Discover more about our courses.
ICA is the trusted partner for you and your organisation.
Written by Gaon Hart on Tuesday April 11, 2023
In January, I looked to the year ahead to try and ascertain the nature and scope of potential change in the world of compliance, and predict where we might see the most significant developments. Now, as we begin the year’s second quarter, I am again scanning the horizon to seek out the patterns and trends about which compliance professionals will need to be aware.
An immediate and obvious problem is the cost of living. As prices rise, firms will look to make savings and they will naturally focus on those parts of the business that are non-profit. Unfortunately, this is the light in which compliance is usually considered. It’s up to compliance officers to challenge this narrative, beyond simply arguing that the cost of non-compliance is greater in the long term. They can do so by demonstrating in today’s ESG and ethically focused world, how robust effective compliance can influence ethical investors, ensure projects are protected from fraud and corruption, and differentiate organisations for client attraction.
Last year saw the biggest inflation shock in over 40 years, and central banks have responded with an aggressive rise in interest rates. Historically, post-war economic downturns were marked by a tightening of the financial screws, and indeed this has played out in recent months, thanks in part to rising inflation. Ian Stewart, Partner and Chief Economist at Deloitte UK aptly summarised today’s environment in the context of the last occurrence of serious economic hardship, the financial crisis of the late noughties:
What we are seeing today is far milder but, as in 2009, credit has become more costly and scarcer, risk appetite is falling and asset prices have become more volatile. These are classic harbingers of slower growth to come.
Corporate insolvencies jumped by almost one-fifth in England and Wales in the year to February, as the economic climate deteriorated. According to the Insolvency Service, registered company insolvencies reached 1,783 in February 2023. This is 17% higher than in the same month of 2022 and one-third higher than in February 2020, before the pandemic and COVID lockdowns were enforced.
Although inflation has probably already peaked and, abetted by lower gas prices, should fall sharply this summer, most experts estimate that challenging business conditions are likely to remain until the end of the year.
At the same time, the cost of compliance has risen with UK finance firms alone spending an estimated £34.2 billion. As a proportion of revenue growth, this is 13% up on 2021, representing quite a drain on firms’ resources, particularly during a sustained period of financial turmoil.
To counterbalance a firm’s desire to decrease costs by reducing compliance spending, compliance officers can point to the deterrent effect. By offering ‘what if…’ scenarios, compliance officers can explain that by spending today a firm will preserve profit tomorrow. The enormous fines handed out to corporates this last decade who have overlooked compliance procedures will help in this regard. To take just a sample, for anti-bribery and corruption failures, there were the penalties handed out to Airbus ($4 billion, 2020), Petrobras ($1.78 billion, 2018) and Glencore ($1 billion, 2022). For anti money laundering (AML) weaknesses, we saw Danske Bank’s fine of $2 billion (2022), HSBC’s of $1,9 billion (2012) and Standard Chartered’s of $1.1 billion (2019). And for sanctions violations, we can look no further than BNP Paribas’s $8.9 billion penalty imposed for processing transactions of sanctioned entities in 2014.
To continue this theme, the UK’s Serious Fraud Office (SFO) has a considerable number of trials listed for 2023 and global fines for failing to prevent money laundering and other financial crime surged around 53% last year. Similarly, banks and other financial institutions were fined almost $5 billion for a variety of AML infractions, breaching sanctions and failings in their ‘know your customer’ (KYC) systems. Total fines since the 2007–08 global financial crisis stand at approximately $55 billion. Significantly, fines to crypto firms rose over 90% in this period. These are the kind of findings that compliance professionals can reference as ‘prevention is better than cure’.
These examples, and the stark amounts involved, offer a strong disincentive to organisations to make cuts to their compliance departments in the months ahead. Yet closer analysis reveals some interesting challenges to any assessment of the risks of not supporting a compliance programme which some boards, in my experience, argue.
