Brexit, FinTech & the Risk of Financial Crime

There is no denying the seriousness of the decision taken by the UK to leave the EU. Time will tell what the impact will be on the UK and Europe’s finances as well as the direct impact on the UK’s blossoming FinTech sector.

FinTech strategist Devie Mohan stated

A lot of London-based fintech startups are run by non-UK born entrepreneurs. This will now reduce, with difficult immigration and a reduced available market. London-based fintechs will now be looking at a more complex web of regulations and trading laws for UK and EU. Economies of scale will reduce. Survival will be harder! Berlin, Stockholm, Sin, HK will emerge as hubs.”

So what does this decision mean from a financial crime risk perspective for FinTech’s operating in the UK market?

Firstly let’s focus on AML and financial crime regulation. The UK is due to implement the 4th EU Money Laundering Directive (4MLD) by June 2017 . The 4MLD is enhancing existing regulatory standards already in operation across the UK and Europe and in fact the UK AML and counter-terror financing regulation is already front running the pack in its completeness and effectiveness. Amongst other factors the 4MLD provides additional requirements on the application of the risk based approach, identification of beneficial ownership, PEP identification and coverage of high value goods. These enhancements are based on the Financial Action Task Force (FATF) 40 recommendations and as the UK is member of FATF it would still need to comply with these recommendations, whether in the form of 4MLD or not. Brexit is unlikely to have any material impact on the requirement to enhance controls in-line with the FATF recommendations. Does this make things easier or more complicated for the FinTech sector? Our view is that companies need to focus on the risks they face first and regulatory compliance a natural second. So the requirement to understand and manage financial crime risks in support of sustainable business does not change. The long term regulatory landscape may look a little more complex but the short and medium term requirements based on FATF recommendations and 4MLD won’t change.

From an operational perspective what impacts may Brexit have?

As Devie Mohan quite rightly highlighted access to high quality resources may be impacted in the medium term by complexities in immigration rules and visa considerations. This may have an impact on financial crime and compliance expertise available to support the growth of FinTechs and the eco-system as a whole as recent history has shown a growth in resources coming from European countries to supplement the UK’s shortage in credible compliance resources across the whole UK financial services industry.  This may be antagonised by the unique skill-set required for a start-up environment where broad financial crime and compliance expertise (across all financial crimes) is required rather than very specific SME knowledge (such as AML only) required by many large incumbents. The reliance on outsourcing compliance processes such as KYC to eastern Eurpean countries such as Poland may also be affected by changes to information and data sharing arrangements although that may open up the market and competition even further.

Will financial crime risk increase?

There is no denying that difficult economic conditions and uncertainty can create conditions that increase the risk of financial crime. We do not yet know whether Brexit will cause a contraction in the UK economy but early indications of market reaction and pre-vote statements from the Bank of England suggest it is a possibility. A 2009 Time Magazine article titled ‘The Reason Fraud Spikes During a Recession” stated some interesting observations:

“a U.S. firm that runs compliance and corporate-governance hotlines for about half the Fortune 500, fraud-related calls amounted to 21% of all reports in the first quarter of this year, up from 14% in the same period in 2007.”

“A majority of members of the U.S. Association of Certified Fraud Examiners who were polled in February and March 2009 said they had seen the number of company fraud cases climb in the previous 12 months; the bulk of those experts attributed the rise to heavier financial pressure.”

“According to a survey published in February (2009) by British insurer RSA, 3% of adult Britons said hard economic times made committing insurance fraud more acceptable. We’re seeing that already: the number of fraudulent claims rose 17% in the U.K. last year, with commercial claims accounting for a third of their value.”

Additionally in January 2014 UK police records showed a 4 per cent rise in shoplifting and a 7 per cent rise in “theft from the person”, such as thieves snatching expensive mobile phones from passers-by. Nick Gargan, chief constable of Avon and Somerset Constabulary, told the Financial Times that police leaders were starting to talk about an “austerity bulge” in crime figures.

So an uncertain and distressed market can create a higher financial crime environment and set conditions for criminals to exploit the prevailing scenario although some of the statistics may be explainable by general social changes such as mobile usage.

What Next?

There is certainly no need to panic and in many cases it remains business as normal. Are we going to see changes and impacts – yes but the scope and scale will take some time to determine. However, it pays to be prepared and think these issues through carefully. At FINTRAIL we are able to support our clients during this uncertain period, whether enhancing risk assessments or helping structure your compliance plans in response to the Brexit decision.