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Banking & Finance

Tackling financial crime

Released at: 16:44, 01/03/2016

Tackling financial crime

Ms. Terri Clementson, Director of Financial Crime at the Deloitte SEA Financial Crime Strategy & Response Network, tells VET about the risks for Vietnam from financial crime and how it can be addressed.

by Hung Khanh

As a developing country deeply integrating into the global economy, how should Vietnamese businesses tackle the issue of financial crime?

Vietnam is increasingly enjoying the value and benefits of its participation in global markets. Progress on recent trade agreements, the desire to attract foreign investment capital, and the critical role of correspondent banks as part of the financial market and the critical remittance network for Vietnam all multiply Vietnam’s integration with other markets. They also magnify the risk faced by Vietnam as well as the risks Vietnam confers on others in the global market. Increasing integration effectively means that what happens in Vietnam can effectively confer financial crime risk as well as liability to other jurisdictions, companies, and investors offshore who deal with Vietnam. So with growth comes connectedness and more viral risk.

From Vietnam’s side, this transfer of risk can be expected to change the way partners and peers assess the country. All emerging markets can expect increased scrutiny from transnational partners’ risk teams, offshore regulatory agencies and law enforcement bodies, and economic commentators. They will ask to see, and may attempt to measure, Vietnam’s financial crime risk management infrastructure. They may be patient and encourage Vietnamese companies to lay down fraud and financial crime strategies and frameworks as soon as possible. But that may be followed by the need to be able to demonstrate that detection and response capabilities are working and that manual risk controls are being replaced by electronic and more fail-safe controls designed over the next few years. What was “enough” several years ago in developed markets has been superseded and bolstered, and so following in those footsteps looks more like an evolving staircase than a linear path.

Similarly, transnational organized crime is increasingly targeting emerging markets like Vietnam. Developed countries often represent a higher likelihood of detection, whereas emerging markets with large populations, evolving controls, and often limited resources available to pursue and prosecute crime, means that countries like Vietnam are attractive target markets for criminals - something academics are starting to measure as “crime attractiveness”. Transnational criminal networks may see the revenues of Vietnamese companies as one asset to exploit, but the higher value lies inside Vietnamese companies’ risk management gaps. Those represent crime doorways into transnational corporations, accounts, customers, information, technology platforms, and supply chains that Vietnam deals with.

What are your thoughts on the potential impact of financial crime on Vietnam’s economy?

The impact of failing to manage financial crime threats effectively could impact Vietnam in many ways. The erosion of profits inside Vietnam is probably the most frequent consideration by Vietnamese companies when we talk about financial crime risk. Many may not immediately cite the risk of not knowing one’s customer or the beneficial owner or the destination of goods or the funds as a risk, but these gaps in risk intelligence can expose Vietnam to money laundering or sanction breaches. And it’s in that space where international fines can be truly crippling to a business. One such fine leveled in Asia in the last few years exceeded $8.9 billion.

If fraud, bribery and corruption, AML, sanctions, or cyber crime incidents are not effectively mitigated, detected and punished in Vietnam, they are likely to escalate and international markets’ response to that could be costly. A loss of faith can trigger increases in the cost of capital offered to Vietnamese companies, raise conditions applied to trade deals (insurance, demands for assurances, inspections, audits, non-compliance penalties) and dilute trade agreements or investment plans. So Vietnam’s current investment in getting financial crime risk mitigation right is a sound national priority that will pay dividends for companies as well as the wider economy.

What solutions are there for businesses to mitigate or prevent financial crime?

Where companies start and the steps they take as part of their financial crime strategy should vary according to the threat profile (markets they trade in, channels used, customer profiles), as well as the scale of their operations and span of regulatory obligations they need to satisfy. That threat profile needs to drive the scale of investment in risk mitigation. And steps they take towards that will be informed by their current state of progress / maturity on financial crime risk management, incident patterns and other investments planned such as technology being introduced into their operations, the experience of their teams, and the Board’s level of appreciation of the threat versus your current state. There is no magic recipe but strategy is a good start.

As part of that financial crime strategy, unpacking your operation’s business model can help reveal points of vulnerability and identify where controls and all the effort an organization is already applying may not be preventing incidents. Getting to the root cause can make all the difference.

And around the controls, a reliable fraud risk foundation is key. Policies, procedures, templates, training, and a dedicated skilled team managing financial crime risk and response are essential, particularly for larger businesses. A fraud risk framework should be part of a wider financial crime strategy, so investments in developing risk capability are not a one-off investment and continuous monitoring of evolving risk and implementing new ways to mitigate new threats becomes part of a company’s strategic planning cycle.

The complexity and workflow associated with risk mitigation can also be important to get right. In some cases an overload of controls has added so much complexity that it’s inspired staff to breach controls to get work done - to meet targets or to deliver the level of productivity expected. Also, maximizing the value from your existing spending on risk control is important. For example, many global financial institutions who were at the forefront of financial crime risk management are now rethinking their financial crime strategy to rationalize the cost and complexity of what they’ve built over many years of adding detail inside their risk framework. There are valuable lessons in that for Vietnam.

And finally, working on enriching, cleaning and restructuring a company’s data can dramatically improve Early Fraud Detection (EFD) driven by smart data analytics. It removes the reliance on blanket application of monitoring and helps target your mitigation effort. In this way some Vietnamese companies are also going beyond relying on a framework and armies of staff managing risk controls by looking back manually over past transactions. Some are using predictive analytics and profiling to target their sampling and auditing to cut through the effort being expended on fraud interdiction.

Over the last few years several major fraud cases have been detected in Vietnam’s banking sector and market disciplines seemed to improve afterwards. What do think about the current process Vietnam is implementing in boosting financial market transparency?

It’s very encouraging to see the media consistently educating leaders, employees, investors and consumers about the importance of transparency and fraud and corruption control. And the recent prominent investments by several banks to add to their risk mitigation effectiveness are another heartening development.

It’s also great to know that right now organizations are adapting online learning modules on fraud and wider financial misconduct to align to Vietnamese culture and values and Vietnam’s 2020 goals and ensure the examples that staff work through reflect the reality of local operations. Just copying “best in class” doesn’t work.

Along with education about progress on fraud and corruption control, we have been encouraging Vietnamese businesses to expand the conversation to “financial misconduct”, where compliance breaches may enable others to commit significant fraud or corruption. When staff understand how seemingly “minor compliance breaches” by them can expose their company to penetration by organized crime their sense of responsibility becomes clearer. And when they understand how those wider threats can damage Vietnam’s international profile and economic future, the message becomes a personal one about more than honesty and integrity or implying that someone is a thief. It becomes a message about individuals and how they can make a real difference.

In addition to talking about fraud and corruption, showing examples of what to say and how to react if threatened, coerced, or bribed to breach controls and how to report a suspicious matter confidentially and safely without fear of adverse consequences is important to throw open the market and make incidents transparent and detectable.

It’s in all these ways that we know Vietnamese enterprises are continuing their diligent fight against fraud and corruption and wider financial crime. Ultimately it will be in the hands of each Vietnamese employee and business owner, in their everyday choices and decisions, that Vietnam’s economic prosperity, international reputation, and financial security will ultimately be determined.

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