EY helps clients create long-term value for all stakeholders. Enabled by data and technology, our services and solutions provide trust through assurance and help clients transform, grow and operate.
At EY, our purpose is building a better working world. The insights and services we provide help to create long-term value for clients, people and society, and to build trust in the capital markets.
Why financial crime prevention is a crucial battle for banks today
In this NextWave Banking in Asia-Pacific podcast episode, the speakers delve into the significant impact financial crime has on society and the creative tactics being implemented to fight against it.
In this episode, Nick Davison, EY Oceania Financial Crime Leader and Duncan Jepson, Founder of Liberty Shared, dive into the societal impact of financial crime and the innovative strategies being employed to combat it.
Join them for an in-depth exploration of the changing face of financial crime over the past two decades, focusing on the rise of cyber-scamming and forced labor as the latest trends. Understand the critical role that banks and big data play in combating these economic transgressions.
Key takeaways:
In this compelling discussion, the speakers also tackle:
How the growing awareness and integration of environmental, social, and governance (ESG) principles intersect with efforts to combat financial crime
The need for the financial sector to adapt to the complex society to combat the ever-evolving financial crime
For your convenience, full text transcript of this podcast is also available.
Nick Davison
Hello and welcome to the EY NextWave Banking Podcast. I'm Nick Davison, EY Oceania Financial Crime Leader. Today, we're exploring the complex world of financial crime. Joining us is Duncan Jepson, Founder of Liberty Shared – a pivotal organization in the fight against modern slavery and human trafficking. Duncan, it's a pleasure to have you with us.
Duncan Jepson
Thanks very much, Nick. I'm excited to join you and to get involved in this discussion about the evolution of financial crime and the challenges of the coming decade.
Davison
Thanks, Duncan. I think a good place to start. So, I think you've had a genuinely front-row seat to the change in financial crime over the last 25 years or so. And I wonder if you could share some of your reflections on the journey with the listeners.
Jepson
Yeah, I mean, it wasn't intentional. I began my career as a lawyer going into financial services just around 2000-2001. And then obviously, the tragedy of 9/11 happened. And then there are suddenly sweeping changes in terms of combating terrorist financing. First of all, the Patriot Act was promulgated. And in that was the creation of the Department of Homeland Security, much greater powers to the Department of Justice and FinCEN to pursue terrorist financing on a global level. And of course, the US could do that, because everybody was using the US dollar as a primary currency of trade and commerce and financing. If another country had tried that, they wouldn't necessarily have had the kind of global change that the US government was able to put into effect. But that meant then that everybody who was using the US dollar, which is pretty much everybody, suddenly had to fall into line with what are the regulations, and in that, the new anti-money laundering, risk management approach, and new control functions are needed to be put into place.
Davison
You've spent more than a decade at the forefront of the fight against human trafficking and forced labor. I wonder if you could share a little bit of that experience, in particular, talk about the crimes, the financial implications and the financial data that helps to fight against those activities.
Jepson
The dovetail between the changes in approach against financial crime, anyone who was in a financial institution in the 2000s, suddenly, there was a huge amount of spend on the control functions, gathering more data about where transactions are coming from, who were the counterparties, where was the money going. Anyone who was born after this, in their teens and 20s, will now be very familiar with credit card companies sending them a text message just saying, "Is this transaction yours?". People have to remember that didn't occur back in the 2000s and pre-2000s. You might get a phone call, or your credit card will just get held, and the transaction would get held up.
Jepson
So as I was there, as a general counsel and the head of compliance, we would get requests for information from the US government saying, "Have you got accounts in these names?" and they were names of terrorists. And I just started to think, because I'd been working on this a little bit, was while we're using the same infrastructure for things like human trafficking and wildlife trafficking, so this is back in 2008, 2009, and I was at a large financial services company that was definitely across the whole of Asia. And it just occurred, why aren't we thinking about these things as well using exactly the same information infrastructure and data infrastructure, and that's where the question mark hung for a while until I started to become more active in this.
Davison
And do you think that the financial institutions have picked up the baton and they've really played the part that you would have expected from them in that fight?
Jepson
It's a bit of a double-edged sword. It was bound to play out this way. Because ultimately, banks are corporations. They are selling services and they're working for their clients, and they have a fiduciary duty to act in the interests of those clients. Unlike, say, a retailer or someone in the production commodity cycle, there are greater regulatory frameworks around operating financial services.
Jepson
So initially, once it established that human trafficking was a predicate offense, which it had been on the books for quite a while, it just hadn't really been acted upon, then once that was activated, then banks did what banks should do, which is I started to say, “Okay, you say this is a crime, we agree it's a crime. It's a predicate offense. The question is, then, is there any data to actually look at transactions? Can we create red flags?”. And that's something that Liberty Shared was very much part of at the front of that.
