Speech by Philip Robinson - Sector Leader for Financial Crime, FSA

The Financial War on Terror and Organised Crime - 6th September 2004

Preliminaries

It is a privilege to be a keynote speaker here today. This is an impressive event – evidence of the growing recognition of the financial dimension in the fight against all types of crime.

Theme of the speech

The theme of my speech this morning is the work that we all have to do to fight crime in the financial sector and the importance of that fight as we see it.

That work has been building momentum. And we have now to push on, finding new - and better - ways of contributing to fighting crime and terrorist finance. And working more effectively with each other and wider stakeholders.


What is the FSA's role?

I am sure you know that the FSA is the single UK financial regulator, regulating some 11,000 firms now and many thousands more shortly, when our scope increases to include mortgage and general insurance intermediaries.

But what is less known is that the Financial Services and Markets Act 2000 broke the regulatory mould, in giving us an explicit financial crime objective of reducing the extent to which it is possible for a [regulated firm] to be used for a purpose connected with financial crime. This is one of our four, equally weighted, statutory objectives. So in all we do fighting financial crime looms large. Which puts us in a new and rather different ball game. It gives a new string to our regulator's bow. And makes us part of the national fight against organised crime and terrorist finance.

To improve our effectiveness the FSA has created the Financial Crime Sector Leader post. It is my job to ensure that everything the FSA does takes into account the objective of fighting financial crime.


The financial crime risks

What financial crime risks are we talking about?

Various ways of answering that question:

  1. By the type of crime – money laundering, terrorist financing, fraud, market abuse, cybercrime etc.
  2. By reference to who's doing the crime –
    • Can be committed by firms,
    • or by their staff,
    • can be committed against the firm including by its customers,
    • or the firm itself can be used by third parties, perhaps by facilitating transactions with a criminal purpose.
  3. Or by where the criminal is doing the deed: within the UK, or - as is increasingly the case – internationally. If you're a criminal, moving yourself and your money around the world is a good way of avoiding being caught and punished.
  4. Or finally, by how the crime relates to other crime. The laundering of proceeds is what makes the underlying crime – drug trafficking etc. - profitable. And fraud is often the crime of choice of the organised criminal and the terrorist, because it can be easy money.

 

Developing our role

Those then are the crimes – what do we do about them? Some of what we do remains as it always has been:

  • Raising firms' standards of systems and controls and risk management for financial crime, through our day to day relations with the businesses we regulate. With Rules in our Handbook; and with the sanctions there if need be - taking action, public enforcement action if we have to, if firms' systems and practices are poor.
  • What we call "Policing the perimeter" of our industry – putting out of business the fraudsters who remain outside the regulatory net but take deposits or market get rich quick investment schemes.
  • Vetting new entrants to the industry and checking that the owners, senior management and other holders of key positions in financial businesses are "fit and proper".

And all of these functions have an impact on crime. Take the Money Laundering Regulations, for example. Before we focussed on defences against money laundering, many firms' procedures were woeful. Our interest has meant that customer identification and monitoring procedures, for example, have become far more rigorous, although perhaps they remain too bureaucratic.

As to the situation internationally, we receive many more requests from regulators and law enforcement overseas than we did in the past. And at the same time relationships between the UK and other jurisdictions have grown closer: in two ways

  • formally in the Memoranda of Understanding with individual countries and through the EU and the International Organisation of Securities Commissions – IOSCO;
  • but also - crucially - in good personal relationships with our partners overseas.
    National boundaries are no longer the obstacle they once were in the fight against crime and so we must use our time in Cambridge not just to talk to the people we feel we already know but use it to build new collaborations. It is what we do together to fight real crime that makes the difference, it is not enough to have world class Laws.

But, building on these firm foundations, we are developing a much richer conception of our role – a 21st century approach for a world in which there is, quite rightly, a growing emphasis internationally on tackling financial crime.

We have much more to bring to the party:

  • We can help strengthen industry's defences against crime. Good law on financial crime is crucial (and we hope that the Home Office find Parliamentary time to reform the law on fraud), but alongside it we need robust, risk-based, effective practices in industry, built on a good understanding of the real world risks.
  • We can encourage firms to do things because that is the best way of managing financial crime risks (and therefore reduce crime), rather than to meet perceived compliance requirements or to defend against regulatory fines.
  • We are a rich source of intelligence that we must share effectively.
  • o And we can work with our partners to disrupt crime. We have some good disruption tools for example, which we need to use boldly – off our own bat or where partner agencies invite us to do so.
  • o This then is our new approach, a more pro-active way of fighting crime. And, through that, we can understand better the management of the financial crime risks.

