Crunch time for crime

With the markets in turmoil and the world poised for a long recession, the threat of fraud is set to increase. Philip Robinson, director of the financial crime and intelligence division at the UK Financial Services Authority, is making preparations. Victoria Pennington reports

The UK is launching a series of initiatives to improve detection and prevention of fraud and other forms of financial crime. These include recently established public-private initiatives such as the National Strategic Fraud Authority and the National Fraud Reporting Centre.

Philip Robinson, director of the financial crime and intelligence division at the UK Financial Services Authority (FSA), says the regulator is also stepping up its approach to combating fraud. In 2007, the FSA created the financial crime and intelligence division (FCID), a dedicated centre of expertise headed by Robinson. It was the result of a concerted effort by the authority to increase its focus on, and resources dedicated to, financial crime prevention. Although one of the FSA's four statutory objectives is to reduce the extent to which the firms it regulates could be used for financial crime purposes, the heightened terrorist threat and its connections to financial crime has given the FSA a steely determination to combat this problem. In the UK at least, fraud is no longer seen as a victimless crime.

The FCID has three functions: policy and risk, intelligence, and the more recently created operations team. The policy and risk teams are charged with ensuring the FSA is aware of what risks lie ahead and decides on the best response, that is, one based on risk management, not detailed rules. "You can't always get to where the criminal is with detailed rules, you have got to engage firms," says Robinson. "That is why we want to be very careful to move firms to a position where they are thinking about the criminal risk rather than the regulatory risk. Our regulatory approach is about moving them to that place.

"The policy and risk teams look over the horizon at things coming at us because we need to think about what and where the risks are, and the policy response to that," says Robinson. "Some of these risks could arise, for example, if the FSA acted in ways that did not take into account the way the market works. The danger there is that you get it right from a public policy perspective but with a significant but unnecessary negative effect on the financial sector. You need to find a way to keep the system working well while dealing with the other issues. That is one key element of what we are always trying to do in the area of financial crime policy - to ensure our approach is effective in reducing the threat but also effective in achieving the right balance of change in the industry."

The FCID ensures policymakers get the right balance by working closely with the industry. "The crucial advantage we have in the UK is that we try to work with the industry to avoid solutions that only address current risks but are embedded in stone," he says. "These risks might exist today but, by the time you have gone through the legislative process, they have changed - which is why you need engagement from institutions. Compliance, without a focus on real outcomes, will never be enough when dealing with financial crime. Rules won't always be right for every situation; you need to think about the risks. Rules will not always respond to changing risks, so we need to engage firms to think about and mitigate risks that might arise.

"We really want people focused on dealing with criminal risk rather than fearing regulatory action. They shouldn't be looking over their shoulders at whether they are going to be fined by the regulators for failing to comply with our rules. They need to be focusing on how their products, geographical location or other factors increase or decrease the risk that they might be involved in fraudulent activity or facilitate fraud against somebody else. This risk management approach - or principles-based regulation - is really saying that senior management are the best people to understand the risks in their firm, and they should not wait to be told to mitigate them by the regulator. This is why we have the high-level requirement in our rule book that firms need to have adequate systems and controls to mitigate the risk of financial crime. The detail is best left to those who can analyse the particular risks their businesses face and mitigate them."

The UK has had success with implementing the European Union's Third Money Laundering Directive through collaboration with industry - in this case the Joint Money Laundering Steering Group (JMLSG). The JMLSG drew up the detailed implementation guidelines for tackling money laundering, which were then approved by the government. "In any implementation of regulation there are three phases: denial, compliance and engagement," explains Robinson. "Denial is saying the rules don't apply to you, which is why you often go straight from denial to enforcement action. The immediate reaction is, of course, how to avoid enforcement action, which is to comply with the rules. There is only one FSA rule on financial crime: that you need to have systems and controls to analyse and mitigate the risk, but the way you get from the rule to the detail is through the industry."

The JMLSG has adopted this tactic for money laundering, but similar structures do not exist in the fraud area. A number of industry bodies have produced some guidance - for example, the British Bankers' Association has published a fraud managers' handbook that includes good practice guidelines regarding fraud mitigation in the banking sector. "This kind of industry focus is essential, because you don't have the same risks in every area," says Robinson.

Industry collaboration is set to improve further, with the establishment of the National Fraud Strategic Authority (NFSA). In the NFSA, trade associations are equally represented along with the police, FSA and other government agencies.

