As the only thing certain apparently is uncertainly (unless you count death and taxes) only a fool would predict anything. So foolishly here are my top 10 predictions for 2019 – in the fight against financial crime.
- Crime will remain a top 10 global industry and the most profitable of all industries (due to extremely low levels of interdiction) but fall to 2nd in the list of none financial risks of concern to FI Board’s, after Cybersecurity. Depending on your definition of financial crime estimates range from USD2.1 trillion a year, though these likely understate the amount, particularly as they are based on classic financial criminal proceeds, such as drug trafficking and organised crime and date back to 2011. The figures could include corruption (IMF estimate USD1-1.5 trillion), Fraud of which Cyber crime is an ever increasing component, estimated in low single digit trillions and tax evasion, now a predicate offence and again likely estimated in low single digit trillions. In aggregate therefore an estimate of somewhere between USD 5-10 trillion is more likely. That’s more than 10% of global GDP. Note whatever the size and due to the nature of financial crime and the lack of interdiction firm figures are very hard to come by and estimates are very broad brush, the effect of such large sums being generated and moved domestically and overseas means those criminal funds are being laundered time and time again, albeit largely unwittingly.
- Countries that generate and/or will receive and transfer 90%+ of the world’s financial crime proceeds will not change, and will be led by the US, China, Mexico, the EU (in particular the UK, Spain and Italy) Russia, India, Canada, and Japan. Whilst conventional wisdom has it that emerging markets are the riskiest the reality is that financial crime is largely generated where both the demand for illicit activities is greatest AND the wealth to pay exists. It’s for these reasons that such Countries require a robust outsized response as well as from those in the regulated sectors.
- Fraud boosted by Cyber tools and Cyber as a Service offerings, will continue to grow and represent the most significant threat in terms of amounts of illicit finance generated. FI’s will be targeted to generate proceeds (as that’s where the money is), and then FI’s will be abused as the proceeds are moved quickly overseas. Other financial crimes will become more important such as AHT and IWT both exploited by organised criminal gangs using established networks as risks are lower.
- Islamic State activity outside “in theatre” hotspots will continue the decline seen in 2018, as they continue playing defence and with losses to territory seeing a reduction in revenues. There is no doubt that the threat from Islamic State inspired actors remains a concern, though there is also evidence that authorities are having successes here and that the risk of foreign terrorist fighters returning is being managed. Nevertheless, it’s likely there will be still some incidents but hopefully not on the scale seen in 2015-217. Other terrorist groups may increase concerns and focus.
- Managing Sanctions compliance risks will increase, with more listings, an increasing scope, ever stringent penalties with longer term consequences and for those FI’s yet to journey from limited controls to implementing a full sanctions compliance programme, the risks will be greatest. The move to real time payments is likely to challenge existing conventional sanctions compliance programmes and vice versa.
- Costs of Compliance will continue to be very significant. To paraphrase a saying..”If you think Compliance is expensive, try non compliance!” Affordability and avoiding trouble will dominate the nature of the response. The experiences of the Big Banks in making significant investments and upgrading responses will increasingly be followed by Regional and Local Banks too. As standards rise, those unable or unwilling to keep pace may face limitations and restrictions or reduced availability of banking services (so called de risking in particular highest risk customers and / or segments and / or products and services / countries). Utilities and platforms to share costs and leverage capability will emerge and grow. As the FATF 4th Mutuel Evaluation Process continues, some Countries will react to sentiment to show a record of effective supervision and or action against none compliant or not even fully compliant parties in the regulated sector. As we have largely see fines and penalties, in a few major financial centres, the publicly issued fine and penalty for AML failings will increase and be more prevalent elsewhere. This is already being seen in Continental Europe for example.
- How to best modernise the fight against financial crime will continue to be discussed and solutions explored in the search for a boost in effectiveness. The most obvious relate to: SAR Reform, Public Private Partnerships, information sharing, embracing new technologies and new ways of working, living with and developing models but retaining flexibility and freedom to respond quickly to changing criminal behaviour and perceived threats, aligning expectations across financial crime and data protection portfolios.
- FI Financial crime programmes will have no choice but to continue to prioritise technical regulatory compliance over everything else – continuing the approach of “running the restaurant for the benefit of the health inspector” – but thoughtful regulators will start to explore new ways to measure effectiveness and to credit the quality of the “fair” served to Law Enforcement as well as the cleanliness of the operation. This will start to be recognised in changes to regulatory rulebooks and examination protocols. What’s needed to move the needle though is an alternative model that enables regulators to assess FI’s more broadly and not just based on existing rulebooks. As FI’s continue to implement financial crime programmes that not only seek to comply with many regulations, some completed and open to interpretation and difficult to implement to achieve 100% compliance, but also programmes expected to be consistent with operational risk requirements, where gross and net risk are measured and reported, then this could prove to be a better set of measures to be assessed and or at least start to be part of a broader discussion around purposes and outcomes, moving beyond compliance.
- Crypto will continue to make the headlines making some investors richer, particularly those setting them up but many overall poorer and enable criminals another avenue to crypto-launder illicit funds. FATF has already announced that this sector will need to accept AML/ CFT regulation which should be pronounced in June 2019. Whether the intrinsic value of the blockchain, upon which crypto relies, can successfully support challenged remittances and charitable transfers is unlikely any time soon, especially with costs likely rising in order to comply with incoming regulations. With impending regulation the number of cryptocurrencies and those supporting them are likely to reduce, especially ones that don’t support this initiative. A crackdown on none compliant parties is also likely to increase.
- New technologies and approaches have started start to replace traditional / legacy systems and activities (not just AI and FISP’s). Technology can support improved operations but excitement should be tempered with caution. There is already plenty of interest and much serious investment going into new technology, some of this money will be productive but most will be wasted and the investment opportunity overstated. Knowing what investments to make and where and when will be all important.
That AML/CTF systems designed decades ago and built to become what it is today, is not working as hoped, is no surprise to anyone, indeed there is a common consensus, that we need to modernise and embrace what works or could work better and to move on from what does not. Many of the predictions I have made for 2019 may take longer but all of them are important elements to be considered and responded to in order to modernise the fight against financial crime and to contribute to what’s needed most and that is in my opinion a substantial increase in effectiveness at all levels.