Bringing you live news and features since 2006 

Andrew Davies, Fiserv

Financial crime and regulatory scrutiny to grow across the industry

RELATED TOPICS​

Investment management is an industry in constant expansion, with PwC recently estimating a USD35 trillion increase in the total global value of assets under management by 2025. Because of this growth, financial crime risks and regulatory scrutiny could also increase across the industry. 

Along with financial crime specialist Themis, Fiserv published the paper ‘Financial crime risks in investment management’ earlier this year. Co-author of the paper Andrew Davies, Vice President of Global Market Strategy, Fiserv, speaks to Wealth Adviser on the current risks threatening firms and the challenges and opportunities that investment managers face in terms of financial crime compliance.

Q:What financial crime risks do investment management firms face?

Even though asset managers and wealth managers operate in a relatively lower risk sector of the financial industry, they must still be aware of financial crime risks. According to our study – which surveyed professionals working in compliance or financial crime functions in investment management – money laundering, fraud, and cybercrime are the top three financial crime threats to the investment management industry. Other prominent threats include bribery, sanctions, and terrorist financing.  

COVID-19 has proliferated these issues, with 80 per cent of respondents agreeing that financial crime risks had increased because of the pandemic and its associated circumstances. Increases in investment-based fraud and cyberattacks have also been reported due to the circumstances presented by remote working. 

Q: What inherent risk factors are present in the industry?

We found that client and geography risks are the main factors that make investment management vulnerable to financial crime. Specifically, powerful clients, such as politically exposed persons (PEPs) and relatives or close associates (RCAs), represented the biggest risk for 55 per cent of respondents. Clients who operate through offshore trusts, complex business structures, or in high-risk jurisdictions were the next most notable risk, as noted by 50 per cent of respondents.

The prominent culture of manager-client confidentiality can also present additional risks, as it can translate into an unintentional tolerance of secrecy, potentially creating opportunities for criminals. Although confidentiality helps managers and clients stay on the same page regarding transaction activity, the closeness of many investment manager-client relationships can lead managers to let formal due diligence slip and allow risks to go unnoticed.

Q:  What is the role of regulators?

Regulators worldwide are bolstering oversight across the investment management industry in response to growing risks and recent scandals. However, the investment management community appears to be divided on whether regulators are communicating their expectations with regard to financial crime compliance, as 47.3 per cent of respondents believed more regulatory guidance is needed.

Here in the UK, investment managers are subject to the Money Laundering Regulations 2017, which impose stringent customer due diligence (CDD), enhanced due diligence (EDD), transaction monitoring, and reporting obligations. The UK regulator, the Financial Conduct Authority (FCA), has also increased its emphasis on operational resilience in its Asset Management Supervision Strategy. Across Europe, due diligence standards have been set by recent legislation resulting in closed loopholes in countries with lower requirements for EDD. 

Q: How can financial crime risks be avoided?
Ongoing screening of public source information is imperative to detect negative media concerning current or future customers. This screening must be conducted in tandem with close monitoring of transaction flows.

Another important step is the implementation of automated financial crime risk management solutions to ensure efficient, accurate, and comprehensive monitoring. Automated solutions have enhanced capability to detect suspicious activity and transactions like excessive transfer, purchase or sale of funds, or irregular flows of capital.

Additionally, firms ought to encourage regular concurrence between client managers and clients, promoting trustful relationships which also include thorough, ongoing monitoring of relevant activities and transactions. If widespread, this practice would counter the potentially damaging effects of the industry’s culture of confidentiality.

Q: What are the main challenges when it comes to financial crime compliance?
Due to the traditional consideration of investment management as ‘low risk’ in terms of money laundering, firms may not deem it a top priority to have sophisticated anti-money laundering (AML) systems in place. As a matter of fact, over the past decade, relatively few firms in the industry have been subject to the attention of regulators on financial crime grounds. Money laundering risk assessments in the sector were often not undertaken, not documented, lacked appropriate consideration of risks, were limited to one element of risk, or were not used to inform control implementation. 

Further, the lack of widespread automation is still a challenge across the industry. Of the Themis-Fiserv survey respondents, 42 per cent replied that their CDD processes still rely heavily on manual processes and procedures, which have shown to be less effective at preventing crime than automation.

Q: How are firms impacted when they get it wrong?
Inadequate implementation of appropriate anti-financial crime measures leaves the sector exposed to potential penalties from regulators, customer loss, reputational damage, and personal liability of senior management. The survey found that the most worrying consequence of inadequate regulatory compliance is the increased risk of financial crime, followed by regulatory fines and reputational costs.

Q: Any final thoughts?
Investment management a growing area of interest to financial criminals, who are exploiting lucrative new avenues of committing fraud, money laundering, cybercrime, and more. Regulators are hard at work finding innovative ways to stop them, but additional effort and investment will be necessary to keep firms both resilient to crime and compliant with their regulators’ high expectations.
 

Latest News

Some big forces moved further into ETF issuance this week, with Capital Group launching 12 new active/passive model portfolios, and..
ASYMmetric ETFs has announced the launch of two new funds, ASYMmetric Smart Income ETF (NYSE: MORE) and ASYMmetric Smart Alpha..
First Trust Advisors has announced the launch of a new actively managed ETF, the First Trust Multi-Strategy Alternative ETF (NYSE..
Allianz Investment Management LLC (AllianzIM), a wholly-owned subsidiary of Allianz Life Insurance Company of North America has announced the launch..

Related Articles

ETF
We are very pleased to open the voting for service providers (selected by nominations) and ETP issuers, selected by our data partners, Trackinsight, for the European ETF Express Awards, in...
Bitcoin
Osprey Funds’ founder and CEO, Greg King, has written an open letter to Barry Silbert, majority owner of Digital Currency Group which owns Grayscale, suggesting that he uses his powers...
Captain
Comparing multifactor ETFs to the popular Marvel Avengers series may seem a bit of a stretch but recent analysis from Morningstar suggests the investment strategies have more in common with...
Mackenzie
Canadian asset manager Mackenzie Investments, with CAD186.6 billion under management, has published its annual Mackenzie Investments Year-End ETF Report. ...
Subscribe to the ETF Express newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by