Partnership and Accountability are the Key to Tackling Financial Crime

A new week and another fine is imposed on the City. The minutiae of financial misconduct is strewn across front-pages and rolling news coverage. Each disclosure undermines London’s reputation as a global financial hub. Every transgression tests the regulator’s patience to maximum. Financial penalties rise and a question mark hangs over the government’s competence and capacity to tackle financial crime.

At stake for banks, regulators and policymakers is nothing less than the legitimacy and stability of the financial system. This triumvirate is tasked with managing the overall effectiveness of the system but that can only happen if the triumvirate is prepared to act together, not always in unison but with the support of each other.

Recent initiatives, such as The Royal Bank of Scotland’s poacher-turned-gamekeeper agreement with the City of London Police to provide free training and advice on financial crime is one example. The creation of a Financial Sector Forum is another. But history tells us that such initiatives tend to lose momentum unless the spotlight of external scrutiny is kept trained upon them via independent monitoring and evaluation.

Breaking the banks

There is little doubt banks are struggling to combat financial crime. Increased exposure to high-risk markets, emerging technologies, and near-instant global banking present a myriad of opportunities to be exploited around the globe. London, like New York and Hong Kong, offers an extensive menu of opportunities for financial crime and illicit financial activity. From terrorist financing for designated groups in Syria, to the corrupt actions of politically exposed persons, all need to interact, at some stage, with the financial system.

One way to prevent financial crime is through regulation. These days the British regulator patrols an increasingly complex landscape of products and services across a growing number of sectors. Previous attempts to police the City have been criticised as ‘lite-touch’ but one could also conclude they have not been terribly sophisticated in their approach. Regulators face their own significant challenges including a lack of knowledge regarding the business and procedures of banking in all its forms and, most importantly of all, limited resources to make a constructive difference. At worst this can lead authorities to impose misguided regulation, forcing the industry to focus on the wrong priorities. Banks spend vast resources on regulatory compliance, as directed by regulators – tackling financial crime per se is secondary. Is that really what regulators intend?

A fact that has not gone unnoticed by analysts is the British government’s reliance (some would say increasing overreliance) on the City to protect the financial borders of the UK. The self-policing City is now a reality and not just in the UK. In the US for example, JP Morgan Chase recently announced plans to add 5,000 staff to its compliance function, and increase its overall risk and compliance spend by US$4 billion. Detectives, senior investigators and crime analysts are leaving their public sector jobs for the City in droves. Law enforcement is not the only answer. Legislation plays a valuable role. But legislation must be necessary and proportionate.

Thirteen years after the 9/11 attacks, the unintended consequences of the proliferation of such laws and regulations are becoming clearer. Whether the counter-terror finance (CTF) regime has been proportional to the actual threats is a moot point. The regime has undoubtedly had some success in raising banking standards but has added a significant cost to the operations of banks and those that use their financial services. Furthermore, the CTF regime and similar legislation has accelerated the phenomenon of so-called ‘de-risking;’ increasing financial exclusion amongst the likes of charities and remittance companies. This has arguably reduced our ability to interrupt financial crime and illicit finance by excluding these flows from the formal financial system where they can be monitored.

A new proposal

In order to rebuild the reputation of London as a financial hub, re-establish the credibility of government and make the regulator smarter, we need to take a different tack. Greater accountability of all stakeholders must be the focus of our endeavours. Accountability rests on knowledge and information — and thus on transparency in governance mechanisms. For too long conversations between the triumvirate have been in private, behind closed doors without public discussion, evaluation, and accountability. The gulf in trust and collaboration between the public and private sectors remains immense.

The new Centre for Financial Crime & Security Studies at RUSI aims to support this approach by evaluating and challenging the effectiveness of the current system in an independent forum with the main stakeholders around the table. There is an urgent need for the current system to be reassessed and for initiatives that could achieve a step change in the efforts to disrupt financial crime and illicit finance to be developed. Accountability and partnership are at the heart of this effort. For the City, regulators, and policymakers, it is time to regain the advantage.

Charlie Edwards is Director of National Security and Resilience Studies and Tom Keatinge is Director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute.