Financial crime risk management (FCRM) is the practice of proactively looking for financial crime, including investigating and analyzing suspicious activity, rooting out vulnerabilities and taking steps to lower an organization’s risk of becoming a victim.
While financial crime has existed since people first exchanged currency for goods and services, technology has changed the attack surface, level of access and number of opportunities for cybercriminals. Almost all organizations are doing business online, making businesses easy targets for cybercrime. Criminals are adopting more stealthy and sophisticated approaches to access critical financial data and cover their tracks. Compounding the threat, many financial crimes are perpetrated by corporate insiders who have not only figured out where critical data is located, but how to effectively hide their nefarious activities.
It’s not surprising, then, that nearly half of organizations have fallen victim to a financial crime. The proliferation of such crimes has led to increased government oversight and legislation, putting the onus on organizations to protect their data from both external and internal threats and ensure that they’re compliant with regulatory laws. If organizations fail to take the necessary steps to identify and combat financial crime, they could face stiff penalties that reach into the millions and even billions of dollars.
Consequently, an effective FCRM strategy has never been more important. This article looks at the various types of financial crimes and their costs, the role of AML and compliance, how to perform a financial risk assessment, and how FCRM solutions can help you combat financial crime.
What Is Financial Crime Risk Management (FCRM): Contents
In simplest terms, financial crime is the practice of taking money or property illegally from another person or organization for one’s own benefit. Among the major types of financial crime are: money laundering, terrorist financing, fraud, bribery and corruption, market abuse and insider trading, tax evasion, embezzlement, counterfeiting, identity theft and electronic crime. These crimes can be executed both by external attackers or internal employees, including leaders at the very top of the business.
Financial crime also incorporates a range of less-serious criminal activities. While the cost or legal ramifications may not be as high as with the major types listed above, the following behavior falls under the under the umbrella of financial crimes:
Meanwhile, financial crime perpetrators tend to range from petty thieves to heavy-hitting global crime syndicates:
Financial crimes have a significant impact on an organization’s revenue. According to a 2018 PwC Global Economic Crime and Fraud Survey, 49% of respondents said their companies had been victims of fraud or economic crime — up from 36% in 2016 — while 64% of respondents said losses directly due to fraud could reach at least $1 million. In addition, 46% of respondents to the PwC survey said their organization spent at least the equivalent or more on investigations and other preventative measures of what they directly lost to the fraud itself. And 52% of all fraud is perpetrated by people inside the organization.
Those breach detection and cleanup expenses, compliance penalties and lawsuits often take a large bite out of profits. What’s more, the damage to the organization’s reputation can last for years.
Financial crime compliance is the process of ensuring that your organization is meeting the standards, policies and regulations (both internal and external) that apply to your industry and organization.
In the United States, the Financial Crimes Enforcement Network (FinCEN) lays the groundwork for financial crime compliance:
Every financial institution is exposed to AML risk, largely driven by three factors:
As a result, organizations aren’t doing what’s necessary to meet AML compliance — which can lead to hefty penalties. Thus, it’s critical that financial institutions:
An AML analyst, also referred to as an AML investigator, focuses on monitoring, investigating, and acting on suspicious financial activity. Being an AML analyst requires a firm understanding of the business, how it operates, its clients, and its products and services. Duties might include:
The laws set the precedent for how your organization can prevent and address financial crimes within your organization. Knowing which rules apply to you, monitoring changes in the laws, and building awareness about them across the organization are your top priorities. These best practices will also help you prevent criminal activity:
A financial crime risk assessment is a systematic, step-by-step process of analyzing an organization’s vulnerability to financial crime. To perform a financial risk assessment, you’ll need to take the following steps:
Identify your risks: You need to both understand and document risks, based on the complexity of your organization, the market you are in, the services and products you provide, and how much of your business is conducted online. Looking at past incidents within your organization, and the general proliferation of these financial crimes in the market, you’ll need to estimate your risk level for each of the following:
Once you have documented your risks, you can prioritize them, based on which pose the biggest threat.
Establish protective measures to mitigate your risks: With full awareness of where you are most vulnerable, you can plan that controls and systems that you will implement to prevent financial crimes within and against your organization. These controls can include:
Review and improve controls: Your organization should conduct regular audits to ensure that the controls you have put into place are addressing new risks. As the market and overall environment changes, you need to create new procedures and policies to address new issues and ensure compliance.
Monitor and report: It’s imperative that you monitor the effectiveness of your controls, so document suspicious activity and the steps you’ve taken to resolve the issue. Proper reporting is required under various compliance regulations, so it’s critical to have that information readily available.
FCRM tools enable security staff to proactively identify potential vulnerabilities, examine activity continuously, perform ongoing risk assessments, and manage and respond to questionable activity. Here’s a breakdown of their capabilities:
Detect threats in real time: FCRM systems instantly detect suspicious activity — even on large volumes of transactions — and send alerts to security personnel who can then decide what action to take next.
FCRM solutions helps to combat financial crime in two ways — it clears away much of the noise so analysts can focus on financial crime prevention strategy and compliance, and it offers better visibility and insight, while alerting analysts when suspicious behavior occurs.
Here is how FCRM technology helps to prevent these common crimes:
When it comes to choosing an FCRM solution, the platform you choose will be heavily dependent on your needs, making it imperative to conduct a thorough risk assessment before you begin researching tools. Here are some of the features you’ll also want to consider:
Customers expect a safe, real-time, omni-channel experience. E-commerce and digital data transactions create new challenges in assessing and managing your financial crime risk. That said, this isn’t something you can put off or ignore.
Regulators will hold your organization responsible for any financial crimes that happen on your watch, even those that come from outside forces. Adopting an FCRM solution makes it easier to identify, respond to and prevent those threats, while ensuring that your organization remains compliant — even with a growing and increasingly complex array of regulations.