On 10 February 2022, a parliamentary report was published entitled ‘Economic crime in the UK: a multi-billion-pound problem’. That report states that ‘The precise scale of economic crime in the UK is unknown, but it could run to tens or hundreds of billions of pounds per year’. The fact that we cannot quantify accurately, in monetary terms, the extent of the harm and costs that financial crime causes should not be a deterrent to efforts to reduce the incidence.
Action Fraud launched 110 investigations related to online fraud in 2021 with account takeover being the most common one. This figure was revealed through a Freedom of Information (FOI) Request submitted to the City of London Police (CoLP) by Money Marketing on 11 January 2022. The most common category of online fraud was account takeover. It was followed by identity fraud, bank card fraud, click fraud and domain name scams.
The harm caused by economic crime is widespread; the consequences are felt well beyond financial loss and the economic well-being of society. We all want to live in a fair and just society and, if economic and financial crimes are not prevented, people begin to feel increasingly resentful and lose trust in the government and each other.
On 2 February 2022, the Treasury Committee called for additional Government action to combat fraud and scammers as it published its long-awaited report on economic crime. The report states that ‘economic crime seems not to be a priority for law enforcement. The number of agencies responsible for fighting economic crime and fraud is bewildering’.
In a series of recommendations, the report calls for law enforcement to be appropriately resourced to tackle the scale of the problem, for the Government to consider whether a single law enforcement agency with a clear responsibility to fight economic crime would be more effective and for proper regulation to be introduced to protect consumers from fraud and money laundering in the crypto asset industry.
The Committee also advocated higher company formation fees and Companies House reform to prevent fraudsters from hiding their identities behind UK businesses to launder money and conduct crime and pushes for the Government to set out the legislation it is currently working on in an Economic Crime Bill. In common with many commentators in this field, the Committee also acknowledges the huge and constantly evolving challenge of economic crime and acknowledges that there is no ‘silver bullet’ solution.
Whilst there is no silver bullet, there is also widespread agreement that new technologies will play a crucial role in reducing financial crime. The last decade has seen an explosion in financial technology across all sectors including insurance, payments, and banking. These technologies are already helping companies to automate processes, improve their services, and onboard more customers. Digital transformation and the move online by customers have created many more data points that companies can use to better understand how their customers handle money – how they receive, move, and spend it.
The reasons for our failure as a country to achieve success in the battle against financial crime are highly complex and interrelated. On the one hand, criminals are using increasingly sophisticated methods; they manage to own and control payment institutions, gaming operators, card issuers, and precious metals and stones dealers. Criminals can, and do, exploit the latest technology. Nor are they constrained by geographical boundaries or concerns about breaking laws, least of all data privacy, as they ruthlessly mine the loopholes in data security. On the other hand, some regulated entities are complicit - wittingly or unwittingly – in enabling financial crime. The supervision of all regulated entities - not only financial institutions but also solicitors and accountants etc. – needs to be improved as the Treasury Committee makes clear. ‘We recommend that the review (by the Treasury of AML supervision) should not shy away from considering radical reforms, including a move away from the self-regulatory model and the creation of a new supervisory body, potentially independent of the FCA.’
We know that a huge sum of money is expended by both the public and especially the private sector in trying to reduce financial crime. However, underpinning all other issues is a sense that the balance between what the public sector does, versus the burden currently placed on the private sector, is not fair. A huge amount of regulation has been imposed and will continue to be imposed, upon the private sector at enormous cost to businesses and the public at large. No single public sector entity is concerned with reducing this burden or these costs hence the Treasury’s call for a single government entity to be responsible.
While regulation has prevented some financial crime, it has also driven criminals to become more adept and it is nowhere near as effective as those in the public sector, responsible for imposing it, hoped it would be. AML Regulation must be improved, and we hope the current Treasury review can achieve some of what is required. The Treasury is analysing feedback from 2 consultations and is committed to publishing a full review report by 26 June 2022.