The NFSA was set up, along with the National Fraud Reporting Centre and the National Lead Force for Fraud, as a result of the 2006 National Fraud Review. The review attempted to find ways to improve inter-agency co-operation on crime (read more about these initiatives and Robinson's remarks about them on page 30). Robinson is delighted with the results of the Fraud Review.

"The crucial issue in the financial crime space is that you have to operate in a multi-agency environment," he says. "Improving that has really been the challenge over the past five years. When we set up our fraud policy in 2004, it was obvious that better public-private partnership, better information-sharing between the public and private sectors and between firms, and a focus on fraud in all parts of the system, were needed. We are delighted with the results of the Fraud Review because it gives that essential leadership to the national agenda on fraud that allows us to define our commitment to working together in the context of that national strategy."

But the FCID is not just about setting policy, it also has an operations function and an intelligence arm. The operations team is drawn from different industry sectors and has a specific remit to support the FSA's supervision teams. "This was a crucial new piece from January 2007," says Robinson. "Financial crime has grown in different sectors and in different ways. The operations teams have been recruited to make sure we give supervisors, and if necessary firms, the best possible support and scrutiny we can."

The FCID intelligence unit works closely with law enforcement agencies to look at trends in intelligence over both the long and the short term to ascertain what types of risks are emerging. It conducts tactical response intelligence work, which is mainly due diligence work, and is also involved with insider dealing investigations. "The people working in that area are typically qualified financial investigators - a lot of these staff have had full criminal casework training in the police. This includes involvement with early-morning arrests, honing their skills in securing financial evidence in a forensically successful way."

There have been several criminal prosecutions for insider dealing in the past few months. "The FSA has made a few arrests lately for insider dealing, which was a great team effort between the FSA's markets, financial crime and intelligence, and enforcement divisions and the police," says Robinson. "The intelligence team is there to provide services for anyone who needs it. In the case of mortgage fraud, we are working closely with the City of London Police to build a common intelligence database, and we also receive suspicious activity reports from the Serious Organised Crime Agency."

In recent months, press attention has focused on the FSA's increased enforcement activity, particularly regarding insider dealing and market manipulation. Robinson views enforcement action as one method to ensure engagement of financial services firms should all else fail. "We have had 22 civil penalties in the area of market misconduct since we received our Financial Services and Markets Act powers on December 1, 2001. However, we're convinced the threat of a criminal sanction is a much more powerful deterrent. If people going to prison achieves our objective of cleaning up the market, that's what will happen, and we send a strong message that market abuse is a crime with serious consequences."

Robinson echoes remarks made by FSA chief executive Hector Sants at the Annual Financial Crime conference in April 2008 by welcoming the chancellor of the exchequer, Alistair Darling's plan to give the authority new statutory powers to enter into immunity agreements with people in market abuse cases. "We need to make sure we have every opportunity to bring successful criminal cases, like being able to offer statutory immunity to some to get those more culpable. This is something the US Securities and Exchange Commission does very effectively and something we should be doing too."

Working closely with firms to reduce the risk of financial crime will be essential during the coming months as the market turmoil causes cracks to appear, and balance is the key, says Robinson.

"The crucial thing is getting the right balance and ensuring you don't treat everyone in the system as criminals," he says. "But we also need to recognise that, in the current market environment, more crime will become evident. Some of that will be because people are desperate and want to get money in any way they can, and some of it will be because the crime already existed but, because of the way the market has gone, it can no longer be covered up. This is exactly the case for mortgage fraud - the tide has gone out, we can see the wrecks, and we want to use that to track the wreckers so we can take them out of circulation. When the tide does come back, and it will, they will not be there to do it again. The chances are there will be other people to replace them, because that is the nature of criminality - it is not a case of fixing it and they will go away - we need to constantly put pressure on and that pressure needs to be amended depending on where the threats are coming from. This is why we think it is absolutely right to do this using our principles-based approach, which essentially state that firms must think about the risks and not just be told exactly how to apply rules."

Biography

Philip Robinson is the UK Financial Services Authority's (FSA) director for financial crime and intelligence.

An accountant by training, he moved from the commodities industry into financial regulation in 1989. He has worked in securities, derivatives and investment management regulation at the Securities and Futures Authority, and has been chief operating officer at the Investment Management Regulatory Organisation. He was also on the project team that helped set up the Financial Services Authority before becoming the FSA's first director of communications in 1997. While an FSA director, he has successfully completed the Pensions Mis-selling Review, led the deposit takers' division and created the regulatory transactions division.