This new approach underpins a number of our current initiatives:

  1. Our review of customer identification procedures, where we are working with stakeholders to design a better way of checking that people are who they claim to be. We are helping produce a system that is better for law enforcement but imposes less pain on the industry and the consumer.
  2. We are making ourselves 'easier to do business with' for our intelligence partners by introducing new working procedures. These take account of good practice elsewhere, such as the National Intelligence Model that is now the "industry standard" in UK law enforcement and intelligence circles. As part of this shift we will make our intelligence requirements clearly known to our law enforcement and intelligence partners.
  3. We need quality intelligence on financial crime so this can help us focus our efforts, and we have been working with law enforcement on cases where systems and controls in institutions may have broken down. We are not on a witch hunt, although we will not shirk from enforcement activity in those cases that warrant it. We are working with partners to identify how fraud and money laundering are being committed through our regulated firms and how, for example, corrupt insiders have been placed or identified in institutions. We are looking into specific intelligence leads. And we will play our full part in helping law enforcement through intelligence sharing.
  4. We will shortly be announcing where we are going over fraud - calling for better systems and controls in the financial sector to manage fraud risks. With these systems and controls being proportionate and effective.

 

But we must be realistic about our ability to fight financial crime

But fighting financial crime is very difficult. Money launderers are imaginative, international finance is complex, terrorist finance transactions can look just like ordinary customer behaviour (if the money is going through the formal banking system at all that is). We need to make life harder for the criminal, but let us be under no illusions that we are going to stamp out financial crime.

We believe that we at the FSA are fighting the battle more effectively than we did before, and we are looking to build on this. But even if we could bring about flawless customer identification and transaction monitoring systems and suspicious activity reporting that produced fantastic intelligence on crime, that would not be enough. After all it is not suspicious to pay rent, buy food, rent cars. What is really suspicious about what terrorists do can be seen in only a few really unusual transactions that present higher risk so we must provide targeted information to the Financial Industry. We also need to look for the funding of the wider support systems that provide terrorism with logistics and propaganda. In some ways terrorist finance is reverse money laundering with good money being used for evil purposes.

The realistic objective is to make life more difficult, more risky, more costly for the criminal or terrorist seeking to use the financial system. What more do we need to do to help deliver on that?

Collaboration

Collaboration has to be part of the answer– and I'm glad to say collaboration is already the hallmark of much we do.

Some of our closest partners are speaking this morning – James Hart, from the City of London Police, and Lucy Makinson from the Treasury. We have also heard Sir David Omand speaking about one of our future partners – the Serious and Organised Crime Agency with its remit over financial crime and money laundering. Customs, the intelligence bodies, the Inland Revenue, they are all close allies.

But we can all collaborate more effectively. To help make this happen we all need to understand fully our partners' needs and capabilities, and what we need to tell each other, when. Indeed that collaboration needs to be seamlessly cross border since that is how international crime and terror operates.

The FSA must ensure that we are good team players – whether it be in the operational or intelligence field – and that we engage with our partners wherever we should. And the opposite applies – law enforcement, the intelligence bodies, all those working on financial crime, need a good grasp of what we can bring to the party and to be willing to send us the invitations.

So a good mutual understanding and willingness to co-operate is crucial.

But so is having adequate capacity to respond to the crimes. And here the Government is the key to success. Over money laundering, the Government has set the high level priorities and worked with us to help deliver an effective regime. But the approach over money laundering has to be end-to-end. It is no use firms investing heavily in spotting criminality and filing reports - with the FSA on their backs if their systems aren't up to scratch - if at the end of the day the police don't have the staff to investigate the crimes. Similarly, we will shortly be asking our firms to manage their fraud risks better, but the numbers in police fraud squads have fallen dramatically in recent years. The long and the short of it is that financial crime needs to be a higher priority in the objectives that the Government sets over crime and in the resources it provides to law enforcement.

 

Conclusions

So let me draw the threads together.

  1. We must all continue to develop a richer conception of our role in relation to financial crime, finding innovative ways to help tackle crime.
  2. We can never stamp out financial crime, but we can make it more difficult for the criminal wanting to operate in our sector.
  3. Collaboration – national and international - has to be key, underpinned by a good understanding of each others' needs and capabilities.
  4. We can make a difference by helping turn Government's high-level objectives on financial crime into practices on the ground that are proportionate and effective.
  5. Law enforcement need more resources to tackle money laundering and fraud.

What has our new approach achieved? We've certainly made life more difficult for the money launderer, and we are intending to do the same over the fraudsters operating in our patch. And we are working ever closer with our partners, nationally and internationally. So far so good, and plenty still to come. But I will leave us all with one key question which we must answer. How do we demonstrate to all of the innocent consumers in our societies that our efforts are being successful after all they are the people we are protecting, whose funds we are spending and whose lives we are, in some ways making more difficult to achieve the aims of reducing financial crime.

So I offer you then the FSA's new approach to fighting crime – a practical, risk-based approach, focused on achieving real world results. And a commitment that we stand ready to work with all of you to achieve these results.