Writing exclusively for International Investment, Chris Ives and Howard Cooper argue that losing sight of regulatory objectives will be damaging in the long term and risk causing more problems than shorter-term government interventions will solve.
The global economy has changed dramatically in the last few months, with entire countries under lockdown and the global workforce largely operating from home or not at all. It's not an understatement to say that we're in the grip of a crisis, characterised by huge injections of cash globally from government bailouts, lending by multilaterals and charitable donations.
At the same time, regulatory controls and oversight are being relaxed to help keep the global economy running. However, losing sight of these long-term objectives could cause more problems than the short-term interventions will solve.
Considerable progress has been made in the fight against financial crime, money laundering and tax evasion and these improvements should not be compromised in response to a short-term crisis, however urgent it may seem today."
Unfortunately, issues like fraud, bribery and corruption and money laundering are likely to increase during a crisis, particularly if regulators take their eye off the ball. We're in real danger of this happening now, and regulators should be learning from the lessons of the past.
The 2008 financial crisis exposed a number of shortcomings in the prudential, anti-money laundering and counter-terrorist financing oversight of financial institutions and set in progress a regulatory reform program impacting Europe and the rest of the world.
Fast forward to 2020, and stress testing and enhanced due diligence requirements implemented post-2008 are already being watered down or suspended.
If regulators continue to relax the level of oversight and international cooperation in response to the COVID-19 crisis, all this progress could be lost. Most worryingly, it will provide opportunities for wrongdoing and could mean that in 2030, we will still be uncovering criminal schemes that are in the works now. While the good guys' attention is elsewhere, the bad guys always take advantage.
In the UK, it appears that the perpetual balancing act between managing financial crime risks and economic imperatives has tilted in the wrong direction given the pressure to provide essential funding to businesses impacted by the current crisis.
The chancellor recently announced plans for 100% guarantees on business interruption loans, but at the same time, the FCA doesn't expect regulated entities to subject applicants to the usual compliance standards. In fact, it is letting authorised firms autonomously decide whether a simplified form of due diligence is appropriate.
On a macro level, the Bank of England has suspended stress testing for the larger UK banks and building societies, as well as several other supervisory programs. It's safe to say that hands have not only been taken off the wheel, but that the door has been left open with the keys in the ignition.
Financial institutions and professional advisor groups must be vigilant to ensure that reduced due diligence requirements aren't widely exploited by those with bad intentions. Without this vigilance, we will see a significant increase of fraud and illicit funds flowing through the UK financial system.
That said, professional criminals often find a way around regulation, too. The past decade has seen a series of high-profile bank frauds, collapses and money laundering scandals that identified the UK as a prime destination for the proceeds of crime.
These schemes came to light during a period of increased regulatory oversight and stronger compliance structures following the 2008 crash.
Moving focus elsewhere also risks leaving criminality and bad practices covered up. Investigations into corruption, money laundering, fraud and a litany of other issues are all put on pause as regulators try to deal with the immediate fallout of the economic crisis.
At this time, with money flooding into the system, regulators need to ask themselves difficult and challenging questions. Is it better to release the controls and relax oversight for a short-term benefit? Or is it better to invest in a structure which will efficiently get the funds to those that most need them over the long-term, but that also minimises the risk of crime?
Considerable progress has been made in the fight against financial crime, money laundering and tax evasion and these improvements should not be compromised in response to a short-term crisis, however urgent it may seem today.
The upcoming consultation from the European Commission on creating a new pan European anti-money laundering authority is a positive step in the right direction. It would be a real and potentially devastating shame if that momentum is lost or even reversed.
Chris Ives is a senior manager and Howard Cooper is managing director for business intelligence and investigations at Kroll, a division of Duff & Phelps.