The growing threat of financial crime represents one of the most significant challenges for financial institutions. Regardless of their size, all of these entities are experiencing increased vulnerability to economic, reputational and compliance risks arising from criminal activities both within and outside the organization.
Types of financial crimes
Criminal conduct linked to financial entities and markets such as banks, financial technology companies and lenders are grouped under the general term of economic or financial fraud.
It is generally considered that financial crimes can encompass the following criminal activities:
Fraud
Fraud encompasses illegal practices such as theft, corruption, embezzlement, money laundering, bribery, insider trading and extortion. Those who participate in these actions are considered criminals, since they use deception to obtain personal benefits in a dishonest manner and causing losses to others.
Money laundering
When criminals make money from illegal activities, they need to hide it. Money laundering involves hiding the proceeds of financial crimes, usually using banking and business services. These criminals move their illicit funds through a country’s financial system, such as banking channels, to support other criminals in different locations.
Terrorist financing
Terrorist financing involves providing resources to individuals and groups for the purpose of carrying out terrorist acts. This type of financing bears similarities to money laundering, as it often involves criminals concealing the transfer of funds within the legitimate financial system.
Bribery and corruption
Bribery involves providing, promising, giving, accepting or requesting an advantage as an inducement to carry out an action that is illegal, unethical or represents a breach of trust. Corruption, on the other hand, involves the misuse of entrusted power for personal benefit.
Insider information
Using privileged or non-public information can significantly affect investment decisions, which is illegal and subject to sanctions such as fines.
Cybercrime
Cybercrime is a crime that involves the use of a computer and its network, either as a tool or a target. It may cause harm to financial health and safety by interfering with or disclosing information, legally or illegally.
Challenges in the fight against financial crime
Fighting financial crime can be complicated due to several factors, including:
- Economic globalization. The growing interconnection of the financial sector worldwide makes it difficult to fully track the flow of money, allowing criminals to move funds in a more agile and complex way.
- Lack of operating platforms and regulatory mechanisms. This can create loopholes that criminals exploit to carry out illicit activities without being detected.
- Sophistication of money laundering tactics. The increasing sophistication of money laundering tactics, which often involve additional crimes such as fraud, cybercrime or identity theft, makes it difficult to identify and prevent these activities.
- Transformation towards digital payment systems. The evolution towards simpler, faster and more adaptable digital payment systems provides criminals with new opportunities to carry out transactions more discreetly and bypass traditional controls.
- Cryptocurrencies. The emergence of cryptocurrencies and their ability to make it difficult to trace the origin of funds represents an additional challenge in the fight against money laundering and other illicit financial activities.
- Fewer face-to-face interactions. The pandemic has accelerated the transition to digital processes, reducing in-person interactions in branches. This increases vulnerability to digital crime and, in the long term, financial crime.
Financial crime prevention
Entities dedicated to preventing risks and incidents of financial crimes implement various strategies and techniques related to financial education that include, among others:
- The creation of a unit to combat financial crimes, as well as a recruitment team.
- The design and execution of an anti-financial crime compliance program based on periodic risk assessment.
- The establishment of policies and procedures aimed at preventing financial crimes, covering aspects such as corruption, money laundering, financing of terrorism, fraud, use of privileged information, among others.
- The establishment of criteria to recognize high-risk clients and the relevant verification processes before and after their inclusion.
- Scheduling regular anti-money laundering (AML) compliance assessments at both headquarters and branch levels.
- Defining limits and transaction situations, supervising daily operations.
- The creation and regular monitoring of key risk indicators (KRI) related to the prevention of financial crimes.
In conclusion, the growing threat of financial crime poses one of the biggest challenges for financial institutions today. Complexity is intensified due to factors such as economic globalization, the sophistication of criminal tactics and the transformation towards digital payments. Faced with these challenges, entities need to begin implementing essential strategies to mitigate risk and guarantee the full integrity of their financial system.