Finance industry budgets to fight pain – but does it really hurt? Finance industry must take holistic view on financial crime to protect reputation and bottom line

The finance industry is struggling in the battle against crime, with many institutions fighting to secure resources, and what little money is available is being spent on only a few focus areas that are not generating the greatest return on investment, according to the latest findings on financial crime from LogicaCMG.

The study revealed that investment was chronically low with 83 per cent of institutions admitting to having no dedicated budgets and three quarters of companies revealing they will spend no more in 2004 than in 2003. Despite this lack of investment, 79 per cent said they would prefer to take preventative measures rather than react later, showing financial crime issues are increasing in importance.

The survey shows that although institutions recognise financial crime as an increasing threat, the industry is taking too narrow a view by focusing mainly on certain areas, such as money laundering (which is being heavily driven by the FSA), with almost one third (29 per cent) predicting it will overtake fraud in the next two years The focus on only some areas of crime, coupled with the apparent lack of investment, shows other areas including identity theft, ‘cardholder not present’ fraud and fraudulent claims are being left open to attack All of these areas present greater financial pain to financial services organisations both in terms of cost and, most importantly, in terms of the impact on corporate reputation from negative publicity.

This focus means that internally employees are not putting forward ROI cases using previous examples of financial crime which are easier to quantify and address. Overall, financial institutions’ difficulty in quantifying how much financial crime is costing them in lost revenue (more than 60 per cent of respondents revealed they did not know what losses would be saved) - let alone reputational risk – appears to be hindering the case for building ROI cases against financial crime. This in turn shows that financial institutions cannot hope to identify where the weakest links in their defences are and how to protect them.

When asked which benefits of investment in technology were most important, reducing costs of managing crime prevention was the highest priority, alongside reducing loses due to crime. This opinion, however, conflicts with the current focus on the prevention of money laundering because most crime currently affecting companies’ profits comes from cards-based fraud and fraudulent claims.

Commenting on the research, Guy Warren, LogicaCMG’s managing director of financial services in the UK, said: "With financial fraud affecting 2-4 per cent of UK GDP, financial institutions need to invest where there is the signficant financial impact. Whilst, institutions attempt to tackle current regulatory issues, such as anti-money laundering they must also review the impact of other, more financially damaging elements of crime. Institutions need to assess all aspects of their business, define what crimes they are susceptible to and evaluate the costs involved in making them less vunerable to attack. Criminals will always target the weakest link in a bank’s defenses and institutions must take a rounded approach to financial crime, as only an holistic strategy will serve to protect their reputations as well as their bottom lines."

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