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Old Friday, November 23, 2007
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Default Financial Crime

Financial crime

Hardly a day goes by without the media highlighting a story concerning financial crime. Some stories seem designed to stir up fear regarding the safety of financial services provided, where other are cautionary tales featuring individuals who have lost their money a simple scam. However, financial crime is not new. It has been with us ever since “money systems” were introduced and will be with us as long as criminals see it as a way of making money.

What is financial crime?

The Financial Services and Markets Act 200 defines financial crime as including any offence involving:

- Fraud or dishonesty
- Misconduct in, or misuse of information relating to, a financial market
- Handling the proceeds of crime.

This goes beyond what many would see as “simple” financial crime issues as cheque fraud.

Who is responsible within the bank?

Everyone in The Royal Bank of Scotland (RBS) should play a part in minimizing financial crime. Fraudsters or money launders will look to exploit any opportunity in the financial services we provide, to steal funds from the bank or our customers, or to introduce the proceeds of crime into the banking mainstream. This is why we ensure that every employee is able to make a difference in stopping fraud, or can identify unusual events that lead to the successful recovery of funds.

For an organization the size of RBS, however, we cannot rely on individual alone to make a difference. Group Security and Fraud is designed to minimize the impact to customers, shareholders and employees of all types of financial crime, including fraud; money laundering; information security beaches; branch raids; and so on. There are several departments within Group Security and Fraud which ensure we have the right breadth of activities and level of expertise to tackle financial crime in its widest sense, namely;

- Anti-money laundering
- Security management
- Information security
- Intelligence
- Financial crime operations
- Financial crime,

I joined the Group Financial Crime department two years ago as Head of Analysis and Governance. Working with a small team and many colleagues across Group Security and Fraud and the rest of the Group, we have created a high-level framework that has introduced:

- A revised fraud policy and set of supporting standards.
These were refreshed to reflect new ways in which criminals were attempting to steal money from the organization.

-A group-wide governance structure supported by executive and senior management. This approach drives both the actions required to address the issues being faced now, and also agrees the strategy for managing longer term threats.
- A financial crime reporting environment that allows us to consistently consider risks and impacts.

A framework for prioritizing risks and issues to ensure we continue to invest in the systems, processes and structures that enable us to create an environment which makes criminal activity as difficult as possible.

In early 2004, Group Financial Crime was formed from existing teams to provide the Group with a revised focus in preventing and detecting financial crime. This was against a backdrop of fraud becoming increasingly complex and global in nature. As well as my team, there are two other teams in the department: Fraud Prevention and Investigations.

The key focus for the Fraud Prevention team is to stop fraud from being successful, and to deter the fraudsters from attempting in the first place.
This enables us to implement new or amended controls before the organization suffers any significant loss. This team works closely with colleagues in all of the Group business to ensure we can achieve a consistent approach to our control environment.
The Investigation team is both proactive and reactive in its approach. Traditionally, Investigations has reviewed incidents after fraudulent events have happened. However, it has the principal remit of proactively responding to early warning signs, triggering data with a view to minimizing the financial effect of future financial crime attacks.

Using this methodology, in one case alone, the team identified early fraudulent activity which could have potentially led to losses in excess of £ 1m.

We know, however, that we can never be complacent and need to maintain a collaborative approach across the entire Group to stay one step a head of the fraudster.


At November’s Scottish Banking Forum financial crime trends, the FSA’s priorities and measures firms can take to prevent financial crime, were the focus of discussion.
John Hitchins, Head of Banking and UK Banking Leader, and Mark Hunter, Partner, PricewaterhouseCoopers, report

Financial Crime – the fight continues

Greater commercial use of the internet has led to a significant rise in e-crime. The familiar example is phishing, where criminals try to “hook” potential victims via false emails that appear to come from a real bank or credit card company. E-crime is so attractive to fraudsters due to the anonymity it gives that sites open and close at a staggering rate. It is estimated that the number of actives phishing site has been rising at average monthly rate of fifteen per cent since July 2004. One example of the phishing treat was perpetrated by an organized gang who stole almost ₤ 200,000 by tricking eBay users to give away their account details. The leader was caught, however, jailed for four years, and became the first UK conviction for phishing fraud.

