Carol Sergeant – Managing Director, Regulatory Processes and Risk Directorate, FSA
Twenty-First International Symposium on Economic Crime
Jesus College, University of Cambridge
10 September 2003

Most people could probably agree that financial crime is in some way damaging to society, and despite the lack of much even remotely reliable data, many would also agree that it is increasing. But observed behaviours and activities, both individually and collectively, might lead you – or the woman from outer space – Venus perhaps – to conclude that it really isn’t all that serious. And the kind of the language typically used - "white collar crime"; "victimless crime" and so on - merely reinforces this perception.

If you are going to get serious about an issue you need to know how big it is, how damaging it is and how urgent it is. You need to agree on priorities, you need to organise effectively - and of course you need adequate resources.

We lack the data, the analysis, any agreed priorities and the organisational structures to tackle this type of crime effectively. And as a nation we suffer from what might be called an "attitude problem". A recent survey from The Association of British Insurers show that an alarmingly high proportion of the population thinks it is acceptable to make fraudulent or grossly exaggerated insurance claims for example. Many people even in very senior positions in our society speak and act as if this were a more acceptable form of gentlemanly criminal activity and many consider sentences for this type of crime to be rather light. There is a very fundamental issue of public understanding and education about financial crime and the harm it does. I fear that this is not a uniquely British problem.

If we are to make progress we need more data and better analysis on which types of financial crime cause the greatest detriment in terms of their impact on society. This can be considered both by size and frequency. The absence of this kind of information makes it very difficult even to begin to have any kind of sensible debate about root causes and remedies.

But analysis and data are not sufficient. We urgently need a small number of agreed national and international priorities in order to make tough resource allocation decisions. No one can ever succeed by tackling everything at once and the range of issues we could tackle is enormous. The field of operators is also particularly crowded and confusing in the financial crime arena. In the UK alone we have 52 separate police forces, several national bodies – Customs and Excise, the Serious Fraud Office (SFO), the National Crime Squad, NCIS, the Security Services, the Financial Services Authority to name only some - and of course the private sector, including the financial services industry.

We need to organise and co-ordinate ourselves better both in order to agree priorities and then to implement them rigorously. We all hear about the increasing involvement of organised crime in insurance or identity fraud. These criminals are not opportunists – like individuals who claim to have lost more than they really have. They are very well organised and they put as much effort into avoiding detection – or prosecution – as they do into stealing money. To have any chance of detecting and preventing that kind of opportunity will take co-ordination, co-operation and information sharing. Even if we were to agree national priorities and performance measures there remains the question of whether the current structure of law enforcement and accountabilities is capable of delivering and implementing a financial crime agenda. This is an issue for government and a difficult one to resolve requiring the delicate balancing of local, national and international priorities and accountabilities, as well as the allocation of limited resources among many competing demands.

But this is not just an issue for government.

The inadequacies of data collection, measurement, analysis, investment and action apply equally to the financial services industry. Our research suggests that many firms do not undertake a thorough analysis of the actual and potential financial crime risks to which they are exposed, and are not organised to tackle them effectively. Being organised includes, for example, having a strategy agreed at Board level, measurement and control systems and an adequately trained workforce. Even if firms do not consider crime prevention to be an essential activity of a socially responsible firm (and many do) there is a serious bottom line issue to be addressed here at a time when all firms are keen to cut costs for the benefit of both customers and shareholders. Those firms that have invested in a strategic way have seen very significant returns on that investment.

In our discussions with the financial services industry all have so far agreed that fighting financial crime is not a competitive issue between them and current inadequacies in data and analysis is not an excuse for doing nothing. It is therefore surprising that there has not been more co-operation and co-ordination between firms. There are of course some exceptions with the most notable being in the area of plastic card fraud where the Dedicated Cheque and Plastic Crime Unit funded jointly by the industry and the Home Office combined with technology and process changes introduced by the industry (known as "chip and pin") will hopefully have a significant impact, although in this we are hardly at the cutting edge internationally. The plastic card case study is interesting in many respects. The fraud data is comprehensive and has been collected and monitored over a long period of time enabling early detection of adverse trends. It also demonstrates the need for constant vigilance as earlier successful actions to combat fraud were eventually circumvented by criminals.

