What is Financial Crimes?

Financial Crimes:
The volume of financial transactions increases at a staggering rate
as an online banking system becomes a norm these days. Due to
convenience of monetary transactions on a global scale, illegitimate
money also takes advantage of the structured transaction systems,
along with legitimate finances. Considering the nature of surrounding
environments, financial crime is not an isolated concept. It evolves as a
reflection of its environmental changes, such as social contexts and ICTs
advancements. Against these backdrops, financial crime proliferates and
diversifies itself into more sophisticated subsets.

Financial crime is one of deeply entrenched illegal activities in any

society. However, the concept of financial crime has not been agreed
upon until now. Without proper classification and conceptualising of
financial crime, it is difficult to figure out ways to identify and respond to
recent types of financial crime. Therefore, it is critical to understand the
nature and characteristics of contemporary financial crime.

There is no internationally accepted definition of financial crime

(IMF, 2001; Ryder, 2011). Financial crime is often defined as crime
against property, involving the unlawful conversion of property of another
to one’s own personal use and benefit. According to the International
Monetary Fund (2001), financial crime refers to “any non-violent crime
that generally results in a financial loss”. In the UK, the Financial
Services and Markets Act 2000 (FSMA) states that financial crime
includes ‘any offence involving fraud or dishonesty; misconduct in, or
misuse of information relating to, a financial market; or handling the
proceeds of crime’.

Some researchers and government institutions do not clearly

distinguish financial crime, financial abuse, and white collar crime and
use them interchangeably without any differences. IMF (2001) suggests
that financial abuse is encouraged by poor regulatory and supervisory
frameworks and weak tax systems and as a subset of financial abuse
financial crime requires a financial loss. Pickett and Pickett (2002) define
financial crime as ‘the use of deception for illegal gain, normally involving
breach of trust, and some concealment of the true nature of the
activities’, using the terms financial crime, white-collar crime, and fraud
interchangeably.

On the other hand, Interpol1 states that financial crime is also

often referred to as white-collar crime which was first coined by
What is Financial Crimes?

Sutherland (1939) as “committed by a person of respectability and high

social status in the course of his occupation”. By this definition, white
collar crime is equivalent to occupational crime. It is analysed that
financial crime encompasses white collar crime in that the former is
perpetrated by individuals or groups regardless of occupations.
Examples of white collar crime are money laundering, insider dealing,
fraud, and market manipulation, which can be captured by financial
crime.

Components of Financial Crimes:

FBI (2005) states that financial crime is characterized by deceit,

concealment, or violation of trust without dependency on physical force
or violence. Pickett and Pickett (2002) enumerate several components of
financial crime as following; ①deceitful ②intentional ③resulting in
pecuniary losses ④possible concealment ⑤breach of trust ⑥possible
appearance of outward respectability.

Based on the definitions and components above, some elements

are found to be important in conceptualizing financial crime; deceitful,
intentional, concealment, and financial loss as a result. Among these
elements, a financial loss is considered the core element in that without
this element it might be confusing with other types of crime that takes
advantage of a financial system or network. For example, when criminals
and terrorists have come to rely on the financial system and the
information within it, it can be said to have abused financial systems
(financial abuse), but cannot be classified as financial crime as long as it
does not generate pecuniary losses.

Typology of Financial Crimes:

Gottschalk (2010) classified a wide range of financial crime into four

main categories (i.e. corruption, fraud, theft, and manipulation). Although
any justification on why these four categories were chosen was not
provided, recent types of financial crime were reviewed in an exhaustive
manner.
Classification of financial crime by Gottschalk
Corruption Kickbacks, bribery, extortion, embezzlement
Fraud Identity, mortgage, occupational
Theft Cash, intellectual, fraud
Manipulation Laundering, cybercrime, bid rigging, insider trading
What is Financial Crimes?

