Curbing financial crimes, ensuring regulatory compliance

At present, the world's banking sector faces a surge in financial crimes due to operational risks and growing challenges of regulatory compliance. Contemporary criminals make use of sophisticated skills and advanced technologies to perform illicit activities in the financial realm. Any bank is likely to become vulnerable to financial crimes involving various parties - customers, employees and those with whom it has business dealings. Broadly, a financial crime could either be an internal fraud committed by the bank's own workforce or an external fraud committed by a customer along with a third party. Such activities are often associated with money laundering, embezzlement, evasion of sanction, and illegal transfer of funds for tax avoidance and financing terrorism. This can expose a financial institution to various risks in terms of operations, legal affairs, regulations and reputations. If the perpetrators take advantage of deficiency in bank management, the risks become higher.
In order to thwart any financial crime, a bank should establish sound and prudent practices in governance and management - developing a strategy, approving a policy and implementing a procedure. The bank can easily minimise criminal risks within its integrated risk management framework. It is compulsory to identify, assess and quantify such risks and implement the risk mitigation measures in order to minimise the possibility of occurrence of any event that may affect the institution.
Moreover, a group-based approach is effective in handling risks of financial crimes and issues of regulatory compliance. Banks transact between themselves, maintain relationships and create networks to serve their clients effectively. Associated activities are likely to have significant effects on other entities in the group. However, financial crimes are often carried out through a bank that forms part of a group - this adversely affects their solvency and compromises reputation of the entire group. Thus, a comprehensive approach to financial crime risk management is needed at the group level. Group members must share information to identify and assess the areas of vulnerability and eventually reduce financial crime risks. Since it addressed the risk of money-laundering in the banking sector, Wolfsberg Group has developed a broad range of standards that deal with a variety of financial crimes including corruption, financing terrorism, and sanctions.
Banks should also conduct uninterrupted vigilance with respect to customers by having sufficient knowledge about them to detect transactions that is likely to be associated with financial crime. For that matter, banks should consider the extent of risks with respect to monetary transactions and financial and investment products. Additional vigilance should be conducted for a section of customers - a bank must establish appropriate identification procedures, a risk profile and acceptance criteria for various customers who are likely to present a greater risk. Based on the risk profile of its customer categories, an institution should take appropriate measures in vigilance. Banks need to focus on preventing the criminal activities associated with employees and third-party entities.
The process of eliminating the financial crimes includes examinations, inspections and investigations relating to suspicious activities. A bank should react promptly to any situation where activities associated with financial crime are suspected or even detected. An effective examination requires skills in several fields of expertise like law, tax or information technology. Regarding a positive effective outcome, employee-training is a must. Any outcome of the examination should be documented for future reference and this might work as a valuable lesson associated with financial crimes.
Furthermore, cooperation and information exchange are crucial to handle financial crime risks. A bank is expected to communicate information regarding activities associated with financial crime to the appropriate authority subject to applicable law. Nowadays, it is a challenge for the banks to implement and manage a business strategy that satisfies the requirements of supervisors as well as the demands of shareholders and investors. Hence, the regulatory compliance is often considered as a burden for them. Even the existing requirement is not enough - several regulatory changes, including new requirements, are looming on the horizon that adds to the compliance needs of the banks. Generally, banking regulators and supervisors have a clear agenda to improve banking conditions and efficiency to protect the benefits of the customers and investors because it is connected with the long term sustainability of a bank.
Bangladesh Bank (BB) has been working to minimise financial crime risks in the country’s banking sector. Remarkable initiatives have been undertaken by the central bank to prevent money-laundering through banks. As part of a collective initiative, relevant laws have been enacted - Prevention of Money Laundering Act and Prevention and Combating Terrorist Financing Act. Last year, Bangladesh became the founder member of the Asia-Pacific Group on Money Laundering (APG) and BB installed UN-accredited software to combat suspected financial transactions to fulfil the promises made to the Financial Action Task Force (FATF). The improved financial transparency and disclosure is likely to bring notable positive changes in handling financial fraud and protecting financial crimes in the country. Banks have already started to respond to the Bangladesh Bank's initiatives and compliance requirements. However, further actions need to be done. In February, BB alerted the banks and financial institutions over poor performances on regulatory compliances and informed that stern actions would be taken against the chairmen and CEOs if for negligence in fighting against money-laundering. In April, BB asked managing directors of the state-owned banks to do more in order to comply with the regulatory requirements and to submit their work plans for FY 2016.
It is crucial to understand that financial crime may have a destructive and devastating effect on the banking system of the country. Truly, the management of risks of criminal activities and compliance of regulatory requirements are costly, challenging and even cumbersome. However, these are extremely necessary for ensuring long term stability and sustainability of the banking sector.
Dr. Shah Md. Ahsan Habib Professor and Director [Training], Bangladesh Institute of Bank Management (BIBM).
ahsan@bibm.org.bd