The annual cost of money laundering and associated crimes is between $1.4 trillion and $3.5 trillion, according to the United Nations Office on Drugs and Crime.
However, these figures do not consider the broader financial and reputational damage inflicted by financial crime on companies. These include fines, falling share prices, the costs of remedial measures, and those associated with legal or regulatory proceedings.
As a result, financial crime disproportionately affects businesses that have lax anti-financial crime controls, says a whitepaper jointly published by Themis and Encompass.
The paper found that the average share price loss in the Financial Services sector one day after a regulatory probe was 5.15 percent, falling to 20.7 percent six months after the announcement.
Senior managers increasingly face individual penalties as well, including forced resignation, bans on operating in the industry, and even criminal charges if they turn a blind eye, ignore, or are unaware of anti-financial crime systems and controls.
2020 research by Themis found that financial crime concerned professionals across the industry for three main reasons: direct financial loss (cited by 36 percent of respondents), reputational damage and customer loss (32 percent), and regulatory fines (15 percent).
However, fines have the most immediate financial consequences for any organisations that have breached anti-money laundering (AML) regulations.
Penalties have reached new heights over the past couple of years, with watchdogs imposing almost $1 billion worth of AML fines in the first half of 2021 alone. According to the white paper, the industry is on track to equal, if not exceed, the $2.2 billion levied in 2020.
So, there is no room for complacency, it says, listing numerous examples of the financial and reputational damage done to institutions by AML failings.
But why do these incidents keep happening? Within organisations, financial crime is often “a result of misconduct or inadequate oversight on the part of senior managers, via the promotion of a corporate culture of risk, recklessness, or secrecy”, says the white paper.
“Yet the true impact of financial crime extends beyond the financials, and has serious consequences for environmental, social, and governance (ESG) issues.
“Financial crime is also cyclical and self-perpetuating in nature; when it robs governments of taxes and citizens of legitimate employment and income, exacerbating poverty, it creates an endless cycle of exploitation, as even more people are forced to turn to crime to sustain themselves.”
So rather than considering compliance purely in terms of potential negatives or ‘fixing a hole’, Financial Services companies should seize the opportunity to “reframe it in terms of active gains”, say the authors.
“Financial crime compliance is not just about the avoidance of reputational damage, regulatory fines, or the associated drop in share price; as a key pillar in firms’ ESG programmes, it can attract customers, confer a competitive advantage, and enable companies to have a net positive impact on the world around them.”