IMF (2001) interpreted financial crime in a relatively narrow sense,

distinguishing the two terms. Financial abuse is defined as a broad
concept. As a subset,‘financial sector crime’ involves a financial
institution or financial market, while ‘other financial crime’ includes a
range of unlawful activities which entail financial loss. And, the rest is
conceptualised as ‘other financial abuse’.

Classification of financial crime by IMF (2001)

Financial sector crime Money laundering/fraud/tax
evasion/circumvention of exchange
restrictions /other
Other financial crime Sale of fictitious financial instruments or
insurance policies/ embezzlement/tax
evasion/stock manipulation/other
Other financial abuse Tax avoidance/connected party
lending/stock manipulation /other

The Activities and Extent of Financial Crime

Examples of financial crime are money-laundering, tax evasion,

fraud (embezzlement, check and credit card fraud, securities fraud,
insurance fraud, health care fraud and pension fraud), stock
manipulation, tax avoidance, bribery and corruption, insider trading,
terrorist financing, etc. FBI (2005) focuses its investigations on
corporate fraud, health care fraud, mortgage fraud, identity theft,
insurance fraud, and money laundering.

Interpol2 points out that financial crime is generally transnational

by the use of networks such as internet. In nature, transnational crime
and cybercrime are closely connected to financial crime, causing a
detrimental impact on financial institutions or individuals around the
world. Why is financial crime more likely to be transnational and hinge on
electronic networks? First, proceeds from financial crime need to be
stored in a safe place where local law enforcement agencies are unable
to trace. It means that sending the proceeds overseas to where cross-
border cooperation does not work well reduces the chances of being
caught. Second, wiring the proceeds does not require going through
customs inspections, thus limiting the reach of law enforcement
agencies. It is almost impossible for local agencies to spot and freeze
the proceeds before transferring beyond the border in that online money
transaction finishes within seconds. These natures correspond to the
characteristics of an information society mentioned by Castells (2000);
What is Financial Crimes?

Informational, global, and networked. Let’s think about remittance of illicit

money. It can be elaborated that “financial information on the proceeds
is delivered to a third person beyond the border (global) via computer
networks”. This explanation substantiates the argument that financial
crime exactly reflects the current societal change into an information
society.

Extent of Financial Crimes:

It seems to be impossible to accurately calculate the extent of financial

crime (Ryder, 2001). A study from the United Nations Office on Drugs
and Crime (UNODC, 2011) estimated that in 2009 all criminal proceeds
were likely to amount to 3.6% of global GDP, which was equivalent to
about $2.1 trillion. Besides, the research pointed out that the volume of
international money-laundering was expected to be about 2.7% of global
GDP or $1.6 trillion. This money-laundering figure falls within the often
called ‘consensus range’ suggested by the International Monetary Fund
in 1998, which is from 2 to 5 per cent of the world’s GDP. This estimate
would be translated into from $590 billion to $1.5 trillion by using actual
numbers of 1998, while FATF estimated about $500 billion. The lower
figure roughly equates to the value of the total output of an economy the
size of Spain.

In terms of corruption which is “abuse of entrusted power for private

gain” (Transparency International3), the World Bank states that
approximately $1 trillion is paid in bribes around the world. Considering
the economic and societal ripple effects, the World Economic Forum
estimates that the cost of corruption equates to 5% of global GDP, which
is about $2.6 trillion and that corruption increases the cost of doing
business by up to 10% on average (World Economic Journal4). IMF
research has revealed that investment in corrupt countries is about 5%
lower compared to countries that are relatively corruption-free (OECD,
2013). It is important to notice that a country’s capital productivity is
adversely related to corruption (Lambsdorff, 2003). The argument that
corruption is directly associated with economic growth in a country gives
more weight to the significance of tackling corruptive activities.

