Financial crime is multi-faceted, multi-national and very often invisible, making it hard to identify, measure and combat, however its impact is felt in many ways. Commissioned by Thomson Reuters, FTI Consulting conducted research with 2,300 senior executives in large companies across 19 countries to reveal the true magnitude and cost of the challenge.
THE SCALE OF THE CHALLENGE
Rapid developments in financial information, technology and communication allow the movement of money anywhere in the world with speed and ease. However, at the same time globalisation has increased the size, geographical reach and complexity of supply chains. This makes it harder than ever before for even the best resourced and most committed organisations to identify and prevent financial crimes, which we classify for the purposes of this report as money laundering, bribery and corruption, cybercrime, theft, slavery/human trafficking and fraud.
Adequately screening all business relationships to uncover criminal connections is vital in the fight against financial crime. Yet, according to the survey, 41% of global customers, third party vendors, suppliers or partner relationships were never screened for financial crime-related issues. One reason for the screening shortfall may be the sheer number of relationships that businesses need to monitor. 1 in 10 (9%) of respondents have dealt with over 10,000 third party vendors, suppliers or partners during the last 12 months. Three quarters had under 1,000 relationships.
Another way to understand the scale of the challenge is by looking at the multiple pressures businesses face. While 71% describe their organisations as being under extreme or significant pressure to improve regulatory safeguards, this issue ranks below the 80% who feel a similar need to improve profit, or the 83% in connection with turnover. 77% felt extreme or significant pressure from government regulators and 74% from corporate boards to improve regulatory safeguards.
One further challenge is the fact that organisations must protect themselves from both internal and external perpetrators, and there are significant variations according to each aspect of financial crime. For example, bribery and corruption had the highest incidence (69%) of internally perpetrated crime over the last 12 months, while cybercrime topped the list for external involvement at 75%.MEASURING THE IMPACT
The survey revealed that 47% of organisations participating in this research have been a victim of at least one type of financial crime in the last 12 months. Globally, fraud and cybercrime both had a 20% incidence, closely followed by 19% of companies who have been the victims of theft. This high level of incidence means that financial crime is regarded as being a depressingly common practice. Taking bribery and corruption as an example, 59% strongly agree that it is a common practice in some of the regions that they operate in.
Looking across sectors, the highest incidence where bribery and corruption was strongly considered to be common practice was in the agriculture, forestry and fishing industry (73%). Regionally, 72% of those operating in Canada strongly agreed money laundering was a common practice, followed by 67% of those in Latin America and the Caribbean.
Our research also found that public companies suffer more. While 55% of publicly listed companies had experienced some form of financial crime in their global operations over the last 12 months, this fell to 45% for private companies. Looking at the different types of financial crime, there was generally more incidence in publicly listed companies.
For many organisations, the costs do not stop there. Those found, knowingly or unknowingly, to be involved in money laundering or other financial crimes risk regulatory fines, reputational damage and even prosecution. The survey reflects this, showing that approximately half of respondents believe that being convicted of undertaking or facilitating financial crimes would have a significant negative impact on their organisation. Perhaps unsurprisingly, financial loss was the biggest concern that respondents considered likely to happen and that it would have a significant negative impact on their company at 31%, closely followed by damaged reputation and client churn/loss at 29%.
This fear of financial and reputational damage due to regulatory breaches is having another, unintended consequence. Fearing that prevention alone may not be able to limit exposure to financial crime, organisations are deliberately avoiding customers, suppliers, regions or industries that they perceive as being most exposed to financial crime. The survey supports this view, with 72% saying they de-risk by avoiding, rather than managing, heightened risk customers. The impact in terms of lost opportunities at both organisational and national level is difficult to quantify, but it is likely to impact productivity and economic development.COUNTING THE TRUE COST
Putting a cost on financial crime is notoriously difficult; historically, many organisations have been reluctant to publicise losses. To address this issue we asked anonymised survey respondents to estimate the impact of each type of financial crime on their organisation. By adding together the estimated turnover lost due to each type of financial crime over the last 12 months, the aggregate figure is a staggering USD1.45 trillion.
Organisations are all too aware that financial crime has a wider societal impact and is not a victimless crime. For example, 46% think that the consequence of money laundering is higher prices for end users and 42% believe it leads to less government revenues. Asked to identify the real victims of money laundering, 48% believed it was the economy of that nation and 38% its people. Overall, just 3% believed that there were no consequences from money laundering and the same percentage considered that there were no victims.
With an estimated 40 million people living in modern slavery, the human and economic costs are enormous. A 2014 report by the ILO puts the cost at $150 billion. It is likely that the real numbers are far higher. In the EU, a survey into the total economic cost of organised crime put the cost of slavery/ human trafficking at €30 billion. If we assume that the EU represents approximately 20% of the global economy and that other areas of the world have a similar prevalence, this puts the global cost at €150 billion.
Our survey reveals that, despite ever tightening regulation and significant spending on preventative measures, the impact of financial crime across the globe remains huge. Organisations are committed to fighting financial crime, but there are gaps in training and resources. It is a common misconception that high levels of financial crime are due to a lack of efforts in fighting it.Respondents estimate they spent an average 3.1% of global turnover over the last 12 months to prevent such issues occurring around their global operations. This adds up to a collective spend of USD1.28 trillion.
To mitigate the risk of financial crime, 6 out of 10 of survey respondents say they operate formal training for their colleagues around the globe for bribery and corruption, money laundering, fraud, theft and cybercrime, although less than half (46%) operate this training for slave labor/human trafficking. This suggests more could be done, with approximately 4 in 10 strongly agreeing that they struggle to educate and influence colleagues on bribery and corruption, money laundering, fraud, theft and cybercrime in some regions; with 6 in 10 strongly agreeing that they are struggling to educate and influence colleagues about slave labor/human trafficking.
FIND OUT MORE
If you want to find out more, a full report covering the findings of this survey can be found at: https://risk.thomsonreuters.com/en/resources/special-report/true-cost-of-financial-crime-global.html
Regional reports are available here: https://risk.thomsonreuters/financial-crime-regional-reports
Methodology: This research was conducted online by FTI Consulting in March 2018. A total of n=2,373 senior managers at large global organisations across 19 countries completed the survey. Weighting was applied to each country to ensure each was equally represented in the global data.
Please note that the standard convention for rounding has been applied and consequently some totals may not add up to 100%.
To understand how FTI Consulting to help you understand your world, email Dan.Healy@FTIConsulting.com