In January, I looked to the year ahead to try and ascertain the nature and scope of potential change in the world of compliance and predict where we might see the most significant developments. Now, in the year’s second quarter, I am again scanning the horizon to seek out the patterns and trends of which compliance professionals will need to be aware.
Key Patterns And Trends To Follow To Avoid Regulatory Action
Here are four patterns and trends compliance professionals need to follow.
Inflation
An immediate and obvious problem is the cost of living. As prices rise, firms will look to make savings, and they will naturally focus on those parts of the business that are non-profit. Unfortunately, this is the light in which compliance is usually considered. It’s up to compliance officers to challenge this narrative beyond simply arguing that the cost of non-compliance is greater in the long term.
They can do so by demonstrating in today’s ESG and the ethically focused world how robust effective compliance can influence ethical investors, ensure projects are protected from fraud and corruption, and differentiate organizations for client attraction.
Last year saw the biggest inflation shock in over 40 years, and central banks have responded with an aggressive rise in interest rates. Historically, post-war economic downturns were marked by a tightening of the financial screws, and indeed this has played out in recent months, thanks in part to rising inflation.
Ian Stewart, Partner and Chief Economist at Deloitte UK, aptly summarised today’s environment in the context of the last occurrence of serious economic hardship, the financial crisis of the late noughties:
What we are seeing today is far milder but as in 2009, credit has become more costly and scarcer, risk appetite is falling, and asset prices have become more volatile. These are classic harbingers of slower growth to come.[1]
Higher Company Insolvencies
Corporate insolvencies jumped by almost one-fifth in England and Wales in the year to February as the economic climate deteriorated. According to the Insolvency Service, registered company insolvencies reached 1,783 in February 2023.[2]
This figure is 17% higher than in the same month of 2022 and one-third higher than in February 2020, before the pandemic and COVID lockdowns were enforced.
Although inflation has probably already peaked and, abetted by lower gas prices, should fall sharply this summer, most experts estimate that challenging business conditions are likely to remain until the end of the year.
Compliance Cost
At the same time, the cost of compliance has risen, with UK finance firms alone spending an estimated £34.2 billion.[3] As a proportion of revenue growth, this is 13% more than in 2021, representing quite a drain on firms’ resources, particularly during a sustained period of financial turmoil.
Compliance officers can point to the deterrent effect to counterbalance a firm’s desire to decrease costs by reducing compliance spending. By offering ‘what if…’ scenarios, compliance officers can explain that by spending today a firm will preserve profit tomorrow.
The enormous fines handed out to corporates this last decade who have overlooked compliance procedures will help in this regard.
Corruption and Serious Fraud
Just looking at a sample of anti-bribery and corruption failures, there were penalties handed out to Airbus ($4 billion, 2020), Petrobras ($1.78 billion, 2018), and Glencore ($1 billion, 2022). For anti-money laundering (AML) weaknesses, we saw Danske Bank’s fine of $2 billion (2022), HSBC’s of $1,9 billion (2012), and Standard Chartered’s of $1.1 billion (2019).[4]
And for sanctions violations, we can look no further than BNP Paribas’s $8.9 billion penalty imposed for processing transactions of sanctioned entities in 2014.
To continue this theme, the UK’s Serious Fraud Office (SFO) has a considerable number of trials listed for 2023. Global fines for failing to prevent money laundering and other financial crime surged around 53% last year.[5]
Similarly, banks and other financial institutions were fined almost $5 billion for a variety of AML infractions, breaching sanctions, and failings in their ‘know your customer’ (KYC) systems. Total fines since the 2007–08 global financial crisis stand at approximately $55 billion. Significantly, fines to crypto firms rose over 90% in this period.
These are the kind of findings that compliance professionals can reference as ‘prevention is better than cure.’
Regulatory Action
These examples, and the stark amounts involved, offer a strong disincentive to organizations to make cuts to their compliance departments in the months ahead. Yet closer analysis reveals some interesting challenges to any assessment of the risks of not supporting a compliance program which some boards, in my experience, argue.
The rise in money laundering fines was primarily associated with the huge increase in fines levied at crypto firms, as well as penalties related to sanctions-busting commodity trading in the wake of the Russian invasion of Ukraine and the settling of legacy issues.
Additionally, while fines rose globally, in the UK, AML fines actually fell to $188.2 million from $436.5 million the year before, with Santander’s £108 million fine by the Financial Conduct Authority (FCA) standing alone as a significant deterrent.