The UNODC estimated that in the U.S. about $300 billion or about 2 per
cent of the economy was generated in illicit proceeds in 2010. Among all
the financial crimes in the US, illicit drug sales and fraud was estimated
to account for most proceeds. The UK HM Treasury (2007) estimated
that over £20 billion of social and economic damage was brought about
in the UK and more than half of the damage is generated by illicit drug
What is Financial Crimes?

use. KPMG’s 2012 survey with 281 respondents reported that the total
value of fraud for public and private sector organisations in Australia and
New Zealand was $372.7million, with an average loss per organization
of $3.08 million. According to the Australian Institute of Criminology
(2011), fraud is estimated to have cost the Australian society $6.05
billion in 2011. To sum up, these figures show that money-laundering,
drug sales, and fraud are major illegal activities that do harm on the
national and international scales.

Victims of Financial Crime

Victims range from individuals to institutions, corporations, thus affecting

all levels of society (Gottschalk, 2010). At a micro level, individual
citizens and corporations suffer the effects of serious financial crimes.
Some market frauds have taken in thousands of people, with many
losing their savings, security and also affecting their emotional wellbeing,
physical health and relationships (Australian Crime Commission5).

At a macro level, financial crime has a negative impact on the entire

economic and social system through the considerable loss of money
incurred.
Classification of victims
Individual Organizational
Internal 1 3
External 2 4

1. Individual internal victims: Individuals in the organization are the

victims
2. Individual external victims: Individuals outside the organization are the
victims
3. Organizational internal victims: Organizations as such are the victims
4. Organizational external victims: Outside organizations are the Victims

Each type of victims has their own interests in different forms of financial
crime. Firstly, individual citizens using services from financial institutions
usually fall for fraud and identity theft either by insiders or outsiders. The
Ponzi scheme by Bernard Madoff in 2008 is an example of fraud by an
insider and it can also be called as occupational financial crime. Fraud
by insiders is not expected to happen a lot because of increasing
internal control, but once it occurs, the amount of damage is massive.
On the contrary, it is more frequent case that criminals outside a
financial institution target individuals. It is quite obvious that phishing has
What is Financial Crimes?

become the most prevalent style of fraud against individuals. By the use
of computers and networks, criminals can target tens of thousands of
potential victims by automated calls or emails or text messages. As
cyber financial crime, phishing affects each individual with a relatively
small amount of damage, but large in aggregate.

Secondly, corporations including financial institutions become victims of

financial crime. Insiders are more inclined to commit crimes such as
corruption, embezzlement, cash and inventory theft, and intellectual
property theft, while outsiders including customers might be responsible
for identity fraud, insurance fraud, and consumer fraud, etc.

Thirdly, financial crime destabilizes national economies (FATF6). Ryder

(2011) claims that the integrity of a nation’s financial institutions can be
eroded and the effects of financial crime can ultimately threaten national
security. Enron scandal was the big single case that rocked the whole
US economy. In fact, a national financial scandal sometimes gives rise
to a ripple effect throughout the global economy.

Lastly, international financial system and institutions are victims on the

global level. Western countries have placed a high priority on tackling
money-laundering and terrorism financing. Responding to calls from the
international community, international organizations such as IMF and
FATF have extended their reach to the areas of anti-money laundering
(AML) and combating the financing of terrorism (CFT). The aim of them
is to secure the integrity of the international financial system. In this year,
it has been discovered that international sport institutions such as FIFA
and IAAF have had serious internal financial problems, which is
corruption. The scandals surrounding FIFA and IAAF were, respectively,
over the selection of hosting cities for World cup and covering up
positive doping tests. It is quite surprising that those non-profit
institutions supposed to maintain a high level of integrity have a difficulty
in preventing kickbacks and bribes. However, it is not easy to pinpoint
victims on a global scale for two reasons. First, victims such as financial
system are intangibles. Second, the actual amount of financial damage
is intricate to figure out.

The Facilitating Factors and Priorities of Public Institutions

IMF (2001) argues that globalization and financial market integration

drives financial abuse. It indicates that the scale and severity of financial
crime are proportional to the extent of global connectedness. Australian
Crime Commission7 states that market diversification, globalization, and
What is Financial Crimes?

technology are the factors that drive this type of crime. There is a notion
that global financial crime is enabled by tax havens networks. The
financial secrecy of some jurisdictions such as Switzerland and the
Cayman Islands provides the favourable environment for fraud, market
manipulation, and money laundering (Ruggiero, 2015).

