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What the Kroll Report Means for Your Business and How it Manages Third Party Financial Crime Risk

This year’s Kroll Fraud and Financial Crime Report found companies are growing increasingly concerned that third parties are driving a higher risk of financial crime. We read through the report to pull out lessons for companies from this survey of 400 executives across 8 countries. By implementing these lessons–with help from LexisNexis–firms can improve their management of third party risk.

“Third-party gatekeepers” are a catalyst for rising financial crime

The influential report is based on surveys which were carried out in the first three months of 2023 with 400 executives and risk management professionals in companies across the US, UK, France, Germany, Brazil, Mexico, Singapore and the United Arab Emirates. The findings are widely regarded as giving a useful indication of the main trends companies are seeing in relation to risk management.

One noticeable trend in the 2023 survey is that regulatory enforcements against financial crimes are becoming more prevalent. 67% of respondents predicted regulators will increase the number and frequency of enforcement actions over the next year, with even higher responses in Brazil, the US and Mexico of 72%, 70% and 70% respectively. A clear majority of these respondents viewed “third-party gatekeepers” as a key reason for this trend.

The report’s findings reflect a reality of modern business: that companies rely on third parties and suppliers around the world to deliver their products and services, yet these third parties expose them to legal, financial, reputational and strategic risk. Another survey in 2023, by Compliance Week, backed up Kroll’s findings by revealing that 82% of company executives said indirect bribery by third parties is a greater risk than bribery from their own personnel.

The lesson for companies is clear: it is critical to understand the risks you face from your third parties, and carry out effective due diligence on these entities on an ongoing basis.

Understanding ESG risk poses a challenge for firms

Monitoring third parties for financial crime, bribery and corruption risks is not new and has been a focus of legislation like the US Foreign Corrupt Practices Act for decades. But a more recent trend has been for regulators to introduce requirements for companies to screen third parties for Environmental, Social and Governance (ESG) risks. Too.

The Kroll report finds that this development is proving a significant challenge for companies. 61% of executives pointed to the limitations of ESG data, and complained of a “lack of standardization” for how to measure a third party’s ESG record.

Companies need to acquire high-quality, accurate and trustworthy data to overcome this challenge. A broad range of data sources can shed light on third parties’ ESG records, from more traditional legal sources to news and social media coverage.

Technology: a solution to the increasing complexity of third party risks

The survey demonstrated that both companies and regulators now recognize technology as a critical part of good compliance. Executives surveyed predicted that regulators will “start looking more closely” at how firms are using technology in their anti-money laundering compliance programs. As a result, more than two-thirds of respondents said they are “prioritizing” investments in compliance technologies.

David Lewis, Global Head of AML Advisory at Kroll, noted that firms are more open to technology due to the rise in financial crime risks. “The survey results show that firms face a perfect storm as financial crime risks increase and get more complex,” he said. “They are not fully confident in the effectiveness of their defenses and will undoubtedly rush to embrace technology to solve all their problems.”

The lesson this offers for companies is to embed technology into their compliance processes, but to do so in a strategic way that supports their overall risk management approach. Machine Learning and AI technologies can indicate patterns of suspicious activity which could warrant further investigation or a report to the regulator, and large banks have implemented these kinds of tools to monitor customers and third parties. But these solutions usually come with high costs.

Instead, a more accessible and cost-effective solution for all companies is to use technology platforms like LexisNexis to screen third parties against a wide range of authoritative data sources. Tools like Nexis Diligence+ help organizations surface relevant risks and insights from high volumes of data more efficiently and effectively than manual searches by staff could achieve.

LexisNexis: Helping you to overcome third party risks

Companies can respond to the trends and threats highlighted in the Kroll report by upgrading their approach to due diligence and compliance. This should involve screening third parties and customers against LexisNexis’ broad range of reliable and high-quality data sources, including:

  • Legal data including court cases involving a company.
  • Sanctions lists and watch lists that reveal which entities and individuals would cause a company doing business with them to be sanctioned.
  • Lists of Politically-Exposed Persons (PEPs), whose prominent political positions can make them a target of bribery and corruption.
  • News data, which can flag perceived and alleged risks involving a company or individual–especially if the data comes with an archive of historic news.
  • ESG data, which indicates a company’s impact on the environment, its reputation for social issues, and any failures in governance.

LexisNexis brings together all these data sources and more in one solution, and leverages technology to help surface relevant mentions of third parties and devise a risk score based on that analysis. A third party’s risk profile will be updated automatically when new information comes to light.

Looking for more tips on how to implement an effective due diligence operation to identify and manage third party risks? Our new E-Book identifies the ten main trends companies need to understand and respond to. Download it for free today.

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