Managing increased financial crime risk and opportunity in an adverse economic environment
Kevin Newe, Assistant Director – Illicit Finance Strategy, HMRC
Below is an insight into what can be expected from Kevin’s session at Fraud & Financial Crime Europe 2023.
The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.
How does the current negative economic environment increase the risk of financial crimes?
Considering the types of risks HMRC faces, specifically people exploiting the tax system, any challenging economic environment can make such activity seem more attractive.
That might be making a claim for a tax rebate or payment that isn’t appropriate, or maybe not paying tax owed at the right time through sales suppression. Now that might have a very short-term financial benefit for that person or business, but ultimately the consequences of less money to support public services has impacts on everyone.
However, while there is an increased risk, it hasn’t fundamentally changed our attitude and approach with most compliant taxpayers. It isn’t about making access to HMRC services that much harder, or that we stop providing financial help in appropriate circumstances. Instead, it’s about applying a sensible and pragmatic approach to risk management, ensuring the department and the public have a heighted awareness about the current economic environment and increased levels of risk.
Also, more generally, there is a very real risk of people getting drawn into some form of financial crime – whether perpetrating or enabling it – because they feel they have no choice. So, whereas usually they wouldn’t entertain the idea of ceding control of their bank account from time to time, being offered a modest but attractive payment can sway their judgement.
In what ways has the current geopolitical tensions impacted financial crime?
Specifically, Russia’s invasion of Ukraine has been a catalyst for a coordinated global approach, particularly the application of sanctions, whether financial or targeting certain types of services. It has really brought the impact of that work into the light, particularly the need to not only apply sanctions quickly and robustly but identify individuals or service providers who are supporting sanctions evasion.
It has also started an interesting debate on what next after sanctions application, including legal frameworks that could support reparations for Ukraine and the rebuilding of destroyed infrastructure.
Domestically, it has certainly accelerated a significant amount of change in how the UK tackles financial crime, including challenging the perception of tolerating financial flows from individuals and entities close to the Russian regime. We have the forthcoming Economic Crime and Corporate Transparency Bill, which will give Companies House new powers to identify and tackle the abuse of UK corporate structures. The new Bill also includes enhanced civil seizure and forfeiture powers to tackle the criminal exploitation of crypto assets, which could be as revolutionary to our response as the introduction of Account Freezing Orders.
The new measures build on the previous Economic Crime (Transparency and Enforcement) Act of 2022, which introduced the Register of Overseas Entities Beneficial Ownership and has provided HMRC with valuable and insightful information. It is therefore not surprising, within the new Bill, that there are ever more measures to increase transparency and encourage more dynamic, and consistent, data sharing across and between the public and private sector.
How have cost reductions impacted compliance programs and risk mitigations?
Like any organization, HMRC needs to be mindful of spend, ensuring activities deliver value for money and / or improve taxpayers’ experience of engaging with the tax system. We are continually looking to invest in new or refine existing financial crime mitigation processes, including the use of new software or data.
Even tax frauds that might be considered the most basic, often have an element of international activity associated with them, so richness of data and how that is interrogated and integrated into our risk mitigation work is critical.
Without knowing the extent to which private sector firms are having to reduce costs, particularly within compliance delivery, I would assume it’s meant looking to innovate on how compliance activities are delivered, perhaps recognizing that short-term spend is necessary to support long-term cost savings through better automation or more efficient and effective threat identification.
How can financial organizations effectively tackle financial crime despite limited resources?
From a law enforcement perspective, we’re looking at new ways to achieve big, meaningful impacts on financial crime. This includes refinements to how criminal investigations are presented to a court, with a significant increase in the use of digital evidence processes, which can help shorten court times, meaning investigators aren’t tied up for months on end.
We’re also very keen to use legislation to enhance systems or processes that are attacked or exploited by tax fraudsters. As noted above, it is about striking a balance between service accessibility and risk management, but even requiring additional identity verification processes (or joining up across government), can make committing financial crime that much harder. Or certainly, put off those who are opportunistically attacking HMRC systems.
New investigation and recovery powers have made a big difference to our response. Account Freezing Orders – introduced in 2018 – meant we could do more in tackling the exploitation of bank accounts. Financial Institutions were seeing a direct consequence in their reporting of suspicious activity, which reinforces the value of the system. Given the new civil powers planned in the ECCT Bill, I think Virtual Asset Service Providers should be encouraged to be robust in how they monitor and report suspicious activity, knowing that law enforcement agencies – like HMRC – have the powers to take immediate, affirmative action.
Finally, it’s also about exploiting the huge growth in Public Private Partnerships. In the UK, we’ve generated significant value through our own Joint Money Laundering Intelligence Taskforce, and so many other countries have introduced their own version. There are real opportunities to work across boundaries on shared financial crime threats.
All the above is featured in one form or another in the UK’s 2nd Economic Crime Plan, which was published end March 2023, so will be specific areas of focus and intense work over the next 3 years, covering the life of ECP2.
What tactical transformation measures can financial institutions put in place to leverage analytics?
Again, reflecting HMRC’s experiences, our response to tax fraud is hugely underpinned by data analytics, married with compliance officer knowledge and expertise. We also find the same to be true of the financial institutions we partner with, whether bi-laterally, or through forums like JMLIT.
Most firms already value both the tactical and strategic insight that analytics can provide, I think it is more a question of continuous evolution and innovation. Whether that’s under the bonnet software that’s assessing and aggregating data more effectively, or continued enhancements to data quality and consistency, so it can be shared – through the right gateways – with a broad range of stakeholders, who can do something positive with it.
It is an area explored within Economic Crime Plan 2 and work is underway to scope a complementary data sharing and innovation strategy that will benefit both public and private sector institutions.