Some others approached financial crime from criminological perspective.

Michel (2008) asserts that financial crime is driven by opportunity and
that opportunistic malefactors such as a weakness in a procedure should
be addressed. This assertion is largely based on the rational choice
theory. If they think that they can gain more benefits from financial crime
compared to costs invested and being caught, it will be worth taking the
risk. Either reducing costs or increasing benefits will lead to a higher
return of investment (ROI). This perspective is related to the rationales of
money-laundering and tax evasion. If criminal proceeds are guaranteed
to be deposited in a secured place, it is more likely to increase the
commission of financial crime.

Priorities of Public Institutions

Interpol puts their resources primarily on money laundering, counterfeit

currency and security documents, payment cards fraud, lottery fraud,
and Nigerian letter scam, while main initiatives of FATF and IMF focus
on money laundering and terrorism financing. And, World Bank and
OECD take corruption seriously. International institutions try to inhibit a
large scale of activities perpetrated by organized criminal groups. On the
national level, each country has its own initiatives in financial crime.

The US has been treating fraud, money laundering, and counterfeit

currency seriously and is moving more into, specifically, corporate fraud,
market manipulation fraud and mortgage fraud after 2008 financial crisis
caused by failures in financial regulation and fraudulent financial
products. National Crime Agency in the UK directly deals with money
laundering and counterfeit currency, cooperating with Serious Fraud
Office when it comes to fraud, bribery and corruption.

On the global stage, there is a broad consensus among some leading

international and national entities that they are regarding corruption,
fraud, money laundering, and counterfeit currency as their core priorities
in order to maintain the integrity and order of global financial markets.
Similarly, common themes are also found on the national level, which
are health care fraud, insurance fraud, identity theft, intellectual property
theft, etc.
What is Financial Crimes?

Relationships among Financial Crimes

Some financial crimes occur independently, but some others may

involve other types of crime, whether it is financial or non-financial crime.
Australian Crime Commission reports that key crime enablers include
money laundering, cyber and technology-enabled crime, identity crime,
exploitation of business structures, and public sector corruption. These
are often criminal activities in their own right, enabling other types of
organized crime.

Money Laundering

FATF defines it as “the processing of criminal proceeds to disguise their

illegal origin”, while the U.S Treasury department explains it in greater
detail as “financial transactions that criminals, including terrorist
organizations, attempt to disguise the proceeds, sources or nature of
their illegal activities”. There should be a predicate crime before money
laundering is pursued. Thus, money laundering is not acknowledged if
the money is not recognized as criminal proceeds. The predicate crime
can be physical crimes, but IMF (2001) suggests that it is often financial
crimes. The types of predicate crimes vary according to the context and
jurisdiction of a nation. It is generally argued that most of financial crimes
entail money-laundering in order not to be disclosed by law enforcement
agencies.

Identity Theft

It is generally committed to facilitate other crimes, such as credit card

fraud, check fraud or mortgage fraud, and phishing. Rested on
information from an identity theft, fraudsters make up a story or
impersonate someone to defraud potential victims. Gottschalk (2010)
contends that identity theft is an enabler of identity fraud.

Exploitation of Business Structures

Complex business structures and sophisticated networks of companies

can hide real beneficiaries behind the curtain by engaging multiple
offshore jurisdictions. This strategy primarily involves money laundering,
tax fraud, illicit commodities, investment and superannuation fraud. In
often cases, global corporations including financial institutions tap into
this strategy in order to get away from corporate tax or to siphon off illicit
funds.
What is Financial Crimes?

