Revealing the true cost of financial What’s hiding in the shadows?

Focus on Latin America and the Caribbean Refinitiv | Revealing the true cost of financial crime

In March 2018, Refinitiv commissioned a global survey to better understand the true cost of financial crime and to raise awareness of its wider impact on business, individuals and society as a whole.

In total, over 2,300 senior managers from large organizations across 19 countries participated. We also supplemented the survey findings by conducting in-depth research and holding interviews with leading NGOs (Education Endowment Foundation, Transparency International UK and Walk Free Foundation) and the European Union’s law enforcement agency to gain perspective on the human cost of financial crime.

This report specifically examines the findings in Latin America and the Caribbean.

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About the survey

For purposes of this report we have based on first-hand experience and used a wide definition of financial knowledge. This report focuses on Latin crime, one that goes beyond the scope America and the Caribbean. with which Refinitiv is traditionally The survey sought feedback from both associated. In order to provide as publicly listed and privately owned complete a picture as possible on the organizations. social and financial impact of financial 2,373RESPONDENTS crime, we have included and A range of industries was consulted, corruption; ; ; including agriculture; mining; ; ; and slave labor/ construction; retail; manufacturing human trafficking. and financial. that the standard A total of 2,373 C-suite/senior Please note 19COUNTRIES management in large organizations convention of rounding has been across 19 countries1 completed applied and consequently some totals the survey. do not add up to 100%. Respondents’ feedback was grouped according to the regions in which their companies operate in order to deliver a global opinion of those regions,

1. Respondents were based in the following individual countries: The USA, , China, India, Singapore, , the UK, Germany, the , Spain, France, Russia, Poland, the UAE, Saudi Arabia, South Africa, , Brazil and Mexico. Please note, however, that research shows that the operations of respondents’ organizations are global, meaning that the regional statistics included in this report do not only reflect information relating to the individual countries listed above. Rather they reflect broader regional perspectives according to the respondents’ firsthand knowledge and experience in those regions.

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The hidden face of financial crime

The true cost of financial crime On a macro level, raising awareness is extends far beyond pure economics. a key tool, as is collaboration and the Critical social consequences include sharing of information and ideas on the the proceeds of financial crime best methods to combat financial crime. FINANCIAL being used to fund the financing On an organizational level, invaluable of terrorism; human rights abuses tools include access to reliable risk data CRIME such as slavery and child labor; and that offers breadth of risk intelligence environmental crime. coverage and finding the right partners AFFECTS to enable a holistic approach to Loss of revenue to national effective risk mitigation throughout the governments has a host of knock-on EVERYONE compliance process. effects, too, including the fact that lower tax revenues mean that less money is Financial crime affects everyone available to fund schools, hospitals and and gaining insight into its true other essential services. magnitude and devastating effects is of paramount importance.

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Financial crime: some background to the challenge

Extensive networks safeguards – but when asked to rate Survey results indicate that, across these different pressures (as expected the globe, an average of just 59% of Financial crime can flourish if it is in the 12 months post-survey), the relationships have ever been screened allowed the opportunity to ‘hide’ in highest percentage across the globe with regard to issues including organizations’ third-party networks (83%) reported that pressure to increase bribery and corruption; money – networks that are often extensive turnover is either extreme or significant. laundering; fraud; theft; cybercrime; and can span the globe. To better This view was echoed in Latin America and slave labor/human trafficking. This understand the magnitude of these and the Caribbean, with 87% of the percentage was the same across Latin networks, our survey asked respondents same opinion. America and the Caribbean. to estimate how many third-party vendor, supplier or partner relationships their Ongoing monitoring to detect potential company had, globally, over the Initial screening and or emerging risk is also of paramount 12 months preceding the survey. ongoing monitoring importance, but survey results again revealed that, once they are initially The average across the globe was This pressure, added to a host of screened, an average of just 59% of reported as 7,693, but in Latin America global regulations and legislation to relationships across the globe are and the Caribbean, the figure rose combat financial crime, has led to a monitored and reviewed on at least an substantially to an average of 12,985 situation where compliance teams annual basis. The corresponding figure relationships, the highest reported often struggle to fully screen and in Latin America and the Caribbean was across all regions surveyed. monitor the vast number of customers, third-party vendors, suppliers and marginally higher at 60%. Ever-increasing pressure partners identified above. This means that only approximately 35% of relationships in the region are fully Organizations are operating against The consequences of compliance screened – both at the initial onboarding a backdrop of growing pressure – failure are significant and compliance stage and on an ongoing basis. pressure to increase turnover, grow teams are aware of their responsibilities, profits, develop new markets, increase but nonetheless often struggle with the market share and improve regulatory task at hand.