Davison
Yeah, that's a good reflection, because we talk to clients every day and they want to play their part, but they're only a small part of the puzzle. There are definitely others that can have perhaps a much bigger impact on this. Banks tracking the money is really important, and ultimately would be the trail back to the criminals and hopefully to drive prosecutions. But as you say, it needs to be done in conjunction with the whole ecosystem. So, changing tack a little bit. The new criminal activities and trends that you see emerging, is there anything that you think needs to be highlighted and people perhaps aren't as aware as they should be of?
Jepson
Yeah, I think there are two things. One is new, which is a cyber scamming, “pig butchery”, as it's been called, by the criminals themselves. And then the second thing is, I think, a much more lucid perception of the issues of forced labor. That is not in itself a new crime, but I don't think it's been completely grasped by both financial services and by corporations who are running these enormous global value chains of production. And that, I think, is something that is harder to grapple with in a way because it's a blurred line between what is licit and legal, and what is illicit and criminal. That I think is a harder one to grasp. But the cyber scamming is definitely the new criminal activity that I really think has come to the fore in the last 18 months to two years.
Davison
Yeah. And with that evolution of crime, how do you see banks and their financial crime teams adapting to that? And do you see that their role changing? And how can they try to stay ahead of what the criminals are up to?
Jepson
I think there are two parts to that. The first is one about current approaches and procedures and processes that came from the 2000s, which is transactional red flags, looking for bigger data sets that provide indications of suspicious transactions, and then following that line, including typologies, studying typologies. Those are all Orthodox methods. The problem I think, is that works very well for sex trafficking, where there's organized crime and there's a clear line between who is a criminal and who is not.
Jepson
But the problem is in relation to say forced labor, where what you have is a bank financial service company offering a massive range of financial services products, to companies that are ultimately benefiting from the use of forced labor and their global value chain, and in their business model, and then the profit and loss. And that's a much harder thing to determine how to respond to that client.
Davison
And go back to our earlier point about banks not being the only answer, they play a part in this. One of the themes that we talked about, and we think we play a role in this as well with our clients, with law enforcement, with regulators is collaboration, making sure that all participants in the fight against financial crime – the financial institutions, their clients, NGOs, advisors like us are playing their part. And we all kind of come to the table to fight financial crime effectively. In your experience, are there any really good examples of how that's worked?
Jepson
I think there are good examples in relation to sex trafficking. And I think the most obvious example is the recent Epstein case, where ultimately, those victims have been paid compensation back by two financial institutions for the involvement those institutions had in those transactions with Jeffrey Epstein. So, I think there's an example there of the actual system working, and those banks coming forward and responding to that. I think on forced labor, it's much more problematic, but that's where greater collaboration or at least greater interaction is needed. And I think that's important to draw a distinction between collaboration and just basically interaction because once you start to talk about things that are of a criminal nature, then not everybody's going to be collaborative, because obviously, some people are going to be investigated and possibly found guilty and prosecuted.
Davison
So thinking about financial crime, it's evolving the priorities of society. And I think about the intersection of financial crime and ESG, as people's awareness of ESG issues, ESG concerns grows. And I know we've talked about this before, but I think it would be interesting for the listeners to hear a little bit about how you see the interaction between this growing awareness of ESG, the issues faced there, the types of reporting responsibilities placed on different organizations, and financial crime, and the intersection between the two.
Jepson
Yeah, it's definitely a thing, which I'm passionate about — this issue of ESG and financial crime. I think, in the simplest way is to understand that when you look at the SDGs or you look at other work to promote resilience within communities, then a lot of it is about equity. A lot of it's about justice. And ultimately, those communities who are providing labor can thrive because they are being suitably compensated and not exploited. So that could be labor, it could be gender-based violence, it could be sex trafficking, and so forth.
Jepson
So the issue is about money, it's about making sure that people aren't being exploited and that they aren't receiving what they are entitled to. And, of course, the central to that simple exchange is the banking system. And that's why, in the end, when the question arises about ESG ratings and how banks are doing — well, we haven't really seen yet, but I think it is coming — it is this question about banks’ role in ensuring that transactions are intended and are actually taking place.
Davison
Do you have any views, any insight as to how you think financial crime prevention within financial services, what that's going to look like going forward? How are banks reacting to all these challenges?
Jepson
Obviously, we're in a period of a fascination with big data, of data analytics, and that's brought many advantages. But it's also worth remembering that a third of the population of the planet is not on the internet, and the things that happen to them and they are often the victims because they're in more fragile environments. One of the aspects of their fragility is the lack of internet, that they are victims, many things, but a lot of what happens to them is not recorded and is not definitely digitized. So, it's not available in large datasets.
