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There have been major developments driving rapid regulatory changes across the world with regards to financial crime monitoring.
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Financial crimes, such as bribery and corruption, are becoming more common and more complex. One of the most common reasons for a company to become implicated in alleged financial crime is its exposure to the activities of its third parties and suppliers.
In this blog, we look at the trends in financial crime that your firm should be aware of. We then suggest how companies can improve their third-party risk management to mitigate this risk and to detect and root out suspected financial crime in general.
The prevalence of financial crime, and companies’ exposure to it, continues to increase year on year. Recent surveys of companies reflect this, including:
Financial crime itself is evolving as criminals devise ever more sophisticated ways to conceal their illicit activities. The acceleration of digital banking and the normalization of remote working after the pandemic have created vulnerabilities for firms seeking to manage risks.
In the past, if a firm’s compliance team flagged a third party as high risk, inspectors could visit their offices to investigate as a form of enhanced due diligence. But today, it has become common for companies to rely on third parties whose staff they never actually meet in person. This creates a grey area which criminals seek to target.
Companies rely on third parties and suppliers around the world to deliver their products and services, and these third parties are increasingly becoming their main exposure to financial crime risk. In the survey by Compliance Week, 82% of company executives said indirect bribery by third parties is a greater risk than bribery by their own personnel.
MORE: The US Foreign Corrupt Practices Act: What it can mean for your business
What should financial services companies such as banks do to manage and mitigate these rising legal, financial, reputational, and strategic risks of financial crime carried out by their third parties? Most major companies must adhere to the requirements in laws and regulations spanning numerous jurisdictions. Many of these laws are based on, or adhere to, the Wolfsberg Principles. This makes the Principles a good starting point for improving regulatory compliance in general.
The Principles were updated for the first time in six years in 2023. While not official regulations, they are developed by an association of 13 global banks called the Wolfsberg Group, and regarded as influential guidelines of best practices for anti-bribery and corruption processes and ethical business. The latest iteration singled out activities by a third party as a “potential liability” for financial institutions.
Along with this warning, the Principles identified “red flags” against which banks should screen third parties to detect possible financial crime. Finding these flags could prompt a company to carry out enhanced due diligence on that third party, supplier, or customer. They include:
The guidance concludes that, once companies have identified the level of risk posed by a third party, they should apply proportionate due diligence and anti-bribery and corruption controls–which is known as a risk-based model. Crucially, they should also “periodically assess” whether they are capturing new and emerging risks.
MORE: The due diligence checklist: A step-by-step guide to managing third-party bribery and corruption
The complexity of financial crime also makes it more difficult for companies to capture the full extent of the risks confronting them. The best way to do that is to screen third parties and customers against a very broad range of reliable and authoritative data sources. This should include:
LexisNexis brings together all these data sources and more in one place, and leverages technology to surface relevant mentions of third parties and devise a risk score based on that analysis. In line with regulatory expectations, a company’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.