This kind of industry-wide strategic approach is however still rare, with most industry groups meeting to discuss specific cases but rarely addressing strategic priorities and responses. Given that most in the industry seem to be agreed about the importance of this apparently non-competitive issue I remain perplexed by the lack of co-ordinated response.

So what is the FSA’s rôle in all of this? As most of you will know one of our statutory objectives is to reduce the extent to which the firms we regulate can be used for a purpose connected with financial crime. Our anti-money laundering and anti-terrorist finance work is carried out under this objective. I do not propose to discuss this work here except to thank the industry and the banking sector in particular for all the work they are doing in this field. For those of you wanting more information on the FSA’s anti-money laundering work there is a large amount of material on our website.

Most of the FSA’s routine regulatory work with firms under the financial crime objective is concerned with the adequacy of firms’ systems and controls to detect and prevent financial crime. We also pay particular regard to financial crime in our Authorisation process for new firms and individuals and have detected and prevented suspected criminal elements from entering the system or acquiring control or influence over existing firms. In our Enforcement work we pursue fraudulent activities by unauthorised firms and individuals – very often in co-operation with the police.

As you would expect we work together with the Serious Fraud Office and some police forces, who give us excellent support. Many others however are not adequately resourced to do so.

We also make efforts to warn consumers about the risks they may encounter from financial crime, both on our website and via specific alerts.

As I have mentioned earlier there are potentially a very large number of players in this field and we in the FSA need to consider carefully what more we can contribute of real added value. We will be issuing a Discussion Paper later this year to consider what, if any, further deployment of our resources and powers might be appropriate. We will also be asking what priority areas in financial crime are most important to the national crime agenda, to consumers and to firms.

In the meantime we have been initiating some reviews and pilots with both the financial services industry and law enforcement.

We have several secondments with Law Enforcement Agencies. We are discussing with the National Crime Squad a possible joint ‘deter and disrupt’ pilot the detail of which is as yet undecided and we have recently signed a Memorandum of Understanding with the City Police to effect arrests on our behalf. We would very much prefer individuals to attend for interview voluntarily, but when they will not we will have to arrange for them to be arrested.

We are working together informally with a group of banks and insurance companies to encourage co-operative industry-led research in areas of key concern. The major banks have agreed to set up two working groups looking respectively at staff fraud and identity fraud. We support and attend these groups but they remain industry led. The objectives are to analyse the risks and consider what measures firms themselves can take to mitigate them as well as the merit or otherwise of FSA involvement. We are also very supportive of the initiative now underway in the Association of British Insurers to improve the quality and quantity of information sharing..

The FSA has undertaken some small cross-industry reviews. We have looked at the awareness, approach and concerns of 25 firms representing a cross-section of the regulated community covering the full range of sizes and types of firm. We have undertaken a similar review of a sample of major banks and have a similar review of a sample of major insurance companies in train. We are still evaluating these reviews and will publish our key findings. Our initial feedback is that many firms are still too reactive – they have not analysed their vulnerabilities and put in place proactive prevention and detection strategies. Some insurance companies – particularly the smaller ones - appear to underestimate the potential scale of fraud to which they are vulnerable. We have begun a project investigating the size and frequency of fraudulent insurance claims.

Most firms interviewed also expressed frustration at the lack of support from the police in pursuing fraud, which they attributed to lack of resources. They felt that fraudsters were well aware that they are unlikely to be prosecuted and that this makes financial services fraud a soft option.

There is increasing recognition that law enforcement and the financial services sector need to work together to produce incisive analysis and effective action. The model of private sector involvement in setting the strategy and overseeing implementation in anti-money laundering is proving effective and should be sustained and rolled out to other aspects of financial crime. I am very optimistic that it will be. Firms can do more for themselves individually and collectively to detect and prevent financial crime – and I hope the FSA can continue to act as an effective catalyst here. But we are still some distance away from turning the concerns that most people seem to share into a properly resourced and co-ordinated national action plan with organisational structure that can deliver. There is a lot to do.

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