Jepson
And I think what we're going to have to see is interestingly a return to some of the skills that were used and relied upon pre-internet and pre-big datasets, which are, frankly, thick data, as the social scientists would call it, which is simply getting on the ground and having a look and understanding what is the environment, what — as some friends of mine say in the military — are the atmospherics, and understanding what is happening.
Jepson
An example of that is, for example, in extractive industries or in the fishing industry, in the end, you do have to wonder, well, what is happening on the ground in this mining situation, that we’re financing, that we’re processing fees for? What is happening in these fishing fleets that we are helping to charter or finance in order to provide guarantees for? We need to know more than simply, is there a red flag in the dataset that we're purchasing, because no bank is going to purchase all datasets. And as we say there are some fundamental weaknesses in the digital environment anyway, as a source of global records.
Jepson
So I think there's going to have to be a realization there. And something like ESG, it won't be maybe enforceable, but it will trigger people to start asking questions, do we want to work for the kind of institution that's just saying, "Well, let's just do the minimum, let's just do what's necessary to comply," or are we going to do a bit more? And I think that's also a generational issue, as there are different generations of people working in these jobs who are asking different kinds of questions — how do we behave, how do we want to conduct ourselves? How responsive are we to these different situations? There's going to be a range of different perspectives, but it's definitely a lot more, I would say, attenuated to the way that we think of the world in 2024 than we did in 2000, or than we did in 1983. And I think that's pretty important to remember also as there are different cultures, different knowledge, and different awareness.
Davison
And I think it's good to expand the debate. As we lean in and we see what's on the horizon, we see criminal activity evolving all the time. It's getting more sophisticated, it's hard to catch up. The information is not publicly available to understand it completely and to take action. And we've talked before about law enforcement being able to go after and pursue prosecutions, and the international nature, the global nature of crime makes that incredibly, incredibly challenging. The odds are stacked against law enforcement and financial institutions as they get into this fight.
Jepson
I think the golden rule is always to remember that we are working in a complex systems, and therefore we have to adapt. And if you're working somewhere, and I've certainly worked in places where adapting stops, then you can just take it as a given you are going to struggle, because simply the old adage will be the world will just change around you and eventually, you'll just get caught out. So, the litmus test is, are you adapting? Are you intellectually curious? Are you thinking about this?
Jepson
And obviously going back to the 80s 90s, and 2000s, people weren't thinking about sustainability and ESG in the detail that we are now. The last 15 years have not just changed the way that crime has been undertaken, but it's also in relation to how we're thinking about what a crime is. And that obviously comes to back, like who benefits from these activities of abuse and exploitation. And so, your litmus test is always “are we adapting to what is happening around us?”. If we’re not, if what we're trying to do is prevent ourselves from adapting because it's expensive and we want to try and just batten down the hatches and stick to what we know, then it’s just going to be a rule that the nature of complexity is you will eventually trip over, probably yourself. And I think that's important to remember — that's just the environment we're living and working in and there's no way around it.
Davison
My personal take, the last thing I can say on it is, I think it's crucial that we remember that this is a societal issue. This is not just an issue about regulatory compliance. I would like to see the regulators continuing to work with all the different participants in the ecosystem to develop regulations that support the continued growth of anti-financial crime and effective prevention and detection. But it's a collective responsibility that we all share and it's a societal issue that is not going away anytime soon.
Davison
So Duncan, thank you very much for making the time to talk to us today. We really appreciate you sharing your insight and all of the work that you've driven over the last 15 years. I'm very conscious of the impact that has had to thousands of people across the world and really appreciative of it. So, thank you for your time today and thank you for all the work you do in this space, and particularly around the fields of trafficking and forced labor.
Jepson
Thanks very much, Nick. And it's been a pleasure to join you today.
Davison
I do hope this conversation has provided valuable insights into the evolution of financial crime and the collective efforts to combat it, including the significant work of NGOs like Liberty Shared. Going forward, stay informed and engaged and join us next time on the EY NextWave Banking Podcast as we continue to explore the transformative world of finance.
Andrew Gilder
You've listened to the EY NextWave Banking in Asia-Pacific Podcast. If you liked this episode, please leave a review to help us bring you more insightful and relevant content. And finally, don't forget to subscribe to our podcast on Apple Podcast, Spotify, or wherever you listen.
Gilder
To learn more about EY, our people, and our latest thinking visit us at EY.com/banking. If you would like to have a further conversation on what you've just heard, or learn more about joining our team at EY, please contact us.
