State of Financial Crime 2023 Report

US financial institutions brace for soaring financial crime, with 100 percent re-evaluating their approach to risk

NEW YORK, Jan 18 – As war rages in Ukraine and inflation impacts the economy, financial institutions in the United States expect a subsequent economic downturn to drive a rise in financial crime. 

A new survey of financial institutions by ComplyAdvantage, a leading financial crime and fraud risk detection firm, showed that 100 percent of US financial compliance professionals are re-evaluating their approach to financial crime risk. For many, this will result in “de-risking” or restricting their client and business relationships to minimize the likelihood of onboarding criminals. While the approach appears effective, it may also make it harder for legitimate consumers and businesses to access financial products like loans. 

Proportionate risk management is an essential compliance strategy, but de-risking occurs when firms adopt blanket policies that, in practice, push criminals into less regulated territories. De-risking can also undermine the wider financial system, as it disproportionately impacts groups like humanitarian organizations and charities that rely on financial services to support vulnerable people worldwide. The Financial Action Task Force, the global standard-setter for anti-money laundering regulations, has said de-risking “should never be an excuse for a bank to avoid implementing a risk-based approach.”

In addition to the universal plans among financial compliance professionals to re-evaluate their approach to financial risk, the survey also showed that: 

  • 68 percent of US compliance teams are preparing for a rise in financial crime. 
  • 55 percent of US financial institutions plan to hire more compliance professionals. 

Commenting on the findings, Vatsa Narasimha, CEO at ComplyAdvantage, said: “During the 2007-9 Great Recession, financial institutions reported a significant increase in the level of financial crime. Our survey shows firms – driven by the expectation of an economic downturn – expect it to rise this year too. However, the digitalization of business and transactions since 2008 – accelerated by the coronavirus pandemic – means the financial crime landscape looks very different today. With new fraud and money laundering tactics emerging all the time, agility and investment in the latest risk detection technologies have never been more critical.”

The survey showed tax fraud, credit/debit card fraud, and investment scams are the top fraud offenses US firms are concerned about. While most financial crimes will be fueled by the economic downturn, investment fraud, in particular, often runs counter-cyclically to the economy. After the decline in asset valuations that occurred in 2022, the likelihood of individuals falling for bogus schemes promising “market-beating” returns has increased. Federal Trade Commission figures show that American consumers lost more than $5.8 billion to fraud in 2021, an increase of more than 70 percent compared to 2020. ComplyAdvantage expects that number to increase in 2023.

No end in sight for sanctions on Russia 

The survey revealed Russia remains the hotspot US firms are most concerned about heading into 2023. When asked to rank their top three hotspots, 51 percent of firms chose Russia, with China selected by 40 percent and North Korea third with 31 percent. As the results indicate, a stalemate in the war is the most likely scenario to emerge, with new sectoral categories of sanctions possible, especially as other countries might aid Russia’s efforts. Western powers are also expected to ramp up the enforcement of existing measures. 

When asked to identify any measures they had taken since the invasion, 52 percent of US financial institutions told ComplyAdvantage they changed their business model in response to Russia’s invasion of Ukraine, with 52 percent implementing asset freezes and 31 percent implementing an onboarding shutdown in the country. Just 3 percent said the invasion had no impact on their business.

Narasimha added, “It’s clear that compliance and sanctions teams realize how significantly the war in Ukraine can – and will – impact their businesses. This will continue in 2023 with further changes to the lists of Russian sanctions designations. But the sanctions landscape is larger than Russia, so firms must prepare for measures that may arise in response to geopolitical events occurring in other countries. As the Federal government focuses on improving private sector implementation and taking enforcement action, a laser focus on sanctions in the year ahead will be critical.”

Extremists being financed through crowdfunding platforms

Attention is also increasingly turning to crowdfunding platforms and how they are being used to finance extremist groups. When asked if they had seen a change in attempts to use decentralized finance platforms to finance extremist political groups over the last 12 months, 89 percent of US financial institutions reported an increase. 

Andrew Davies, Global Head of Regulatory Affairs at ComplyAdvantage, explains: “Many crowdfunding platforms are less focused than they should be regarding compliance, mostly due to surging demand for their services. We saw this most prominently last year in the use of various crowdfunding platforms to support the so-called “Freedom Convoy” in Canada, but they are increasingly being used by extreme groups worldwide. Crowdfunding, in conjunction with cryptocurrencies and social media, increases the risks of terrorist financing by allowing bad actors to utilize the reach of crowdfunding platforms and crypto asset technologies to gain support from followers and receive funds. Crowdfunding platforms should ensure they have appropriate anti-fraud and money laundering solutions. Banks and other providers working with crowdfunding organizations should perform enhanced due diligence before agreeing to a partnership to reduce exposure to financial crime risks and bad publicity by association.”

About the survey

In October 2022, ComplyAdvantage surveyed 800 C-suite and senior compliance decision-makers across the US, Canada, UK, France, Germany, Netherlands, Singapore, Hong Kong, and Australia. 150 respondents were located in the United States. 

All respondents currently work in financial services, with 50+ employees and total assets of over $5 billion. 

Those who responded to the in-depth survey are represented by the following sectors: financial institutions (e.g., banks), wealth and investment management, capital markets, money service businesses, crypto exchanges, and insurance.

About ComplyAdvantage

ComplyAdvantage is the financial industry’s leading source of AI-driven financial crime risk data and fraud detection technology. ComplyAdvantage’s mission is to neutralize the risk of money laundering, terrorist financing, corruption, and other financial crime. More than 1000 enterprises in 75 countries rely on ComplyAdvantage to understand the risk of who they’re doing business with through the world’s only global, real-time database of people and companies. The company identifies thousands of risk events daily from millions of structured and unstructured data points. 

ComplyAdvantage has four global hubs in New York, London, Singapore, and Cluj-Napoca (Romania) and is backed by Goldman Sachs, Ontario Teachers, Index Ventures, and Balderton Capital. Learn more at complyadvantage.com.

For Information:


ComplyAdvantage

Will Thompson

[email protected]

 

ComplyAdvantage Americas

Duncan King

+1 917.570.7616

[email protected]