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Measuring the impact of financial crime

Respondents were asked whether their $1 billion could provide 180,000 companies had been victims of any of toddlers with the foundations they need GLOBALLY the identified financial throughout to become fluent learners at school. their global operations during the In Mexico, it would mean 327,000 12 months preceding the survey. additional children placed in primary Responses revealed that, globally, and secondary schools; and in India 47% had been a victim of at least one 1$ billion could build 2,000 more % form of financial crime, compared to a schools. In Poland, this money could 47HAVE BEEN A VICTIM OF proportionally higher 54% across Latin pay for 64,000 additional teachers, or FINANCIAL CRIME America and the Caribbean. 21,000 in the USA. The true cost of such crimes must be These examples just begin to illustrate measured in terms of their financial, the real-life consequences and impact on OUT OF social and humanitarian impact. Within individual lives as a direct result of every each country surveyed, we calculated dollar of revenue lost to financial crime. the sum of the published turnover Moreover, there is a further ‘hidden’ (last 12 months) of listed companies cost – the opportunity cost that results with a turnover of USD$50 million or when organizations avoid doing 2,373RESPONDENTS more and applied a global estimate business with high risk customers of lost turnover as a consequence of because they feel unable to identify financial crime at 3.5%, giving a global actual risk. When questioned whether, estimated loss of turnover of just over in order to avoid rather than manage USD$1.45 trillion. heightened risk customers, their On the same basis, we analyzed 386 organizations consider de-risking listed companies in Latin America and to be appropriate, 72% across the the Caribbean with a total sum turnover globe agreed. In Latin America and USD$1.19 trillion and the estimated loss the Caribbean, this percentage rose amounted to USD$38 billion. substantially to 82%, the highest across all regions surveyed. In concrete terms, what could this lost revenue have meant? By way This is unsurprising, given that any of example, let’s look at how much connection, even unwitting, to any form $1 billion can buy in the vital area of of financial crime could potentially result education in different countries across in regulatory fines, reputational damage the globe. and even prosecution. In Spain, this amount could pay for high-quality early years education for 150,000 toddlers, whilst in Russia

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Different aspects of financial crime

Perceived relative a widespread lack of appreciation Conversely, two areas – bribery and of the importance of addressing and corruption; and cybercrime – stood importance eradicating these crimes against out across all regions, with the highest What aspects of financial crime humanity. With an estimated 40 million percentage across the globe (94%) do organizations feel are the most people living in modern slavery, selecting bribery and corruption as an important to prevent? the human and economic costs are important issue to tackle. Respondents In every region surveyed, the enormous. A 2014 report by the in Latin America and the Caribbean lowest percentage of respondents International Labour Office (ILO) puts were of the same opinion, with considered slave labour/human the cost at $150 billion. It is likely that bribery and corruption selected by a trafficking to be important, suggesting the real numbers are far higher. significant 97%.

3.6% 63% 92% TURNOVER LOST TO BRIBERY OF RESPONDENTS BELIEVE THAT STRUGGLE TO EDUCATE AND AND CORRUPTION THE CONSEQUENCE OF BRIBERY INFLUENCE COLLEAGUES ON AND CORRUPTION ‘WILL BE BRIBERY AND CORRUPTION HIGHER PRICES FOR END-USERS

In the 12 months preceding the 63% of respondents in the region A vast percentage (92%) within survey, the percentage of turnover believe that the consequence of this the region agreed (either strongly lost to bribery and corruption was an bribery and corruption will be higher or slightly) with the statement ‘we average of 3.2% globally and in Latin prices for end users. struggle to educate and influence America and the Caribbean this figure colleagues on bribery and corruption rose to 3.6%. in some regions’.

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The current state of play

How much are companies When asked how fully their organizations perform these IN LATIN AMERICA AND spending? procedures, gaps were evident, with THE CARIBBEAN Globally, survey results revealed that respondents globally revealing that companies spent an average of 3.1% just 57% fully screen and classify risk; of global turnover to prevent issues 52% fully conduct due diligence; and relating to financial crime during the 52% fully monitor and refresh. 12 months preceding the survey. In Within the region, some notable gaps % Latin America and the Caribbean this 57MONITOR AND REFRESH, percentage rose to 3.6%. were also evident – in Latin America and the Caribbean, just 57% of IMPLEMENT WORKFLOW, respondents fully: PROCESS REPORTS AND TRAIN Shortcomings in formal AND EDUCATE compliance • Monitor and refresh There is a range of formal compliance • Implement workflow and procedures in relation to customers, process reports ACROSS THE REGION third-party vendors, suppliers or partner • Train and educate their customers, relationships that companies can third-party vendors, suppliers undertake, including: or partners • Screening and classifying risk Even though companies across the % • Conducting due diligence region are spending an average of 3.6OF THE GLOBAL ANNUAL 3.6% of their annual global turnover • Monitoring and refreshing TURNOVER IS SPENT ON to fight financial crime, gaps in COMBATING FINANCIAL CRIME • Implementing workflow and compliance remain. process reports • Training and educating

