Financial crime can never be completely eradicated but it can be prevented. It happens time and again, but is anything ever learnt from this phenomenon? Are the causes ever studied to prevent the same happening again? Looking at the way the banking and financial world operates; the lessons from history, no matter how recent, are often all too easily forgotten.

Financial Crime: History Repeats Itself

Financial crime is an ongoing problem - just take a look at the corporate cases in the UK and the US, involving Guinness, Blue Arrow, Maxwell, Allied Deals, WorldCom, Health South and Enron. Financial institutions have fared no better. In the UK, the Bank of Scotland, Bank of Ireland, Royal Bank of Scotland and Abbey National have all been fined for failures in their money laundering requirements. In the US, Citigroup, Bank of New York and Riggs Bank have also been fined for the same failures.

Currently, the 'Colossus of the Carolinas', Bank of America, stands before The Senate Permanent Sub Committee on Investigations in the US. According to a report by Stacy Kaper of The American Banker, 'Bank of America acknowledged that it had failed to follow its own anti-money laundering procedures in handling offshore accounts owned by two Texas billionaires. The company also said it had taken several steps to tighten its anti-money laundering policies and taken disciplinary action against bank officials involved with the case'. (Read Fundamentals of Due Diligence: A Critical Business Tool - Part One and Fundamentals of Due Diligence: A Critical Business Tool - Part Two).

Bank of America admitted that it hired an associate who apparently brought the business with him from another bank. When the accounts were opened at Bank of America, details of the beneficial owners were requested - as required by new anti-money laundering laws - but these details were refused as the banker claimed his clients needed confidentiality. The bank still allowed the accounts to operate. A fundamental prevention strategy is that financial institutions must never allow clients or customers to dictate regulatory policy (read Do You Know Your Employee).

A number of banks have been mired in the aftermath of the Enron and Parmalat scandals. No matter what the scale of involvement, association with any form of fraud and financial crime will be detrimental to an organization's admired reputation. As with all organizations, the anti-money laundering regulations on both sides of the Atlantic are clear and concise (read the Special Report on Money Laundering). As a result, any organization's internal policies should also be clear and concise. So where is the problem? Why do these money laundering and fraud cases continue to happen and how can more effective preventative measures be put in place?

The Value of Regulation

Legislation and regulations will always be introduced to ensure that effective prevention measures are enforced.

Recently, Michael Snyder, the Chairman of the City of London Policy and Resources Committee, wrote in an article in the Financial Times: "The [UK] government is often accused by business of meddling in all sorts of areas, but one area where interference is welcome is the strengthening of anti-fraud measures." He claims that some big companies regard fraud as a "risk that they have to manage down to acceptable levels" but, he argues "this not good enough and that this attitude smacks of complacency and ignores the damage done to the City's reputation as a fair and honest place to do business and invest."

As the world's leading international centre of financial and business services (bigger in these terms than New York), London - and especially the City of London - risks being a target for white-collar criminals. Lord Goldsmith, the UK's Attorney General, has said he wants to "get tough on fraud, establish a financial court and extend sentencing options." He also wants a National Fraud Strategic Authority and a lead police force based in the City of London responsible for a National Fraud Reporting Centre (see box below about how financial investigation measures have developed in the UK).

Financial Crime Investigation in the UK

In the UK, during the 1970s and 1980s, significant public frustration with the system for the investigation and prosecution of serious and complex frauds reached a high that forced the government to take notice. As a result, a committee under Lord Roskill was set up to consider the ways in which the conduct of criminal proceedings in cases of fraud could be improved.

The Fraud Trials Committee Report, known as The Roskill Report published in 1986, was the momentum that drove the introduction of the Criminal Justice Act 1987. Lord Roskill recommended establishing a new unified organization for the detection, investigation and prosecution of serious fraud. In turn this led to the creation of the Serious Fraud Office (SFO), which was a new concept in fraud investigation and prosecution.

At this time, London had two successful fraud investigation bodies within the police service: The Metropolitan and City Company Fraud Department at New Scotland Yard and the City of London Police Fraud Squad at Wood Street Police Station in the City of London.

The then new powers granted by Parliament to the SFO meant that enquiries would be led by a new genre - 'forensic' accountants and 'investigative' lawyers. In a role reversal, their assistants would be the experienced police fraud detectives who still retained their powers of arrest but lost authority over the management of the enquiry.

In 1998, the police regional crime squads established in the 1960s were rationalized into the National Crime Squad. In 2006, the National Crime Squad and the National Criminal Intelligence Service, established in the 1990s to receive, among other matters, all suspicious reports from financial institutions, were merged to form the Serious Organized Crime Agency.

Fresh approaches to tackling financial crime can be viewed as threatening, encouraging or motivating; but it must have a logical and evident purpose of improvement and not be solely for political appearance or for the sake of change. This destroys the paradigm.

In a forward to the recent Fraud Review Final Report in the UK, Lord Goldsmith states, inter alia: "We are all victims of fraud. Fraud victims sometimes suffer devastating losses of pensions and life savings, ruining their lives, and honest businesses can be bankrupted by fraudsters. Yet fraud should be one of the easier crimes to prevent. Fraudsters mostly extract money by exploiting carelessness, ignorance or gullibility. Elementary caution and healthy scepticism about offers that look 'too good to be true' would prevent most people becoming victims of fraud. Business and the public sector can protect themselves against fraud by putting in proper systems and controls, but they must make sure that they are actually implemented. These precautions are not going to stop all fraud; fraudsters will always manage to deceive some people and businesses. But following them should stop most fraud and make tackling the remainder more manageable."

The one matter that is not mentioned in this statement is the ongoing struggle against money laundering. In all money laundering, where the criminals legitimize their ill-gotten gains, there is a fraud somewhere. It would appear that this has been left to the financial institutions to deal with under the strict gaze of the regulators.

The human traits of greed and ego mean that the global financial services industry will always face the risk of financial crimes and fraud. However, the wisdom of the UK Attorney General's statement that fraud (and ergo money laundering) is an easy crime to prevent is true, and the secret lies in effective education on prevention.

Education, Education, Education

Many organizations see technology as a substitute for trained staff although a machine, unlike a human, has no instincts. Some organizations may choose to reduce training expenses but this can be a false economy as penalties and profits make poor companions. Chairman Snyder's comment that some companies manage fraud to an acceptable level is as credible as it is incredible to think that banks and other corporates would consider penalties as a cost of doing business.

Prevention is the product of experience, education and teaching. The quality of prevention, however, can be diluted by a misguided focus on cost-savings, but skimping on staff training in prevention measures and policies will inevitably put business and reputation at risk. In order to fully understand the issues at stake, staff must understand what they are trying to prevent so they can approach the issues sensibly and rationally. Good leadership with excellent, first rate staff are the core of a good, admired business and fine reputation. This is the secret of effective prevention.

In this era of prevailing and authoritative regulation, organizations tend to recruit principally from regulatory and government quarters. But it is also important to engage people who have practical experience in dealing with those who perpetrate financial crimes. It is impossible to understand, from an academic perspective, for example, the charisma with which the professional fraudster or money launderer can dupe their victims.

Organizations should create interesting programmes that are both practical and relevant. For example, the spotlight today is on webinars, automated teaching, videos and CDs, but instructors with the experience, credibility and ingenuity to design and deliver interesting interactive seminars are equally important.

Novelist and journalist, Gail Goodwin, summed it up when she said: "Good teaching is one quarter preparation and three quarters theatre." If staff only have the Internet and CDs to learn from, devoid of any interaction, the education will not be as effective. Give them some theatre: They will remember it, that I guarantee.

Source: gtnews.com