Updated: May 1
Misconduct is like a cancer for financial firms, and just as when an individual faces a medical diagnosis, organizations want to identify these problems as early as possible to ensure the best course of action and recovery. Rules and regulations inform compliance strategy and implementation, leading teams to use surveillance tools in both a reactive and proactive way. These regulations usually put a hefty price on violations.
Monetary fines are the first line of defense regulators use to ensure compliance from financial firms. They serve as a powerful tool to encourage firms to avoid financial crimes—yet these types of crimes still splash across our networks monthly, if not weekly. And it appears that frequency is increasing.
The Financial Industry Regulatory Authority Inc. also posting a 43 percent jump in fines in 2020, noting the first reversal of a five-year downward trend. After a record-breaking year of fines in 2019 (£392 million), the Financial Conduct Authority (FCA) started 2021 off by releasing Market Watch 66, with firms taking notes of the recommendations for communication monitoring.
The pandemic forced firms to find new ways to make sure employees were maintaining compliance. Without on-premise, over-the-shoulder monitoring, teams had to suddenly monitor additional data sources like Zoom, Teams, and WhatsApp—and their teams’ exponential growth of movement between platforms.
Communication surveillance must be more comprehensive and more technologically advanced than ever before to protect both buy- and sell-side firms from misconduct that could lead to fines. Our research found that over the past five years, FINRA has dished out $86.6 million in fines, on average, every year. Since FINRA governs 3,517 companies directly, these companies have risked exposure to that $86.6 million annual fine amount.
And FINRA isn’t the only fine-levying body companies have to worry about. The SEC averaged $4.1 billion over the past five years, with 27,000 companies in their purview, for an average exposure of $154,568 in fines. However, with an AI-powered communication surveillance solution like Relativity Trace, the risk for these companies is reduced significantly.
As you know, for financial crimes like money laundering, bribery, insider trading, and corruption, regulators don’t simply stop at issuing fines. In many cases, senior executives are held responsible and can even face the threat of job loss and jail time. Following the LIBOR scandal, the FCA now requires banking and financial executives to complete the Senior Managers and Certification Regime (SMCR), which promotes effective governance and healthy culture. The responsibility and consequences of these serious crimes are meant to be felt not only at the company level, but by individuals as well.
With violations and fines still being levied, Danske continues to feel the effects of its 2018 scandal. One of the largest money-laundering scandals of the past decade, the fallout was immediate with then-CEO Thomas Borgen resigning and being charged by prosecutors. In addition to the ongoing criminal and regulatory investigations in Denmark, Estonia, France, and the United States, the company faces 276 separate legal actions—and Borgen personally faces action by 72 institutional investors.
Beyond the monetary fines inflicted by regulators that can damage a company, there can be a huge devaluation of the brand because of bad behavior. Both customers and investors take notice of regulatory violations and—particularly in today’s #MeToo climate—code of conduct violations like workplace harassment.
This type of harassment—including sexual harassment and bullying—can result in considerable costs to companies: legal fees, settlements, employee turnover, lower team productivity and motivation, and brand reputation damage. Even though high-profile cases may be the only violations we see making headlines, this grossly underestimates the true number of cases that are settled. A 2019 study found that companies with the highest accounts of sexual harassment underperform in the U.S. stock market by approximately 19.9 percent the next year. This represents an average annual dollar loss of $2.1 billion per firm.
The Big Picture
Like finding a parking ticket too late or dealing with a delayed medical diagnosis, in cases of misconduct, it’s painfully clear that damages could have been mitigated by earlier action. That’s why proactive, diverse communication surveillance is the best protection buy and sell-side firms can invest in. Regulatory scrutiny continues to be unrelenting—focused on making sure the markets are free of financial crime—but organizations aren’t helpless to do their part in preventing it from occurring in the first place.
Budgetary restraints have always been a concern for compliance and financial crime teams, but thanks to the instability of market conditions because of the pandemic, these concerns have led to deeper evaluations of costs and investments. However, from third-party audits to employee settlements, regulatory fines or diminished brand value, maintaining a compliant workplace is worth the cost.
A manual, lexicon-based compliance solution is not enough to protect a firm from a crisis any longer. With an AI-powered surveillance system like Relativity Trace, teams can pinpoint risk based on their specific needs. From audio, chat, email, and mobile communications, Trace identifies bad actors before non-compliant behaviors escalate.
Global penalties for anti-money-laundering, know-your-customer, and sanctions violations reached $8.4 billion in 2019, and we’re just now learning about monetary fines collected in 2020—so who knows what 2021 will hold. Market investments can be risky, but a compliance solution shouldn’t be. Invest in a long-term business strategy by investing in a better communication surveillance platform.
Cassandra Morrison is a senior specialist in content marketing at Relativity, with a special focus on the platform's communication surveillance solution: Relativity Trace.