Would you buy your food from a supplier who you do not trust? Does the possibility that a food supplier’s recklessness with their product lead you to distrust all suppliers? For most of us, the answer to both questions is no. We use tell-tale signs and established mechanisms to avoid untrustworthy suppliers.

There would be relatively few of them in the market, and the more we avoid them, the more isolated they will become. We can never be sure that we will always be successful at avoiding them each and every day of our lives, but our behaviour would consistently ensure they do not proliferate and harm society in any significant way.

This is a simple explanation of a risk-based approach, which is used in many decisions that we make in our lives. This approach is equally important, and most probably even more essential, for banks to be successful in the war against financial crime.

The risk-based approach in the war against financial crime was introduced and promoted by the British regulatory authorities around 20 years ago where the Financial Services Authority (FSA) was one of the first authorities to put such concept in a written approach in its book titled A New Regulator for the New Millennium. Since then, it was endorsed by various international bodies such as the Wolfsberg group and the Financial Action Task Force.

To this day, it remains a cornerstone in focusing efforts to fight the financial crime that matters, where and when it matters, especially to ensure that crime is prevented and stopped before it actually happens.

Financial criminals go about their business in three stages: the placement, the layering, and the integration. They often attempt to use banks in order to attain their aims. To effectively stop them, the banking industry must focus its efforts on the rela­tively small proportion of its potential clientele that actually consists of criminals. It must shift its approach from a post-analysis approach to investigate crime after it happens to a proactive approach to detect and stop crimi­nals before they can abuse the system to achieve their aims.

Financial criminals go about their business in three stages: the placement, the layering, and the integration

It is equally important that banks need to have controls in place to identify all offences with a stronger focus on the customers that pose the highest risk for the institution, the financial system and society in general.

This requires the use of a range of tools and behaviours by banks, spanning their strategic approach to business, the training, the development and retention of human capital and the use of appropriate technologies. It is above all to be expressed in a culture, whereby banks are open for business and are there to facili­tate transactions for all legitimate dealings, but are at the same time fully focused on detecting and stopping criminals for using them as vehicles for financial crime.

It is very important to ensure a culture of good governance and a corporate strategy that avoids crime as much as possible. A culture that can be apportioned into a number of portions such as the strategic approach to the business and the human capital phenomena where in the foreseeable time the focus may be on various areas such as in forensic accounting, financial investigations and intelligence and big-data technicians, among others to top-up the much-needed banking and industry knowledge to be able to challenge the real risks that banks are facing which are also changing depending on various outlooks and scenarios.

Furthermore, and especially nowadays, technology and artificial intelligence play a very prominent role in the fight against financial crime.

Above all, what is needed is a culture of discipline and good understanding of the bank’s defence model, policies and guidelines to manage the risk of financial crime and support genuine businesses and customers, while curtailing criminals through on-going customer due diligence and knowing your customer and monitoring activity for unexpected behaviour.

In the current scenarios, subject persons need to fully understand the nature of organised crime groups, fraudsters, the misreporting of financial data, the business fronts, the complex structures, the beneficial ownership challenges, and a number of other elements that at the end of the day are causing the challenges of today financial crime reporting which ultimately are the real threat to the development of economies and their stability.

It is also true that the fight against financial crime requires a society-wide endeavour. The current scenario compels not only banks but all other relevant subject persons in the private sector to work closely and interact with various local and international agencies, law enforcement bodies and authorities. These should apply their regulatory oversight hat but also be of guidance and support to the industry, to better understand and acknowledge the real threats, the constant changing typologies, and the clients, in order to use risk-based approaches to decrease as much as possible the residual risk that is coming from such illicit activities.

Any views, assumptions or opinions expressed in this article are those of the author. Issued by Bank of Valletta plc, 58, Zachary Street, Valletta VLT 1130. Bank of Valletta plc is a public limited company regulated by the MFSA, licensed to carry out the business of banking and invest­ment services in terms of the Banking and Investment Services Acts (Cap. 370, 371 of the Laws of Malta).   

Ryan Caruana, deputy MLRO (money laundering reporting officer), Bank of Valletta 

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