Corporate fraud at financial services companies is a very expensive problem. The particular forms that it takes result from three features of the sector: that it deals with money itself; that this is held largely in an electronic form; and that sector activities are closely regulated.
- The loss per firm is US$14.6m, well over twice the average for all industries and the highest in our survey.
- Increasingly complex information technology has left 43% of respondents more exposed to risk. Consequently 27% have suffered from information theft in the past three years, and 28% consider themselves highly vulnerable to this most widespread worry for the sector.
- In practice, regulatory and compliance breaches make up the most common problem, having affected 29% of companies. This risk represents an area of high vulnerability for 17% of respondents.
- Money laundering is understandably a particular problem in financial services, although less common than the others discussed. More than one in ten firms consider themselves highly vulnerable to it and a similar number have actually suffered from it in the past three years. Given the attention that governments, regulators and security agencies pay to illicit cash flows in the post 9/11 world, these figures are far too high. Failure here will attract little sympathy or leniency.
- Internal financial fraud is significantly more common, hitting more than one quarter of firms, but theft of physical property is rarely a problem. The asset worth stealing in this industry is money rather than stationery.
The sector is working harder than most to combat corporate fraud, but could do more.
- The use of most anti-fraud strategies is far more widespread within financial services than among other businesses. For example, 85% use financial controls to combat such problems (compared with an average of 79%); 80% use IT security measures (compared with 70%); and 69% use staff background screening (compared with 57%).
- Formal risk management systems are more than one-and-a-half times more common in this sector than overall.
- Financial services companies are much more likely to plan to invest in financial controls, IT security and management controls to combat fraud than their counterparts in other sectors.
- However, although 85% of firms use financial controls against fraud, this means that nearly one in six financial services firms do not. In this industry, such arrangements should be second nature, and would help with some of the biggest vulnerabilities.
The financial services industry is working much harder than most but, given the financial and legal costs of failure, it needs to do even more.
