Financial crime is constantly evolving, presenting new and increasingly complex challenges for compliance and counter-fraud professionals.
In order to navigate these challenges, it is important to understand the various types of financial crime, the risks they pose and strategies to combat them.
What is financial crime?
Financial crime encompasses a wide spectrum of illegal activities that involve the misuse and manipulation of money for illicit gain.
These crimes not only undermine the integrity of financial systems, but also pose significant threats to economic stability, national security, and social well-being.
What are the main financial crime types?
Financial crime spans a spectrum of illegal activity, from money laundering to cybercrime, simple theft or fraud perpetrated by individuals to complex, global schemes that span borders organised by criminal organisations.
Below, you’ll find just some of the main types of financial crime
- Money laundering: Money laundering involves the process of disguising the origins of illegally obtained funds to make them appear legitimate. This typically involves a series of complex transactions or activities aimed at concealing the illicit source of funds. For example, criminals may use shell companies, offshore accounts, or cryptocurrencies to launder money derived from drug trafficking, corruption, or other criminal activities.
- Terrorist financing: Terrorist financing involves the provision of funds or resources to support terrorist organisations or activities. This may include fundraising, donations, or other financial transactions intended to finance terrorist acts or facilitate their operations.
- Fraud: Fraud encompasses a wide range of deceptive practices aimed at obtaining money or access to financial products and services through false pretences, misrepresentation, or deceit. Common types of fraud include identity theft, credit card fraud, investment scams, and insurance fraud. Fraudulent activities can have devastating financial and reputational consequences for individuals, businesses, and financial institutions alike.
- Bribery and corruption: Bribery involves offering, giving, soliciting, or receiving money or something of value to influence the actions or decisions of individuals in positions of authority or trust. Corruption refers to the abuse of entrusted power for personal gain, often involving bribery, kickbacks, or embezzlement.
- Insider trading: Insider trading occurs when individuals trade financial assets based on non-public information about a company. This illegal practice gives insiders an unfair advantage in the stock market and undermines the integrity of financial markets.
- Cybercrime: Cybercrime involves the use of digital technologies to commit fraud, theft, or other illegal activities. This includes hacking, phishing, malware attacks, ransomware, and online scams targeting individuals, businesses, and financial institutions. With the surge in digital transactions, cybercrime poses a significant threat to data security, privacy, and financial stability.
- Tax evasion: Tax evasion involves the deliberate underreporting or concealment of income, assets, or transactions to evade tax obligations. This may include falsifying records or using offshore accounts to hide income from tax authorities.
- Sanctions violations: Sanctions violations occur when individuals, entities, or countries engage in prohibited activities or transactions that violate international sanctions regimes. These sanctions may be imposed by governments or international organisations to address national security concerns, human rights abuses, or other geopolitical issues.
- Human trafficking and smuggling: Human trafficking involves the exploitation of individuals for forced labour, sexual exploitation, or other forms of coercion. Smuggling refers to the illegal transportation of people across borders for financial gain. Both human trafficking and smuggling are lucrative criminal enterprises that exploit vulnerable populations and fuel the fire of organised crime networks.
What risks does financial crime pose?
The prevalence of financial crime poses a number of risks to individuals, businesses, and society at large. Firstly, financial loss is a significant concern, as financial crimes can result in substantial monetary losses for victims, including individuals, businesses, and financial institutions. Fraudulent activities, such as identity theft and investment scams, can drain savings, damage credit ratings, and cause irreparable financial harm.
What’s more, financial crime exposes firms to regulatory and legal consequences, which can be severe. Non-compliance with anti-money laundering (AML), counter-terrorism financing (CTF), and other regulatory requirements can expose businesses to significant legal and regulatory risks. Financial institutions may face fines, penalties, and sanctions for failing to implement effective compliance measures or for facilitating illicit financial activities
Moreover, financial crime poses national security threats by funding illicit activities, extremist organisations, and hostile regimes. Activities like terrorist financing and sanctions violations undermine global efforts to combat terrorism, proliferation of weapons of mass destruction, and transnational organised crime.
How can compliance teams combat financial crime?
Compliance teams play a pivotal role in combatting financial crime through a combination of proactive measures and robust strategies. Firstly, conducting thorough risk assessments and due diligence processes enables compliance professionals to identify potential vulnerabilities and assess the level of risk within their organisations. By analysing customer relationships, and understanding their risk profiles compliance teams can detect suspicious activities and implement risk-based controls to mitigate the threat of financial crime.
Implementing robust Know Your Customer (KYC), Know Your Business (KYB) and Customer Due Diligence (CDD) procedures is essential to verify the identity of customers, assess their risk profiles, and monitor their risk profiles for any irregularities or red flags.
