2022 resulted in changes to who is subject to AML regulations in the UK. As a result, businesses that previously had not been affected by these laws, found themselves subject to new regulations and forced to make significant changes to remain compliant, and avoid negative consequences. In the future, there may be new regulations that apply to your organisation and will require you to take action.

Preparing for the impact of increased globalisation

As an increasing number of institutions take their business global, they will experience new challenges in the face of financial crime. This may require a greater focus on cross-border transactions, foreign entities, and the use of offshore accounts and cash havens.

The increase in cross-border transactions makes it easier for criminals to move illicit funds across borders and exploit differences in regulatory frameworks. Similarly, it can lead to more complex financial systems, involving multiple layers of intermediaries and complicated ownership structures. This can make it difficult to trace the source and destination of funds, and to identify the involved parties. Detection and prevention of cross-border financial crime will also require international cooperation between financial regulators, law enforcement agencies and other stakeholders, which can be extremely challenging to coordinate.

Educating your teams on the risks of international crime and setting up global relationships from the beginning will ensure you are better equipped to deal with international financial crime risks, and carry out effective KYC remediation.

Understanding the consequences of geopolitical risks

Geopolitical risks can have a major impact on financial crime in a number of ways, and it is likely to have the largest effect on global institutions. Political instability can contribute to an increase in corruption, namely money laundering and bribery. Similarly, countries experiencing political instability or war may have ineffective or weak regulatory frameworks to operate with relative impunity, which can make it easier for illicit activity to occur. Recently, geopolitical risks have been heightened by events such as Brexit, COVID-19 and the Russo-Ukrainian War.

Keeping pace with the rise of technology

Emerging technologies, such as digital currencies and artificial intelligence, are changing the game for financial institutions and creating more opportunities for financial crime to manifest. Advancements in technology can facilitate criminals in carrying out illegal financial transactions. However, on the flip side, it can also be leveraged by financial institutions to prevent this.

For instance, the rise in technology can lead to increased anonymity through the use of blockchain and digital currencies, which can make it more difficult to understand where funds are coming from and going to. Likewise, artificial intelligence and machine learning can be used to automate illegal transactions and make conducting illegal activity much easier, such as money laundering and fraud. Yet, automation technology can also be used by financial institutions to increase the speed and efficiency of risk detection and response.

It is imperative that regulators stay up to date with new technologies to ensure that financial institutions take the appropriate measures to mitigate the risks associated with them. This could include implementing robust cybersecurity controls, enhancing customer due diligence procedures, or investing in their own technology and advanced data analytics to detect and prevent financial crime.

If financial crime risk were a country, it would have the equivalent gross domestic product of France.

Yves Laffont, Head of Risk, Regulation and Compliance, FDM

How the FDM KYC PODs model can help your business meet compliance

It’s evident that there are many considerations with regard to mitigating financial crime and this will only become more challenging as globalisation and technology continue to advance. In order to keep up, you’ll need a team of experts who know the industry inside and out, and who can provide effective Know Your Customer (KYC) and Anti-Money Laundering (AML) solutions.

When you carry out KYC remediation, you generally have two options: do it yourself or outsource to a managed service. FDM is a strategic talent solutions partner that places expert tech professionals with our clients across sectors, to help meet their changing resource requirements and facilitate growth. Our AML-KYC PODs services are designed to help businesses mitigate financial crime risk and provide a solution to their KYC resourcing issues.

Unlike hiring contractors, we offer an in-between solution, giving financial organisations control over their KYC remediation with the expertise of our consultants. Our teams are agile and adaptive, and will help fix the problem long-term, staying up-to-date with regulatory changes and industry developments – like all those mentioned above.

The FDM AML-KYC PODs offer organisations numerous benefits, including:

• A proactive model to efficiently scale your operations
• Operations under our client’s control
• Agile teams
• Highly-skilled full-time employees who are up-to-date with best practices
• Immersive training programmes prepare our consultants for even the most complex scenarios
• Diverse talent pool for stronger teams

Read more about the benefits of effective strategic workforce planning.

“FDM generated significant benefits… At one point, over 40% of the bank Client Management CIB ITO Function was staffed by FDM”

Basit Riaz, Head of UK Due Diligence at BNP Paribas Client Management CIB ITO