Why 2023 is time for us to tackle financial crime properly
The UK’s HMRC has declared war on tax evasion.
Simon York, HMRC’s outgoing head of serious fraud, recently said that tax evasion was “much more complex, more sophisticated, more international and more digitally enabled”, while adding that HMRC will now be actively pursuing enablers of evasion.
Interestingly, both financial and professional services firms that facilitate tax evasion as well as the evaders themselves were called out as being responsible, along with a declaration that more cross-border collaboration would be required to be successful.
This is good news for the industry, and I’m pleased to see HMRC tackling the issue. However, this announcement discussed just tax evasion, which alone costs the UK economy roughly £10 billion per year (according to government estimates).
When it comes to total financial crime, the scale is so large that even the government can’t quantify how much it actually costs us per year. All we have is an estimate – to the tune of $2 trillion globally – yet that was calculated before the pandemic. Considering everything that has happened since, many of us would put money on the fact that number has grown.
Financial crime’s impact continues to be severe, yet it flies under the radar for many. Its underground nature means the spotlight rarely falls on it, and for too long a blind eye has been turned. For context, the Intelligence and Security Select Committee in its July 2020 report on Russia noted that London is considered a ‘laundromat’ for corrupt money. How is it that this beacon of regulated activity is seen as a hotspot for criminals to move their money and coerce others out of theirs?
The problem is, we’re not helping ourselves. While firms are doing what they can to tackle the problem, they’re actually not. The UK’s financial setup is haunted and hampered by legacy technology knee-capping any meaningful transformation. The result? Manual checks of balances being relied upon to spot needles in haystacks.
Spotting any kind of financial crime – be this fraud, money laundering or corruption – is difficult. Most criminals are skilled in leaving behind as few traces as possible. Therefore, spreadsheets holding watch lists are labour intensive and rely on the human eye to spot anomalies. Take terrorism as an example. The actors have become more sophisticated – funding smaller amounts in order to commit smaller acts, as opposed to the big attacks we conjure to mind more readily. This is incredibly hard to spot, as small incomings and outgoings are normal for the average bank account. The experts looking at this are skilled and do a fantastic job, but in this day and age we should be looking to automation as much as possible, given computers are more skilled in this area and can do it much quicker.
The worrying thing is C-suites don’t seem to consider technology upgrades as a priority – they seem to take the view that the issue that costs our economy billions of pounds each year is something that can be fixed at a later date. Productivity and geopolitical responses are more pressing according to KPMG’s 2022 Banking CEO Outlook. These are imperative – however, they are also short-termist in their outlook. Digital transformation or better technological output could instantly boost the former, for example, yet it is perceived as an expensive afterthought.
It’s true – transformation costs are very expensive. However, firms can only battle on with equipment which doesn’t communicate for so long. Eventually the bullet must be bitten, and 2023 makes sense as the year it happens. We are entering into a recession – yes, the balance sheet hit will be extensive, but then it can start paying for itself when the economy starts to grow again.
When there’s a raft of mortgage applications, isn’t it better to have a functioning API system that can speed things up? Or be able to risk-profile customers on a more consistent basis other than when they’re first onboarded? For a start, this would help with growing customer value by improving personalisation, but it could also start to spot anomalies sooner, flagging up potential concerns and perhaps actioning the issue before it goes any further. A single customer view could be possible, with incomings and outgoings analysed and the manual work removed.
Sadly, humans can’t catch everything, and just by adding in this extra layer of scrutiny, the UK might be able to start turning the tide against financial crime.
The lack of progress was highlighted by the May 2021 ‘Dear CEO’ letter from the FCA. It outlined a worrying number of areas retail banks are falling short, despite observing effective control frameworks and good practice. The FCA is trying to move the dial – it appreciates it won’t be stopped instantly and its approach of looking favourably on those who admit to any issues and taking more severe action against those who try to cover it is working to a degree. However, carrots and sticks only go so far.
The fact of the matter is, firms need to start spending more on technology. People costs continue to rise, yet they could do a much better job if they were helped by the technology stacks they rely on. Phasing in more automation means humans can be relieved of manual checks and go on to more strategic work – consulting when potential cases have been identified, for example. Machines can work every day and at speed, allowing a more effective approach to the issue, and they don’t leave businesses, removing experience and knowledge from the business each time.
There’s no denying the next year or two are going to be very difficult. Balance sheets will be under pressure as costs rise and employees clamour for pay increases amid the cost-of-living crunch. Granted, this means a transformation project is hard to justify. However, it needs to be done – the question of how long firms limp on for with legacy systems is up to them, but for every year wasted their challenger bank peers are moving further ahead, gaining market share and customers with personalised portfolios. We’ve been eulogising about transformation for too long – wouldn’t it be great if we all started to live the benefits instead of reading about them?