Broadly, a financial crime could either be an internal fraud committed by the bank's own workforce or an external fraud committed by a customer along with a third party. Any bank may become vulnerable to financial crimes involving various parties - customers, employees, external organised crime groups or influential sections and those with whom the bank has business dealings. Such activities are often associated with money laundering, embezzlement, evasion of sanctions, and illegal transfer of funds for tax avoidance and financing terrorism.
Economic and financial crimes are global problems today. Different forms of asset misappropriations and cybercrimes have become grave concerns both at operational and policy levels. The changed scenario exposes a financial institution to various risks in terms of operation, laws, regulations and reputation. If the perpetrators get advantage of deficiency in bank management, the risks become even greater. Several drivers, including globalisation, proliferation of banking channels, rising transaction volumes and technological advancements, have created new opportunities for financial crimes. Offenders are more sophisticated than in the past and criminals continuously probe banking organisations' defences through innovative techniques. Alongside big banks, small banks are easy prey for criminals, as many lack robust systems to fend off threats. It has become a critical challenge for banks to catch up with technological developments.
There are definitional differences of the term 'financial crime' and thus the scope. Broadly, financial crime could be connected with any economic sectors though in some definitions it has been linked only with the financial sector. An economic or financial crime refers broadly to any non-violent crime which results in a financial loss. These crimes comprise a broad range of illegal activities, including fraud, tax evasion and money-laundering, which have become complicated with rapid advances in technology.
Financial scams are amongst the common news in the media. Media reports and surveys have been coming up with the information of innovative scams regularly. Financial scams and crimes are becoming so common that news of email scams, online scams, invoice fraud, cheque and bank draft scams, etc. do not surprise us any more. A recent BBC report noted, a financial scam was committed once every 15 seconds in the first half of the year 2016, prompting a new campaign to highlight the risks. According to the most recent Global Economic Crime Survey of the PricewaterhouseCoopers, at least one in three organisations reports being victim of economic crime; and close to half the organisations surveyed believe that local law-enforcement agencies are not adequately equipped to investigate economic crimes and leaving the responsibility for fighting economic crimes to other agencies. The forms and degree severity of financial crime threats have changed and increased over the years, partly due to the increasingly globalised/borderless financial systems, coupled with new technologies. In recent times, concerns over money laundering, cybercrime and violation of sanctions have became very rampant both in developed and developing countries.
The high percentage of non-performing loans is a key concern of many banks in developing countries and some of these are clearly cases of asset misappropriation. Though not always, in many instances these are the outcomes of financial frauds or crimes. Sometimes, it is not easy to identify the willful defaulters from the defaulters with genuine reasons. Thus, in most instances, the stakeholders do not term these as financial crimes, and generally willful default is not regarded as a criminal offence. However, the situation is changing now, and there is a growing demand to categorise willful default as a criminal act and to frame stringent regulations to handle this financial crime to save the banking and financial sector. For example, in India, in recent days, mounting bad loans and high default rates by large companies have drawn criticism from experts and regulators, and there is a growing demand from different quarters to frame strong laws to deal with cases of diversion of fund and willful default by treating these as serious financial crimes.
It has been proven that the losses of financial crimes could be high. Several banks were victims of crime and there is a trend of rising costs of individual frauds. Moreover, a number of banks have recently paid big fines for contraventions of US and EU sanctions. Compliance requirement is ever increasing and unpredictable. Anti-money laundering requirements and cyber security are now in the top of the priority list of banks.
On the way to handle financial crimes, increased regulatory demands for transparency and compliance, as well as hefty penalties for non-compliance, have put enormous pressure on banks, both financially and operationally. In several instances, these crimes threaten the security and safety of nations. These crimes range from simple operations carried out by individuals or small groups to highly sophisticated rings seeking funding for criminal enterprises or terrorism. Although financial criminals are often well-organised and persistent, bankers and citizens can take proactive steps to handle the challenge. Especially, an integrated and coordinated risk management and monitoring arrangement might deliver.
There is no doubt that the combination of today's financial services, regulatory as well as technology trends and landscape demands a more comprehensive and assured approach to financial crimes. As financial institutions can no longer solely rely on the 'basics' i.e. compliance programmes, internal controls and traditional risk management, banks need to do more. Regulators want banks to take greater responsibility for preventing financial crime to make efforts to enhance their transaction monitoring systems, acquire greater knowledge about customers and their transactions, and recruit people with expertise in risk investigation and compliance.
As in the case of the banking sector of developed and developing economies, banking sector of Bangladesh is increasingly facing the difficulties of financial crimes. In spite of some notable improvement in the loan default status over the years, some banks has still been struggling with high volume of non-performing loans (NPL) when cyber frauds and other forms of sophisticated financial crimes are adding to the burdens of the banking sector. It is true that all NPLs cannot be tagged with financial crimes; however, there is growing body of literature that termed willful default as a criminal act. On the way to addressing the challenges of financial crimes, banks in the country are mainly complying with growing requirement of the Central Bank. Especially, banks are consistently requiring higher compliance requirements to attain international standards related to AML and international trade facilitations. It is crucial to understand that financial crime may have a destructive and devastating effect on the banking system of the country. Truly, the management of risks of criminal activities and compliance of regulatory requirements are costly, challenging and even cumbersome. However, these are extremely necessary for ensuring long-term stability and sustainability of the banking sector.
Dr. Shah Md Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).