Fighting Financial Crime in Investment Management

Jul  01 
Staff Writer   

How to protect an industry soon to be worth $145 trillion

In a sector predicted to reach $145 trillion in assets under management by 2025, it's not surprising that investment management is drawing heightened regulatory focus and increased attention from financial criminals. To discover more about the industry's challenges and how it's protecting itself and clients, Themis and Fiserv recently surveyed financial crime professionals working within asset and wealth management.

Those professionals flagged money laundering, fraud and cybercrime as the top three risks, with 63.2 percent directly exposed to fraud and 57.9 percent to cybercrime during the preceding 12 months. The survey also found that 80 percent felt the risk of financial crime had increased because of circumstances stemming from the pandemic.

Certainly, exposure to money laundering can increase when working with offshore trusts or companies, politically exposed people, or clients working with higher-risk or sanctioned jurisdictions. But many firms don't have adequate systems and controls for assessing and managing risks.

The problem can stem from a lack of investment in protection. While banks invest heavily in prevention of cyberfraud, bribery, corruption and theft, investment managers have tended not to. That makes them an increasingly attractive prospect for organized crime, especially in an increasingly remote working environment fostered by the fallout from COVID-19.

There are plenty of examples of funds and managers that have paid a heavy price for not investing in financial crime protection. Respondents in the Themis and Fiserv survey noted financial crime, costs and reputational damages as their biggest concerns.

Preparation and multilayered strategies are the keys to a preemptive approach that keeps the industry one step ahead of criminals.

Facing Evolving Challenges

While the level of confidentiality expected from manager-client relationships is important, it unfortunately plays into the hands of criminals. It can mean that certain due diligence boxes go unchecked and warning signs go unnoticed.

With criminals more often targeting the industry and media scrutiny on the rise due to various scandals, regulators are increasing their oversight worldwide. There is an evident focus on enhanced due diligence, especially when it comes to beneficial ownership and understanding the control structure of corporate clients.

But the industry is divided about how clearly compliance expectations are being communicated.

Finding Solutions

Preparation and multilayered strategies are the keys to a preemptive approach that keeps the industry one step ahead of criminals.

In addition to ongoing screening of public information and across-the-board due diligence, transaction monitoring is an easy way to spot patterns and red flags. While much of the industry relies heavily on manual processes, automating financial crime monitoring can enhance protections. That approach is easily scalable to the volume of transactions and can be better equipped to detect suspicious activity such as excessive transfers, purchases or sales that are not in line with the client profile.

Ultimately, the survey found there is a feeling within the industry that there is a lack of understanding of the full complexity and risks of financial crime. Understanding those threats and identifying the best strategies for protection can help firms reduce their exposure to criminal activity.