The rise in money laundering fines was primarily associated with the huge increase in fines levied at crypto firms, as well as penalties related to sanctions-busting commodity trading in the wake of the Russian invasion of Ukraine and the settling of legacy issues. Additionally, while fines rose globally, in the UK, AML fines actually fell to $188.2 million from $436.5 million the year before, with Santander’s £108 million fine by the Financial Conduct Authority (FCA) standing alone as a significant deterrent. Admittedly, the total number of fines issued more than tripled, with 14 fines issued in the UK in 2022, up from four in 2021, but most corporate boards I have dealt with consider the bottom line. In addition, US money laundering offence enforcement has decreased by around 23.5% since the fiscal year 2017.
Anti-bribery and corruption fines also provide a mixed picture to corporate boards reviewing spending in difficult circumstances. In 2022, the US Department of Justice and the Securities and Exchange Commission issued financial penalties against 8 companies, with a total penalty fee of around $1.5 billion. This is significantly above 2021 (four companies, fined in total $282 million), but remains one of the lowest annual fine levels in recent history and the second lowest since 2015. It was below total fines imposed in 2020, (12 companies, $6.4 billion in fines) despite that year being inflated by a single penalty. According to Transparency International, countries’ enforcement against foreign bribery has dropped to its lowest level since the body began measuring these figures in 2009.
It is estimated that global money laundering is running somewhere between $800 billion and $2 trillion, with $300 billion estimated each year in the US alone. AML activities recover only an estimated 0.1% of criminal funds in the US. Therefore, the chance of being caught is relatively slim, which reduces the deterrent effect considerably. Similar comments abound around global anti-corruption and fraud enforcement.
The increasing costs to business and the mixed picture on deterrence reduce the potential justification that compliance professionals can expound to support the rising cost of compliance programmes. This is particularly concerning in this technological age, where enhancing protection usually requires improving expensive KYC, transaction monitoring, third party management, gifts and entertainment, whistleblowing and other systems. It will be interesting to see how firms balance the imperatives of rising costs with the knowledge that reducing the role of compliance can leave a firm open to risk, as well as how compliance professionals will act to shore up their role in ensuring their firms are successful.
In the next article, I will provide some suggestions as to how good corporate compliance can demonstrate an alternative basis for existence, and how it can be profit-generating by being the great differentiator between organisations to attract investors and clients in today’s changing society.
You may also like to read:
 Ian Stewart, ‘Measuring financial stress’, Deloitte, 7 November 2022: https://blogs.deloitte.co.uk/mondaybriefing/2022/11/measuring-financial-stress.html – accessed April 2023
 Financial Times, ‘Corporate insolvencies rise 17% in England and Wales in year to February’, 14 March 2023: https://www.ft.com/content/645a6312-a640-483b-b568-1c9605417959 – accessed April 2023
 LexisNexus, ‘Explore The True Cost of Financial Crime Compliance Worldwide’: https://risk.lexisnexis.com/global/en/insights-resources/research/true-cost-of-financial-crime-compliance-study-global-report – accessed April 2023
 All figures approximate.
 Fenergo, ‘Global AML Fines Research Report’: https://www.fenergo.com/aml-fines-report – accessed April 2023
 United States Sentencing Commission, ‘Money laundering’: https://www.ussc.gov/topic/money-laundering – accessed April 2023
 Transparency International, ‘Exporting Corruption 2022: Enforcement Against Foreign Bribery Hits Historic Low’, 11 October 2022: https://www.transparency.org/en/press/exporting-corruption-2022-enforcement-against-foreign-bribery-hits-historic-low – accessed April 2023
 Chris Kolmar, ‘20 Money Laundering Statistics  Facts About Money Laundering In The U.S.’, Zippia, 29 March 2023: https://www.zippia.com/advice/money-laundering-statistics/ – accessed April 2023
 Transparency International, ‘Exporting Corruption 2022: Enforcement Against Foreign Bribery Hits Historic Low’
Thank you. Your comment is awaiting moderation and should appear on the site shortly.
Required fields are not completed, please ensure all required fields (*) have been filled in properly.
You can leave the name empty should you wish to remain Anonymous.