In a world where money matters more than education, those that do not have it will do their best to have it and those that have it will do their utmost to ensure they have more lawfully or unlawfully.
Financial Crime Risk Management (FCRM) is intended at protecting the financial system to counter, detect and deter financial abuse and financial crime.
Financial Crime refers to any non-violent misconduct that normally results in financial loss, as well as financial fraud. It consists of a variety of illicit activities such as money laundering, terrorist financing, fraud, bribery and corruption, market abuse and insider trading, tax evasion, embezzlement, counterfeiting, and identity theft.
Financial abuse refers to illicit activities that possibly will damage financial systems and other activities that might exploit the tax and regulatory framework with undesirable consequences, e.g. forcing or tricking a senior into signing or changing a contract or will.
FCRM plays a crucial role in financial institutions by detecting and deterring financial abuse and financial crime. Failure to manage and prevent financial crime risks may result in the financial institutions being impacted in three ways as follows;
l Facilitators of financial crime, e.g. money laundering, terrorist financing, tax evasion
l Perpetrators of financial crime, e.g. bribery and corruption; and
l Victims of financial crime, e.g. fraud
Financial abuse, if not prevented, can led to economic downfall and financial market failure. A global example of an economic downfall and market failure is that of global financial crisis of 2008, which resulted from the mis-selling and misrepresentation of the subprime market and value of mortgages to customers. Financial institutions, mainly banks, ended up paying billions of dollars in fines and penalties for their roles in the crisis.
FCRM should always ensure that a Financial Crime Risk Assessment is in place in their financial institution/business. Financial crime risk assessment is a systematic, step-by-step process of analysing your business activity’s vulnerability to financial crime risks. The step-by-step process of the risk assessment should include the following amongst others;
l Risks Identification: Being able to identify, understand and document risks, based on the complexity and size of the business, the targeted market and geographic location, the products and services offered, the type of customers (customer risk rating), and the channel that the business uses to conduct its business activities (online/face to face).
l Risks Mitigation: Once risks have been identified and the business is now fully aware of its most vulnerability areas, business should now come up with and implement controls, measures and have systems in place to detect and deter financial crime risk within and against its business activities.
l Control Testing: An independent assurance function will play a crucial role in conducting regular audits to ensure that the controls, which business have put into place to manage and mitigate risk are able to address the identified risks and be able to detect and deter new risks. Having policies and procedures in place is key in addressing new risk and ensuring compliance in alignment with the overall market and environment changes.
l Monitoring and reporting: It’s imperative that FCRM monitors the effectiveness of the business controls and measures in place, to identify any deficiencies and the step taken to resolve the issues identified and report them to senior management and board for sign off.
Regulatory and Supervisory Authority, including the Financial Intelligence Agency engagements should be part of business as usual for Financial Institutions, as building a positive regulatory relationship will assist the Financial Institutions to earn the trust and confidence of its primary regulator.
The trust and confidence by regulators in the Financial Institutions will come worth and stand in during good times and bad times, which will result is less fines and penalties by the regulatory and supervisory authority.
*Lesego Kgalemang is a Financial Crime Risk Analyst with First National Bank Botswana