Financial crime and fraud have become an increasingly more complex issue for financial institutions and authorities over the last decade or so as the world rapidly shifts to e-money, even more so in recent times thanks to the coronavirus pandemic.
Keeping in mind that financial crime and fraud is a trillion-dollar industry, it is safe to say that it is not something to be taken lightly by any stretch of the imagination. It is reported that private companies spent about $8.2 billion on anti–money laundering (AML) controls in 2017 alone.
When talking about financial crime and fraud, people naturally tend to associate both with each other and use the terms interchangeably. Albeit, the boundaries between the two are blurring, but they are not entirely the same.
It’s important to learn about these concepts and educate yourself so as to stay aware and not susceptible to the frauds that you may potentially come across in your life. Financial crimes can be very creative and use really sophisticated techniques to hide the true identities of the culprits and make it incredibly hard to track down the parties responsible.
Let’s understand both concepts first before we move any further.
What is Financial Crime?
To put it simply, financial crime is a bigger concept than fraud i.e. fraud is one of the several different types of financial crime. Financial crime is essentially a crime in which the ownership of property of an entity is unlawfully converted to one’s personal use or benefit without the consent of the original owner.
The Financial Conduct Authority (FCA) defines financial crime as “any kind of criminal conduct relating to money or financial services or markets.” This includes offenses involving the following:
- Fraud or dishonesty
- Misconduct in, or misuse of information relating to, a financial market
- Handling the proceeds of crime
- The financing of terrorism
Some examples of financial crime may include, but are not limited to:
- Money laundering
- Terrorist financing
- Insider trading
- Tax evasion
- Insurance fraud
- Market manipulation
- Credit card fraud
- Armed robbery
What is Fraud?
The difference between financial crime and fraud is a little tricky to understand. Fraud is basically the use of deceit, trickery, and deception to gain something of value from someone or extract any kind of benefit, monetary or otherwise.
This can include, but is not limited to:
- Obtaining someone else’s passport, travel document, or driver’s license
- Insurance fraud
- Mortgage fraud
- Bank fraud
- Credit card fraud
- Cheque fraud
- Health care fraud
- Corporate fraud
- Securities fraud
Basically, any time you get tricked into paying or giving anything of value to someone without receiving any equivalent value in return, that’s a fraud. Let’s try to compare financial crime and fraud with the help of some examples stated below.
Let’s take money laundering as our first example.
Money Laundering is the process of moving funds raised from an illicit activity like drug tracking, terrorist financing, or fraud into the financial system and making them appear to have come from a legitimate source.
This is done by running the funds into a chain of complex bureaucratic financial transactions so as to mask their true origin and make it difficult to track down the same.
Now, in this context, money laundering is a financial crime and the funds that are laundered in this process may have been obtained through means of fraud, say insurance fraud or a Ponzi scheme/pyramid scheme. Though financial crime and fraud do sound similar, they are not entirely the same.
Money laundering cannot be said to be a fraud. Why? Because its purpose isn’t to use deceit or deception to gain property or benefit from someone, but it is rather simply a way to dodge allegations and identification of the crime committed.
Now, let’s try to understand fraud using insurance fraud as an example.
Insurance fraud, on the other hand, can most definitely be considered as a fraud because it involves the use of dishonesty and trickery to claim something to be the case in order to extract a monetary benefit out of the illusion created i.e. the insurance claim money.
Preventive Measures for Financial Crime and Fraud
With all this talk about financial crime and fraud, it’s natural to be a little anxious about your money and financial security. In fact, according to some estimates, money laundering accounts for about US $800 billion – US $2 trillion laundered every year. If that wasn’t chilling enough, keeping in mind that about 5% of the world’s annual GDP.
It wouldn’t be surprising to say that these financial crimes affect all of us, whether directly in the form of fraud and scams or indirectly in the form of disruption of the financial system and degradation of the global economy.
Luckily for us, though, there are authorities that exist solely with the mission to eradicate these financial crimes. For instance, the Financial Action Task Force or FATF is an inter-governmental body and watchdog founded specifically for this purpose.
Its purpose is to scan and audit countries with the aim to identify and erase financial crimes like money laundering and terrorist financing so as to serve and protect society and the financial health of the global economy. It does so by setting up international standards and taking remedial measures whenever they are crossed.
They categorize countries in different lists called Blacklists and Greylists. While on one hand, blacklists contain the name of the countries that are notorious for such crimes, the FATF Grey Countries List holds the names of the countries that impose a greater risk of the same but have offered to work with the FATF to develop action plans to remedy their systemic deficiencies.
Financial crime and fraud is a global problem, one which can take many forms. With the latter being targeted to exploit vulnerable sections of society, it imposes a threat on people’s personal finances. The former, on the other hand, is concerned with establishing political power and dominance with the use of financial strength.
It is advisable to stay aware and on your guard whenever making a financial transaction to avoid being susceptible to these threats. Thank you for reading this article. We wish you the best in your journey to financial health.
Difference between Fraud and Financial Crime