Identity theft is probably the most high profile of recent fraud trends. It is attractive to criminals as a relatively risk-free crime to commit, the rewards are high and the opportunity to compromise customer data is commonplace throughout organizations that hold personal data. Home Office figures estimate that identity theft costs the UK £1.7bn each years Recent news headline suggest that this figure may be too conservative.

Identity theft has been increased by use of insiders to extract information, causing concern amongst the financial services community, law enforcement and the FSA. Employees are increasingly targeted by criminal gangs to pass on confidential information and organized criminals also plant staff in firms to carry out fraud.

While e-crime, identity theft and insider fraud are rightly receiving a lot of focus, firms should not underestimate the more traditional treats, such as misappropriation of assets, which still occurs. In a recent case a credit manager misappropriated approximately £700,000 over six years by gaining access to passwords, covering up authorizations and taking advantage of a poor internal control environment. Few question were asked when the first warning signs were picked up.

FSA Priorities in the areas of financial crime

The reduction of financial crime is one of the FSA’s four statutory objectives, While money laundering has traditionally received much attention, the FSA is now focusing more closely on assessing how firms manage the risk of fraud. Senior management responsibilities are outlined in the Senior Management Arrangements, Systems and Controls Sourcebook (SYSC), which has a requirement to established and maintain systems and controls for countering the risk that their firms may be used to further financial crime.

The FSA expects firms to have a clear allocation of responsibility for the day-to-day management of fraud risk, effective staff training arrangements and relevant management information on fraud presented to senior management. The FSA also expects senior management to understand their financial crime risks and to own the risk assessment.

Evidence of the FSA’s commitment to tackling fraud was publication of a report on firms high level management of fraud risk in February 2006. the report concluded that senior management recognized that the growing threat of fraud needed to be managed in a more effective and integrated way. The FSA’s key findings included the desirability to have increased co-operation within the financial services industry, via greater information sharing, and that firms under investing in anti-fraud measures tended to suffer relatively high levels of losses.

Firms whose customer fall victim to internal fraud are likely to find themselves discussing the possibility of a S166 Skilled Persons Review on their fraud systems and controls, or a referral to enforcement, or both. The FSA also recently took its first fraud related enforcement action against a firm which was fined £300,000 for anti-fraud systems and control failures. Other similar enforcement cases are still in the pipeline.

What measures can be taken to prevent financial crime?

It is impossible to eliminate the risk of fraud. Ideally firms should have effective preventative controls that reasonably address their perceived fraud risks. While preventative controls are unlikely to be fully effective, firms must also be proactive and look at future threats. Firms need to appreciate the rising sophistication of criminals, anticipate new types of attacks and put in place effective controls before an incident of financial crime.

Simply being aware that high quality duplicate documents such as utility bills, bank account statements and insurance certificates, tailored to the criminals’ exact specifications, can be openly purchased on the internet may encouraged firms to challenge and refresh their controls around account opening processes. Awareness that compromised customer data is openly available for sale on the internet should encourage monitoring of such services.

Proactive monitoring may enable firms to identify a serious security breach and put measures in place to limit any damage to either the firms themselves or their customers.

In the current regulatory environment financial crime should be on the board’s agenda. Failure to address the various challenges increases the scope for regulatory censure and loss of reputation. All firms should undertake a fraud risk assessment to ensure that their systems and controls are appropriate – both preventative and detective. A firm’s overall antifraud culture must come from senior management, who should also encouraged an open reporting environment. If the “tone at the top” does not encourage an open reporting environment, then there is a real risk that financial crime will go undetected.

Policies and procedures for financial crime prevention and detection underpin senior management’s overall strategy. Firms must also consider whether they do enough with respect to wider co-operation with industry bodies and law enforcement. Support in fighting fraud is available and even the smallest firms should be address this issue with the ambition of achieving good or even best practice in preventing financial crime.
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