“Too many firms get basics wrong”

Banks and regulators need to work together to fight financial crime, as some institutions are still falling behind on basic measures, according to Tracey McDermott, head of enforcement and financial crime at the UK’s Financial Conduct Authority (FCA) .

Speaking on a panel at SWIFT’s 2014 London Business Forum in April, McDermott pointed out that, despite an apparent increase in headlines, the risk of financial crime was neither a new nor a temporary phenomenon. “The threat evolves over time,” she said.

Nevertheless, financial crime is undoubtedly moving up the agenda at most financial institutions, which must deal with increasingly stringent know-your-customer (KYC) requirements, comply with anti-money laundering rules and keep up with multiple, frequently-updated sanctions lists.

Staying ahead Regulators have higher expectations of banks, which must now demonstrate that systems in place for compliance are actually working. The FCA, for example, regularly conducts detailed reviews of how institutions are tackling financial crime issues.

“Our findings over the past few years have been mixed,” McDermott said. “We do see many examples of good practice, but there are too many examples where firms are getting the basics wrong.”

She said systems and controls policies that are adequate in principle often fall down when applied in practice. Firms are failing to act on flags, for example, by assuming they are incorrect. “We need this to change and we need to get the basics, which includes KYC, right.”

Barbara Patow, head of global banking and markets financial crime compliance at HSBC , said banks needed to be sophisticated in their approach to KYC. “Technology can be used to bring us so far, but there also needs to be human intervention to get to understand it.”

Banks must take a proactive approach, according to Patow, rather than waiting for regulators to impose further regulation to update their systems because the tactics, tools and strategies behind financial crime continued to evolve. “Banks are improving on an ongoing basis. We have to make our own systems and controls agile enough to take into account new standards in regulation.”

While acknowledging that regulators have a role to play in helping institutions meet their obligations, McDermott called on banks to participate in a dialogue rather than be forced out of markets or product lines by rule changes.

“Risks change and often businesses react by simply exiting the market. We don’t want a world in which fear of potential consequences means that legitimate business and consumers are denied access to critical financial services,” she said.

Banks have scaled down, or even exited, their corresponding bank relationships, as KYC demands and transparency requirements such as the US Foreign Account Tax Compliance Act have turned corresponding banking into a potentially high-risk and high-cost area.

De-risking The issue of clearing banks re-evaluating their presence in particular markets as part of a ‘de-risking’ strategy was also raised. McDermott said it was a huge issue and acknowledged that banks needed “to look at what certain businesses do and how they manage those risks”.

Justine Walker, director, financial crime, sanctions and bribery, British Bankers’ Association , said the topic of de-risking would be at the forefront over the next few years.

“We need to work with regulators on this,” she said. “We really need to understand and unpick the drivers. Is it regulation, risk or cost that is driving this? I think it’s a combination of all of them coming together and creating unintended consequences.”

Walker said achieving the right balance between financial crime controls and responsibilities to customers was a complex challenge. Banks and regulators needed to work on developing a shared view of risk and have a consistent view globally where possible, she said.

McDermott underlined the need for banks and regulators to come together: although the issue of financial crime is becoming more prevalent, more work was needed to increase debate. The battle against fraudsters would never be won, she said, as they are constantly innovating and are the early adopters of the newest technology, but progress can be made.

“We need to seize the opportunity presented by the particular circumstances of the moment to move the financial crime agenda forward and work together,” she said.