Public Sector Corruption

Organized criminal groups attempt to corrupt politicians or public officials

in an effort to gain access to information, public funds and to affect
future investigations on them. This enabler facilitates general organized
crimes which include both non-financial (drug smuggling, human
trafficking) and financial crime. For example, bribes taken inevitably lead
to money-laundering and tax evasion.

Relationships with Cybercrime

Internet can be considered a breeding ground for financial crimes (Wall,

2007). Many financial crimes are known to have a close relationship with
cybercrime. Technically speaking, most of financial crimes, nowadays,
can also be classified as cyber-enabled crime in that perpetrators end up
taking advantage of networked ICTs at some point in the course of
committing a financial crime. Like cybercrimes, financial crimes are
exacerbated in their scale and reach by the use of networked computers
and other ICTs. McGuire and Dowling (2013) posit that fraud and theft
are the most widely published instances of cyber-enabled crime. Main
forms of cyber-enabled fraud are electronic financial frauds (internet
banking fraud), fraudulent sales through online or retail sites, mass-
marketing frauds, consumer scams, phishing, and online romance.
Snyder and Crescenzi (2009) argue that intellectual property crime has
links to cybercrime and the increase of cybercrime paves the way for
more victimization of intellectual properties of businesses.

Conclusion

Organized criminal networks are often behind financial crime. Baker

(1999), citing the U.S. Treasury Department, stated that 99.9 per cent of
the criminal money has ended up being deposited in secure accounts. In
order to secure evidence or to freeze and seize illegally obtained assets,
law enforcement officers need to react swiftly. The amount of being
seized and frozen by legal institutions is less than 1 per cent of global
illicit financial flows (UNODC, 2011). As a matter of fact, there are some
debilitating factors that make it hard to trace the criminal or the illegal
assets.

These factors are differences among countries in terms of their national

jurisdictions, their implementation of international conventions, and the
level of expertise of their investigative and prosecutorial authorities.
What is Financial Crimes?

When financial sector crime occurs, it is difficult for law enforcement

agencies to hold employees in financial institutions accountable for
illegal transactions. More frequently, government departments pursue
enormous multi-billion-dollar civil penalties against big banks, rather than
charges against individuals (Bloomberg News9). Especially, for some
countries that are based on adversarial legal system, jurors drawn from
the ranks of working people find themselves stuck with little grasp of
what the defendants want to argue. In order to reach a final verdict,
jurors should struggle to understand the mind-boggling modern financial
system. Although many difficulties in restitution exist, regulatory
authorities and law enforcement agencies need to figure out ways to
outsmart criminals who take advantage of loopholes in financial systems.
What is Financial Crimes?

Financial crime over the last 30 years has increasingly become of

concern to governments throughout the world. This concern arises from
a variety of issues because the impact of financial crime varies in
different contexts. It is today widely recognised that the prevalence of
economically motivated crime in many societies is a substantial threat to
the development of economies and their stability.
It is possible to divide financial crime into two essentially different,
although closely related, types of conduct.
First, there are those activities that dishonestly generate wealth for
those engaged in the conduct in question. For example, the exploitation
of insider information or the acquisition of another person’s property by
deceit will invariably be done with the intention of securing a material
benefit. Alternatively, a person may engage in deceit to secure material
benefit for another.
Second, there are also financial crimes that do not involve the
dishonest taking of a benefit, but that protect a benefit that has already
been obtained or to facilitate the taking of such benefit. An example of
such conduct is where someone attempts to launder criminal proceeds
of another offence in order to place the proceeds beyond the reach of
the law.

Who commits Financial Crimes?

There are essentially seven groups of people who commit the various
types of financial crime:

 Organised criminals, including terrorist groups, are increasingly

perpetrating large-scale frauds to fund their operations.
 Corrupt heads of state may use their position and powers to loot
the coffers of their (often impoverished) countries.
 Business leaders or senior executives manipulate or misreport
financial data in order to misrepresent a company’s true financial
position.
 Employees from the most senior to the most junior steal company
funds and other assets.
 From outside the company, fraud can be perpetrated by a
customer, supplier, and contractor or by a person with no connection
to the organisation.
 Increasingly, the external fraudster is colluding with an employee
to achieve bigger and better results more easily.
What is Financial Crimes?

