Extraordinary crimes against ordinary people

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VERONICA R. BARTOLOME

It cost $500,000 to finance the September 11 NYC Twin Tower bombings that killed 2,973 people, $50,000 to fund the 2002 Bali bombings that killed 202 more, and 15,000 euros to finance the 2015 Paris attacks that cost 130 more lives. Running a terrorist organization can be expensive, but organizing a terrorist attack can be cheap.

A European banking institution agreed to pay US authorities a record $1.9 billion in fines for allowing itself to be used to launder South American drug money and violating sanction laws by doing business with Iran, Libya, Sudan, Burma and Cuba. Another large European bank admitted to violating the International Emergency Economic Powers Act and the Trading with the Enemy Act by processing $9 billion in banned transactions involving Sudan, Iran and Cuba.

Terrorist financing is the process by which terrorists fund their operations from legal or illegal sources to perform terrorist acts. Money laundering is the process of concealing the existence, illegal source, or application of income derived from criminal activity, and disguising of the source to make it appear legitimate. Terrorist financing and money laundering are only two examples of the types of financial crime that compromise the integrity of the financial system, deter economic growth and development, and undermine shared prosperity.

Financial crime is a crime against development


Global Financial Integrity (GFI), a Washington DC research organization uses the term illicit financial flows (IFFs), defined as “cross-border movement of money illegally earned, transferred and used.” World Bank studies have shown that IFFs and the activities underlying them are detrimental to development. IFFs are symptomatic of issues that plague developing economies – weak institutions, limited accountability and weak implementation of the rule of law, entrenched vested interests, collusion, and the absence of transparent economic and governance processes. Hence, IFFs and the activities that support it have an adverse impact on economic growth and development.

While IFFs are difficult to measure, estimates indicate they are substantial and growing. Developing countries lose almost $1 trillion per year. GFI’s 2017 report notes that IFFs accounted for 14 percent to 24 percent of total developing country trade between 2005 and 2014. In the Philippines, of total trade, 6 percent are IFF outflows, while 30 percent are IFF inflows.

PwC’s 2017 Global Economic Crime Survey shows a possible correlation between fraud and economic development. In developing territories, 58 percent of companies involved in money flows said they experienced anti-money laundering regulatory enforcement in the last two years (vs 47 percent in developed territories).

Fifteen percent of companies said they expect to significantly increase funding for anti-fraud investments in the next 24 months (vs 9 percent in developed territories).

That’s why financial crime is not just about the money but the impact that permeates the lives of ordinary people across several countries.

An integrated and concerted multisectoral approach can combat financial crime

Fighting financial crime represents an enormous challenge, which can only be tackled successfully through a concerted and coordinated global effort. The World Bank Group’s (WBG) efforts are organized around: (1) measuring IFFs broadly, (2) preventing behaviors that promote IFFs, and (3) stopping IFFs, like anti-money laundering.

At the national level, the WBG developed a National Risk Assessment Tool, aligned with the standards of the Financial Action Task Force (FATF), to assist countries in identifying and responding to risks related to money laundering. In the Philippines, the Anti-Money Laundering Council (AMLC) is the entity responsible for implementing the Anti-Money Laundering Act of 2001. AMLC is a financial intelligence unit, yet performs investigative and prosecutorial functions.

At the corporate level, financial institutions need to ensure they have the proper policy and institutional mechanisms to prevent, detect, and respond to different types of financial crime, especially as more regulatory scrutiny takes place.

PwC’s 2018 Global Economic Crime and Fraud Survey finds that 49 percent of global organizations say they have experienced economic crime in the past two years (up from 35 percent). The most common types are asset misappropriation (45 percent), cybercrime (31 percent) and fraud committed by the consumer (29 percent).

Not having robust defenses is costly. Nearly two-thirds of survey respondents said losses from the most disruptive frauds they experienced could reach up to US$1 million; 16 percent said between US$1 million and US$50 million. Further, the impact on employee morale, reputation and brand, and relations with regulators can be significant.

Organizations can consider the following safeguards against financial crime:

1. Conduct risk assessment of clients to identify and address money laundering risks. PwC’s survey indicates only 54 percent of organizations have conducted an economic crime risk assessment over the last two years.

2. Ensure customer due diligence (CDD)/know your customer (KYC) policies and processes are up to par with regulatory standards and the team is equipped with the right skills and capabilities to implement them effectively.

3. Leverage technology aimed at monitoring, analyzing, learning, and predicting customer behavior. Survey results indicate the financial services industry finds the most value in artificial intelligence and advanced analytics.

4. Invest in people, not just machines. Given that financial crime is ultimately a result of human behavior and motivation, understanding the three drivers of financial crime – opportunity, incentive and rationale – offers a compelling opportunity to combat fraud and other types of financial crime.

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Veronica R. Bartolome is a consulting director at PricewaterhouseCoopers Consulting Services Philippines Co. Ltd., a member firm of the PwC network. For more information, please email markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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