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A New Year’s resolution – To adequately resource the fight against financial and economic crime?

Written by Guest on Tuesday, 2 January 2018

by Nick Maxwell – Nick is the Head of ​the Future of Financial Intelligence Sharing (FFIS) programme. As a partnership between the RUSI Centre for Financial Crime & Security Studies and NJM Advisory, FFIS leads independent research into the role of public-private financial information-sharing partnerships to detect, prevent and disrupt crime. www.future-fis.com

Blink and you would have missed it, but at the tail end of last year the UK Government launched its long awaited ‘Anti-Corruption Strategy’ – a 70-page tour de force of policy ambition to tackle corruption and economic crime.

It was released without much fanfare, which may be one reason to be concerned about the political commitment to its implementation. But there is another reason to be concerned. Despite its Christmas period launch, it seems that there is a lack of giving where it matters: cold hard resources for the UK’s over-stretched law enforcement agencies to tackle serious economic and financial crimes.

Focusing specifically on the integrity of the UK as a financial centre, the anti-corruption strategy refers to “Stronger law enforcement, prosecutorial and criminal justice action; further enhanced anti-money laundering and counterterrorist financing capability; and stronger public-private partnership, to share information and improve targeting of those who pose greatest risk”. All this is to be congratulated.

However, there is a risk that the resources allocated to the challenge do not back up the words.

As the recent ‘Future of Financial Intelligence Sharing’ study found, using public/private partnerships in the fight against financial and economic crime should not be considered a resource-free exercise for the public sector. While it can be tempting to rely on private sector intelligence capability in major financial institutions, Robert Barrington recently warned of the dangers of ‘outsourcing’ law enforcement responsibilities. Our research identified a strategic risk for the future of public/private partnerships if the central analytical capability of the partnership is not adequately resourced and if law enforcement agencies do not have the means to take financial intelligence on to prosecution outcomes.

Despite the National Crime Agency estimating that up to £90 billion of illicit funds are laundered through the UK each year, UK law enforcement resources are not yet meeting the scale of the challenge.

We can find some glimmers of hope in the Anti-Corruption Strategy. The strategy refers to increasing the analytical capability of the Joint Money Laundering Intelligence Taskforce (JMLIT) and the establishment of a National Economic Crime Centre (NECC), based in the National Crime Agency. However, it is unclear how the increase in its analytical capability will be achieved, beyond secondment of existing staff. Details are also thin on the ground as to what the NECC’s role will be, and – as yet – it seems there will be no new resources dedicated to this effort.

What is the crux of the problem? Those with any insight into government know that it is far easier to impose costs and regulatory requirements on the private sector, than to fund a public agency. In the context of tackling financial crime, this dynamic has led us down a path that has imposed enormous cost on the private sector, systemic duplications of effort across each regulated firm, and – ultimately – is having a limited effect on the underlying crimes.

As a very conservative estimate, $8.2 billion is believed to be spent worldwide on AML compliance by the financial sector. However, in the Anti-Corruption Strategy, the UK government refers to an industry estimate that over £5 billion a year is spent on financial crime compliance just in the UK.

In the current system for tackling financial crime, each ‘regulated entity’ is required to develop its own intelligence understanding of the financial crime risk it faces and then must make decisions about whether to take on customers where there are grounds for suspicion. This information and suspicion cannot typically be shared between financial institutions. As a result, when a bank or another regulated entity decides that the level of suspicion against a client is so high that they exit the customer relationship, the suspect customer may then simply establish a new account with another financial institution. That new financial institution must then start their investigations from scratch.

The reliance ‘in the system’ on private sector compliance spending to respond to the financial crime challenge also raises perverse incentives to drain law enforcement agencies of skilled investigators who are, quite rationally, offered higher salaries to work for regulated firms.

A key objective of this very costly regulatory regime is to provide high-quality reports of crime from the financial sector to law enforcement agencies who can then take on investigations. However, this is not happening in an effective and efficient way.

The major bottle-neck in the system is law enforcement capacity to take on prosecutions. Our study found that, as a conservative estimate, 80% to 90% of reports of suspicions of financial crime submitted by the private sector are not being used to support law enforcement investigations. Compared to the £90 billion of illicit funds flowing through the UK each year, UK efforts to freeze and seize illicit funds are insignificant, let alone taking the perpetrators to criminal justice. In essence, the scale of financial crime currently swamps the resources within UK law enforcement.

A key step to move us out of this paradigm should be to move beyond secondments within JMLIT, or the new ‘NECC’, to fund adequate analytical resources in the UK ‘Financial Intelligence Unit’ (FIU) and provide law enforcement with adequate investigative capacity to prosecute. Reform of the SARs system, also profiled in the Anti-Corruption Strategy, may provide an opportunity to help achieve this.

In terms of its analytical firepower, the UK’s FIU pales against its peers in Australia, the US and Canada. JMLIT has provided something of a stop-gap for a small number of cases, but, in order to provide analysis at scale, real resources and up to date IT will be required. As we highlight in our study, the Australian FIU, which is funded through an industry levy, and the Fintel Aliance partnership may provide a funding model that the UK could follow.

Are we giving enough to the fight against financial crime in the UK? The answer appears to be: yes, but not in the right way. Collectively and across the system, the resources are there to have a significantly greater effect against financial crime, but they are not allocated across the system in a manner that makes sense.

The ambition in the Anti-Corruption Strategy should be recognised and supported, but if it is to avoid being a Christmas season wishlist it will require innovative solutions to substantially increase the funding available to the law enforcement effort. As far as this strategy goes, implementation will be key and money will speak louder than words.

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Read 311 times Last modified on Wednesday, 03 January 2018 15:00

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The TI-UK blog features thought and opinion from guest writers as well as TI staff. Any opinions expressed by external contributors do not necessarily reflect the views of Transparency International UK.

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