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Training gaps Gaps in training suggest an opportunity for organizations going forward. For example, globally, just 46% confirmed that formal training is undertaken by colleagues around the globe in identifying, preventing and reporting % breaches in slave labor/human 44CONFIRMED THAT FORMAL trafficking, meaning that over half of TRAINING IS UNDERTAKEN global respondents’ organizations BY COLLEAGUES AROUND either don’t undertake training in this THE GLOBE IN IDENTIFYING, important area, or they don’t know that PREVENTING AND REPORTING they do, raising another important issue BREACHES IN SLAVE LABOR/ – one of awareness. HUMAN TRAFFICKING A lack of training in this area was evident within every region surveyed, but in Latin America and the Caribbean, the highest percentage across all regions surveyed (56%), respondents were able to confirm that formal training on this important issue is undertaken. Whilst this suggests a greater relative awareness on the topic by organizations in the region, there is still a sizable gap of 44% who are not undertaking – or are unaware of – such training.

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Finding solutions

The importance of data Collaboration as a tool to Tools to fight financial When it comes to rooting out financial fight financial crime crime crime, reliable and complete data There is a range of different actions Refinitiv offers a holistic approach is a critical requirement needed to that could be employed to tackle global to help businesses identify, mitigate develop a 360 degree view of risk. financial crime, including: and act upon the risk associated with Additional Refinitiv research has financial crime. Our broad range of • Sharing of financial intelligence/ revealed a plethora of challenges that solutions encompasses: organizations encounter, specifically information on specific cases by relating to third-party risk data. These companies • Risk intelligence screening include unreliable risk data sources, • Sharing compliance best practice • Screening as a managed service insufficient availability of risk data and by companies • Geopolitical risk ranking poorly connected data sources. • Improving public-private partnerships • Enhanced due diligence Respondents were asked what they • Stronger global sanctions as • Transaction monitoring consider most valuable when selecting punishment by governments We provide a centralized, scalable and a financial crime data vendor, including • Disinvestment in companies by the integrated suite of solutions, powered advanced technology capabilities; investment community by World-Check, the trusted and subject matter expertise; research • Disinvestment in countries by accurate source of risk intelligence. methodology; and breadth and depth companies of information. • Prioritizing working with companies Respondents across all regions that follow best practices overwhelmingly (95% or above) either • Boycotting of those facilitating or already have or would consider a perpetrating such crimes vendor with all of these attributes. • Media campaigns exposing specific cases Globally, 94% of respondents were either very or slightly supportive of sharing of financial intelligence/information on specific cases by companies and sharing compliance best practice by companies, pointing to a clear appreciation of the importance of collaboration in the fight against financial crime. In Latin America and the Caribbean, similar views were expressed, with 97% supportive of ‘sharing compliance best practice by companies’.

Join the conversation: #FightFinancialCrime

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Conclusion

In Latin America and the Caribbean, respondents reported extensive networks – in fact the most extensive across all regions surveyed. Only approximately 35% of these relationships, however, are fully screened – both at the initial onboarding stage and on an ongoing basis.

Over half (54%) of those surveyed in the processes are simply inadequate when region had been a victim of at least one it comes to screening vast international form of financial crime in the 12 months third-party networks for any links to preceding the survey, even though they financial crime. The result is that such had spent an average of 3.6% of global crime continues to flourish, with high turnover to prevent issues relating to percentages of respondents confirming financial crime during this period. that their organizations had fallen victim to at least one form of financial crime Bribery and corruption was considered in the last year. Moreover, Europol by respondents in the region, to be research reveals that, since 2006, an an important issue to tackle and, as average of only 10% of all suspicious part of this, 97% are supportive of transaction reports received by law sharing compliance best practice by enforcement agencies across Europe companies in the ongoing fight against have ever resulted in any meaningful financial crime. investigation, with the primary reason The majority of respondents across behind this cited as a general lack of the region are clearly supportive of quality intelligence. Access to reliable, the idea of industry collaboration as quality data and actionable intelligence, an important tool going forward, but as well as industry-wide collaboration, undoubtedly lifting the lid on the full lie at the heart of any future solution to a extent, impact and multi-faceted cost plethora of issues that continue to cause of financial crime is the first step to incalculable harm to industry, society combating this global scourge. and the millions of individuals across the globe who collectively shoulder the true The insights delivered by our survey cost of financial crime. bring into sharp focus a global scenario in which inefficient, costly compliance

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