How can the Nordics better fight financial crime?

‘Striking Back Against Financial Crime’ is our latest report on the status of financial crime in the Nordics. It follows on from our 2018 report, ‘Partners Against Crime’, and draws insight from interviews conducted with senior people across major Nordic financial institutions, both private and public sector, from heads of financial crime and chief risk officers in banks, through to law enforcement personnel and regulators.

Concepts like money laundering often sound abstract and remote, but their impact is real and devastating. Financial crime fuels some of the world’s most serious social and economic menaces, from drug and people trafficking to terrorism and counterfeiting. The United Nations Office on Drugs and Crime estimates that criminals launder between two and five per cent of global GDP – up to USD $2 trillion – each year1.

Typically, law enforcers across Europe only act on about 10 per cent of suspicious activity reports (SARs). And between 2010 and 2014, they only seized 1.1 per cent of the proceeds of criminal activity2.

Denmark, Sweden and Norway are no different than any other country in their need to better combat financial crime. But we believe all three have further to go than many of their European counterparts when it comes to countering the problem. Based on a wide range of interviews with those involved in tackling financial crime, the sense is that authorities seize, proportionally, even less criminal money in these countries than they do in Europe as a whole. Our respondents concluded the Nordics are as much as 10 years behind in the development of their financial crime organisations, systems and, perhaps most importantly, culture dedicated to combating financial crime.

So, why are the actions of Nordic law enforcement agencies, regulators and perhaps most importantly, of the regulated industries themselves, having such a limited impact on the fight against financial crime? And what would improve the collaboration between banks, government, law enforcers and regulators?

Our new report, Striking Back Against Financial Crime, looks to address these questions. It examines the extent of the money laundering problem, barriers to countering it and new ways for each country to improve its system. It then explores the possibilities for pan-Nordic collaboration. Outlined here are some of our key findings.

The Nordic region is facing growing financial crime challenges

In Denmark, Norway and Sweden, financial crime used to be, in the words of one respondent, ‘someone else’s problem’. But the increasingly global profile of the countries’ larger banks has brought with it bigger anti-money laundering (AML) and combatting the financing of terrorism (CFT) compliance risks. And with more intense EU Directives, Nordic banks are facing scrutiny from both peer regulators and supranational scrutiny such as FATF and EU bodies.

Danske Bank, Swedbank, SEB, DNB and Nordea have all been the subject of investigations, often resulting in historic fines and CEOs losing their jobs:

Danske Bank saw its share price halved and experienced immeasurable reputational damage after €200 billion-worth of suspicious transactions flowed through its Estonian branch without appropriate AML controls. The bank is still awaiting final decisions on fines from the Danish and US authorities, but the market expects the total amount of fines to reach multiple billion Danish Kroner
Swedbank got a SKR 4 billion fine for lax controls over €37 billion of suspect payments through its Baltic branches
SEB received a SKR 1 billion fine for poor risk management around Estonian transactions.

Such cases suggest that the Nordic banks are experiencing disproportionately more serious AML failings than the average European bank. There are several reasons why AML is so difficult for established banks, ranging from old technology that makes it hard to extract good-quality data, to poor risk policies or controls that allow criminals to exploit vulnerabilities in the system. There are also significant barriers to collaboration, stemming from banking secrecy laws and legal constraints that prevent the sharing of data on criminals.

Corporate AML knowledge is still nascent, it takes time to train and develop robust in-house AML capabilities.

Building experienced and effective teams of experts is challenging and takes time. As a whole, the cohort of Nordic financial crime experts within financial institutions are relatively inexperienced. And hampering their efforts is legacy technology and organisational structures that are not designed to place AML vigilance as a top priority.

If that wasn’t enough, compounding these issues is that Nordic banks now face the added pressure of compressing more corrective activity into less time to not only stay in line with regulations, but to ensure that changes made across the Nordics are done so in a coordinated fashion and that systems and policies complement each other, before it becomes too difficult to make meaningful changes and the resulting systems still permit financial criminals to operate across borders with relative ease.

Reasons to step up the pace

The increasing tempo of regulatory directives from the EU and elsewhere has inevitably forced the banks’ hands.

Where regulation used to be relatively soft-touch, it’s fast becoming anything but. The threat of hefty fines is more real than ever, gone are the days when Sweden’s FSA handed down maximum fines of SKR 30 million. EU regulations now allow penalties of up to 10 per cent of global turnover.

It is not only the threat of financial penalties that need to be considered. Retail customers are increasingly sensitive to how failings in AML controls and systems impact badly on banks’ trustworthiness. And corporate clients fear the potential knock-on damage to their own reputations if they’re seen to be associated with a bank that’s lagging in this increasingly important sphere.

Striking back against financial crime

Norway, Denmark and Sweden each have systems for combatting financial crime. But the fundamental issue for those involved is that collaboration between the various parts of the system isn’t effective enough. In addition, banks’ technology has yet to step up to the demands of the sophistication and speed of the modern-day financial criminal. Data flows in one direction, from banks to financial crime units, and there’s little or no feedback on it, as legal constraints often prevent the collaboration necessary.

This leaves banks in the dark about the progress of investigations and uncertain about where to focus their stretched AML resources. The lack of any other information sharing or discussion also makes it hard to build timely views of emerging financial crime types, making it harder for banks and the public sector to formulate a shared strategy to counter it.

And then there’s the human factor, cultures are slow to catch up. Banks are still struggling to embed the need for AML vigilance as a central part of how their teams and people work. Individual banks are progressing with pieces of the puzzle but without a coordinated effort, the financial systems through which the financial criminal operate will still have plenty of gaps for them to exploit.

So, what is the answer? How can Nordic banks tackle these issues and avoid the financial and reputational damage that non-compliance and weak controls within financial crime threaten?

Our reports explores three country-specific anti-financial crime models, developed by our experts and a wide variety of expert respondents, that reflect and build on work already underway. They rely on better technology to improve the quality of data and closer collaboration to ease the sharing of it.

The report also explores what a pan-Nordic partnership could look like, and how it would limit cross-border crime. Our pragmatic method reflects the very real challenges shared by the countries, starting with a digital forum for sharing intelligence and building a shared strategy, built upon modern technology that is able to get ahead of the financial criminal. This kind of pan-Nordic, technology enabled system doesn’t currently exist across the Nordics – although both Norway and Sweden have country specific solutions – and would mirror similar information-sharing forums in the UK, US, Singapore and Australia.

The keys to better tackling financial crime in the Nordics

It’s time for a new way of working. Based on our interviews across the Nordic financial services landscape and analysis of the situation, it’s essential for public and private institutions to:

share data, faster and more widely
invest in better technology to analyse data more quickly
better collaborate within countries and across borders.

Without this, progress will continue to be slow. Trust in the financial system will carry on declining, along with national reputations. And, even worse, crime will continue to thrive.

The potential rewards for getting this right are huge. Banks will reassure their investors and customers, cut the risk of compliance breaches and fines, and make their pressured resources go further. And public sector organisations, from law enforcement to regulators, will achieve more of their own objectives. Most importantly, criminal organisations will receive the unmistakable message that they can’t expect to use the financial system with impunity.