Not all is negative in the fightback - numerous public sector committees do sterling work such as JMLIT and JMLSG, and the Joint Fraud Taskforce etc. although their membership rarely includes any regtech representatives. There seems to be a fear that criminals may infiltrate such bodies but that is not a reason to exclude those who know about and can explain, how technology can help.
One irony is that the public sector has not been obliged to abide by the anti-financial crime laws it so happily imposed upon the private sector. The huge number of loans and grants that the public sector issued to those committing fraud could have been prevented by better due diligence. Government backing for loans meant those businesses granting them did not feel concerned about the rigour of their due diligence.
Anyone reading the LinkedIn posts about the lack of checks for new companies can only cringe at the laissez-faire approach. Companies House reform is long overdue: as the Treasury Committee made clear reform of Companies House is essential if UK companies are no longer to be used to launder money and conduct economic crime.
Collaboration between the public and private sectors is essential if we are to reduce economic crime. The public sector needs more investment in both people and technology and the regulators need to drive the private sector to adopt technology to reduce the manpower burden and make their human processes more effective.
Given how important accessing and using the right data is to reduce financial crime, AI and machine learning can do much of the heavy lifting when it comes to sifting and sorting relevant data. These aids can free up analysts’ time so they can make the best use of their skills and judgement, and we know that upskilling such staff is vital to identify patterns and activities which signal financial crime.
For their part, regulators can recommend types of technology– eg real-time data, knowledge graphs, and some types of artificial intelligence but they cannot recommend any specific proprietary technology. Again, the words ‘we support regtech’ come cheap especially when many deserving companies will not get the backing they deserve. The market incumbents who for example, provide data to the banks, retain their position; no one ever got fired for using them and supervisors rarely encourage better data sources. In other words, there is no incentive to use better data and/or new technologies, only a fear of being fined, if not by the FCA or HMRC then possibly by the ICO.
The current pressure to improve the legislation and regulator and law enforcement actions to prevent financial crime gives us hope and a reason to be optimistic for the future. Standards in anti-financial crime are being driven up: in January the FCA published a webpage containing guidance on how FCA-authorised firms should consider and demonstrate the competence and capability of prospective heads of compliance and money-laundering reporting officers (MLROs) before seeking FCA approval for such individuals to perform the senior management functions of compliance oversight (SMF16) and MLRO (SMF17). Despite the huge cost in money and manpower, the FCA is exploring further use of its criminal powers that led to a landmark conviction of NatWest in December 2021.
Although the public sector – law enforcement and regulators - have been slow to acknowledge the value of anti-financial crime technologies and encourage their use, this attitude is gradually changing especially when they see the value of the technology helping them fulfil their own supervisory role.
In the Autumn 2021 Budget, the Government announced it would introduce a new levy to raise approximately GBP 100 million per year to help fund anti-money laundering and economic crime reforms. The Treasury Committee which reported in February said ‘We welcome the Government’s undertaking to be accountable for spending the money raised by the Economic Crime Levy in the way in which it is intended. We recommend that the Government publishes an annual account of its spending on economic crime, including an account of how the yield from the Economic Crime Levy has been spent, and an evaluation of its effectiveness’.
They added a cautionary note ‘Given the scale of the problem and the speed at which it is growing, we remain to be convinced that this extra resource [the Levy] will enable a sufficient response in the absence of a substantial reform of the anti-fraud infrastructure’.
We need greater impetus and speed in making changes if we are to catch up with criminal behaviour, let alone overcome it. If the Treasury Committee’s recommendations are actioned promptly, we can expect a significant bolstering of the UK’s anti-financial crime capability and a long-awaited reduction in financial crime.
This editorial was first published in our Financial Crime and Fraud Report 2022, which showcases the innovation and development of the best practices and instruments used by financial institutions in their fraud prevention activities, to improve the digital onboarding process of their customers while fighting against financial crime.
About Jane Jee
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