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Protect Your Reputation; Don't Take a Risk with Financial Crime.

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Financial crime within the industry will never be stopped completely but the risk and damage caused can be minimised. Banks and other financial institutions must put in place effective measures and keep up-to-date with latest developments to stop themselves becoming victims of financial crime. The consequences of financial crime are severe and companies could face the risk of losing their most valuable asset: a good reputation. Ultimately, if its reputation is tarnished, it will always be remembered to the organisation's detriment.

The ethos of banking is a straightforward one. A bank is a repository of money either in cash form or other redeemable security, a lender of money and the supplier of a cornucopia of financial products and services. Primarily, the bank is a commercial operation relying on profit to survive, much the same way that lawyers and accountants do, with one exceptional difference. Banking is by definition a risk business.

Taking risks is perfectly acceptable as long as the risk factor is properly assessed. Most bank operations are risk associated, but identifying vulnerability in areas could identify possible conflict between the value of a particular product and how a potential customer might wish to use it.

Recent actions by regulators and the courts in various jurisdictions have reinforced the need and requirement for good corporate governance. The thorough screening of those in key positions takes the 'know your customer' ideal to the next level of 'know your employee'. Management responsibility and accountability should be clearly defined and it is now a legal requirement under regulations, such as the US Sarbanes-Oxley Act. This means that combining operational roles (e.g. the initiator of the transaction being made responsible for record keeping, accounting and settlements at the same time as being the keeper of the transacted assets) is no longer an option for organisations, despite the obvious cost-cutting benefits.

Banks, as do all other financial organisations, must have preventative measures in place and keep abreast of new developments. This is particularly true in the area of money laundering.

Changing Dynamics of Money Laundering

New laws and money laundering directives passed by various governments, e.g. the EU Money Laundering Directives, have affected money laundering techniques and methodology. For example, activities have shifted from criminals using banks as their first place of depositing money to non-bank institutions or establishing their own import/export companies. Criminals now also legitimise their illegally obtained income through acquisition of domestic and international real estate, investment in securities, personal property, works of art or loans. In each case though, the money will eventually pass through the banking system whether as a deposit, collateral for a loan or maybe the purchase of a derivative product.

Banks are cautioned regularly to make sure that they do know their customers. They must make every reasonable effort to determine the customer's true identity and have effective procedures in place for verifying the bona fides of all new customers, whether they are borrowers or depositors.

The Basel Committee on Banking Regulations and Supervisory Practices has repeatedly made this clear and advised banks internationally that public confidence in them and hence their stability, can be undermined by adverse publicity as the result of inadvertent association by banks with criminals. In addition, banks may lay themselves open to direct losses from fraud, either through negligence in screening undesirable customers or where the integrity of their own officers has been undermined through association with criminals.

This has transformed the 'know your customer' practices and procedures from a 'friendly chat' in the bank manager's office and the production of acceptable identity to a modern day intelligence art form. It has also been recognised that launderers are professionals themselves. Not only professional in their methods of operation, but often professional, almost vocational, by calling.

The new customer entering a bank with the view to commence an association may be interviewed personally. What happens when a new customer is introduced by a solicitor from a respected firm or an accountant from an equally respected company both of which have overseas representation? The bank should still conduct its own due diligence process but has the introducing professional carried out his?

Let us hypothesise that the potential customer is a company based offshore. The bank has the responsibility to try to identify the beneficial owner. The introducer may not know because, for example, they are dealing through a 'trusted' agent operating under a power of attorney. How much information about the customer is the bank able to obtain from either? Possibly very little but ultimately it is the bank who will be held responsible. The marriage of what is reasonable with what is responsible could be determined an unholy alliance when it comes to due diligence. Even if a financial institution takes all reasonable steps to determine the veracity of a potential customer, it may still be held responsible if that customer is subsequently determined to be engaged in criminal or other illegal activities.

How can organisations ensure this does not happen to them? Most importantly, they must enforce a strict 'know your customer' policy as well as preventative measures against other forms of financial crime, such as identity theft and credit or debit card fraud.

What is 'Know Your Customer'?

In general terms it is:

Making every reasonable effort to determine the true identity and beneficial ownership of accounts.
Knowing the source of funds.
Knowing the nature of your customer's business.
Knowing what constitutes reasonable account activity.
Knowing who your customer's customers are.

How can this be done? General guidelines include:

The examination of financial statements.
The examination of the relevant credit history.
Obtaining bank and other references directly from the referee.

Reputation is Everything

The integrity of a bank and any other financial institution can be severely damaged by a failure to identify a problem area that enables the financial crime. This could lead to penalties for organisations, which in turn generates bad publicity with the ensuing loss of public confidence nationally and internationally.

Financial crime will never be stopped completely but the risk can be minimised. Organisations and their employees must be aware of this and take this issue seriously. Remember, the most valuable asset an organisation or individual can possess is a good reputation. If that reputation is dented or damaged, let alone destroyed, there is virtually no recovery and it will always be remembered to the organisation's detriment.