Admittedly, the total number of fines issued more than tripled, with 14 fines issued in the UK in 2022, up from four in 2021, but most corporate boards I have dealt with consider the bottom line. In addition, US money laundering offense enforcement has decreased by around 23.5% since the fiscal year 2017.[6]
Anti-Bribery
Anti-bribery and corruption fines also provide a mixed picture to corporate boards reviewing spending in difficult circumstances. In 2022, the US Department of Justice and the Securities and Exchange Commission issued financial penalties against eight companies, with a total penalty fee of around $1.5 billion.
This figure is significantly above 2021 (four companies fined in total $282 million) but remains one of the lowest annual fine levels in recent history and the second lowest since 2015. It was below the total fines imposed in 2020 (12 companies, $6.4 billion in fines) despite that year being inflated by a single penalty.
According to Transparency International, countries’ enforcement against foreign bribery has dropped to its lowest level since the body began measuring these figures in 2009.[7]
It is estimated that global money laundering is running somewhere between $800 billion and $2 trillion, with $300 billion estimated each year in the US alone. AML activities recover only an estimated 0.1% of criminal funds in the US.[8]
Therefore, the chance of being caught is relatively slim, which reduces the deterrent effect considerably. Similar comments abound around global anti-corruption and fraud enforcement.[9]
In Summary
The increasing costs to business and the mixed picture of deterrence reduce the potential justification that compliance professionals can expound to support the rising cost of compliance programs.
This trend is particularly concerning in this technological age, where enhancing protection requires improving expensive KYC, transaction monitoring, third-party management, gifts and entertainment, whistleblowing, and other systems.
It will be interesting to see how firms balance the imperatives of rising costs with the knowledge that reducing the role of compliance can leave a firm open to risk, as well as how compliance professionals will act to shore up their role in ensuring their firms are successful.
In the next article, I will provide some suggestions as to how good corporate compliance can demonstrate an alternative basis for existence and how it can be profit-generating by being the great differentiator between organizations to attract investors and clients in today’s changing society.
This article was first published by the International Compliance Association (ICA), the leading professional body for the global regulatory and financial crime compliance community. For more information on the benefits of becoming an ICA member, including access to the ICA’s complete content library of articles, videos, podcasts, blogs, and e-books, visit: Become an ICA Member – Application Form (int-comp.org)
About the author
Gaon Hart is experienced in developing Parliamentary and regulatory relationships as a renowned expert in designing, developing, and implementing global corporate compliance programs. He has recently been Head of Public Policy in the economic crime arena for Amazon, covering UK & Ireland, and prior to that, he was Head of Global Anti-Bribery & Corruption Advisory, Policy & Training for HSBC Bank, designing and implementing a global anti-corruption program from scratch covering 64 countries and 230,000 staff. These roles led from his experience as a Senior Crown Advocate with the Special Crime & Counterterrorism Division of the CPS, where he was seconded to the Attorney-General’s Office, acting as Lead Solicitor for the Government’s 2006 Fraud Review change program, developing the UK counter-fraud architecture that still exists today.
Publicly, he represented the UK at GRECO, UNCAC, and at an EU Mission to Romania, was Co-Chair of the UK Finance Anti-Bribery & Corruption Committee, advised the UN on their report, ‘Bankrupting the Business of Human Trafficking,’ co-authored the UK Finance definitive guide to the ‘Definition of Public Official’ and undertook multiple public engagements including appearing before a Parliamentary Treasury Select Committee on behalf of Amazon.
Gaon is currently also a Non-Executive Director for the NHS Counter-Fraud Authority and Managing Director of Legal Advisory Worldwide (a boutique legal consultancy company).
References
[1] Ian Stewart, ‘Measuring financial stress’, Deloitte, 7 November 2022
[2] Financial Times, ‘Corporate insolvencies rise 17% in England and Wales in year to February’, 14 March 2023
[3] LexisNexus, ‘Explore The True Cost of Financial Crime Compliance Worldwide’
[4] All figures approximate.
[5] Fenergo, ‘Global AML Fines Research Report’
[6] United States Sentencing Commission, ‘Money laundering’
[7] Transparency International, ‘Exporting Corruption 2022: Enforcement Against Foreign Bribery Hits Historic Low’, 11 October 2022
[8] Chris Kolmar, ‘20 Money Laundering Statistics [2023] Facts About Money Laundering In The U.S.’, Zippia, 29 March 2023
[9] Transparency International, ‘Exporting Corruption 2022: Enforcement Against Foreign Bribery Hits Historic Low’