This is according to David Grace, global financial crime leader for PwC. Grace was speaking at a financial crime breakfast conference held in Johannesburg recently at which he shared insights on global developments in financial crime with some of South Africa's leading financial services institutions, and how PwC is responding to them globally and regionally.
Financial crime can have a long lasting effect on a company's brand and seriously damage its reputation. Grace points to examples where the UK and US regulators have sanctioned major banks and financial institutions that exceed billions of dollars for breaching policies and legislation.
Globally, financial institutions are facing a severe financial crime expertise talent shortage. There are not enough skilled people to detect financial crime. Furthermore, organisations do not have sufficiently effective technological solutions and systems required to uncover improper and unlawful activity.
"New rules and stringent enforcement of existing legislation and regulations are also assisting in protecting customers and reducing the impact of financial crime.
However, good intentions can also have negative and unintended consequences," says Andrew Clark, EMEA regional financial crime leader for PwC.
The typical response to increased regulation by financial institutions has been to de-risk. "Rather than trying to manage risks more effectively, organisations are reducing their risk appetite. As a result, firms are moving out of some markets which are seen to be more riskier than others and are terminating some business relationships in an attempt to reduce their exposure to regulatory censure," he explains.
Clark says this has had an effect on certain groups such as charities and other non-government organisations struggling to receive funds that they require in order to provide aid to those less fortunate. The effect is also spilling over to firms that do business with banks, such as money service businesses, as banks impose bans on doing business with them as a result of the increased risk. Furthermore, emerging markets are increasingly being cut off from the global correspondent banking network.
He says that significant improvement is required in this area. Financial services organisations must reduce the risk of financial crime in an effective and proper manner. They must get to know their customers and manage the risks.
Roy Melnick, who leads PwC South Africa's anti-money laundering and counter-terrorist financing division, says South African accountable institutions need to adopt a risk-based approach to manage money laundering and terrorist financing risks. This comes in the face of proposed amendments to South Africa's anti-money laundering law - the Financial Intelligence Centre Act (FICA).
"The new laws will not only strengthen South Africa's fight against money laundering and terrorist financing, but also go a long way to ensuring that South Africa's legal framework aligns itself with global anti-money laundering and counter-terrorist financing standards."
Current measures employed by accountable institutions to identify and verify their customers will need to be revisited and potentially enhanced. This will almost certainly lead to changes to existing measures employed by institutions such as the manner in which high risk clients are managed; more onerous beneficial owner requirements; and the manner in which clients such as politically exposed persons are identified, verified and monitored.