 Finally, the successful individual criminal, serial or opportunist

fraudsters in possession of their proceeds are a further group of
people who have committed financial crime.

What are the main types of Financial Crime?

Financial crime is commonly considered as covering the following

offences:

 fraud
 electronic crime
 money laundering
 terrorist financing
 bribery and corruption
 market abuse and insider dealing
 information security

How is financial crime linked to terrorist financing ?

Terrorist organisations require financial support in order to achieve their

aims and a successful terrorist group, like any criminal organisation, is
therefore one that is able to build and maintain an effective financial
infrastructure.
It is generally believed that terrorist organisation raise funds by the
following means:

 legitimate sources, such as the abuse of charities or legitimate

businesses
 self-financing (i.e. through their members or sympathisers)
 criminal activity
 state sponsors
 activities in failed states and other safe havens

Terrorists often control funds from a variety of sources around the world
and employ increasingly sophisticated techniques to move these funds
between jurisdictions. To manage their finances, they draw on the
services of professionals, such as bankers, accountants and lawyers,
and take advantage of a range of financial services products.

How should a firm react to a suspected fraud?

What is Financial Crimes?

A financial institution should take appropriate action where a corporate

customer, a member of its senior management or a senior
representative of the customer is the subject of an investigation by a law
enforcement agency or regulatory body.
Financial Institutions must also consider any obligations they might have
to report suspicions of money laundering (including any successful
fraud).
Consideration should also be afforded to obtaining appropriate legal
advice to reduce the risk, that:

 customers transfer or move fraudulent funds, or use the bank to

illegally
 transfer or dispose of assets, including money or other negotiable
instruments
 constructive trust claims are made against the bank, by third
parties arising out of a dispute between a third party and the bank’s
customer
 assets under management are not negotiated without proper
authority in law, when the subject of an asset-forfeiture or restraint
order issued by a Court

How do you motivate employees to fight frauds?

The foundation of any successful fight against fraud is the culture within
the institution. When correctly motivated, employees remain honest and
become the most effective front-line defence against the fraudster.
Employees become motivated when they believe:

 that their institution is honest and ethical in its business dealings,

including dealings with customers, suppliers and employees.
 that their employer treats them with respect, rewards them fairly,
imposes discipline fairly, and, where regrettably redundancy
becomes necessary, carries this out fairly.
 that fraud prevention is a common objective throughout the
organisation at all levels, that they have been trained to play their
part in the fight, and that their efforts are acknowledged.

Why is insider dealing relevant to financial crime professionals?

An awareness of what constitutes insider dealing activity is imperative

for financial crime and compliance professionals in the detection and
What is Financial Crimes?

prevention of exposure to the activity as a serious financial crime.

Regulatory data shows unusual share price movements – a potential
indicator of market abuse – in around 29% of takeover announcements.

Additionally, it is possible in the case of financial services businesses

that are themselves listed, for directors to commit the offence. To this
extent, financial crime and compliance professionals should ensure that
businesses and their employees comply fully with all relevant disclosure
rules.
More commonly, financial services businesses are exposed to insider
dealing through customers who are engaged in the activity. Any money,
goods or property derived from insider dealing activity is capable of
predicating money laundering offences in most common law
jurisdictions.

Why is the financial sector vulnerable to fraud?

Due to the often complex nature of financial services, detecting and

preventing fraud within the financial sector poses an almost
insurmountable challenge. The threats are both domestic and
international. They may come from within the organisation or outside it.
Increasingly, internal and external fraudsters combine to commit
significant fraudulent acts.
The victims may be the financial sector firms themselves or the
customers of those firms. The proceeds of fraud are rarely generated in
cash. The funds that are the target of the fraud are generally already
within the financial system but will undoubtedly need to be moved in
order to confuse the audit trail.