Breaking from Tradition

Overcoming Experimenter’s Bias to Better Manage Financial Crime Risk

In many ways, current best practices within the Financial Crime and Risk Management space seem to be preordained; the common wisdom of the industry seems sound, yet stubborn and immoveable. For many risk managers, it’s common sense that extractive industries or real estate brokers would present as high-risk clients, while medical equipment manufacturers or food service providers likely don’t throw up any flags. There’s a strong possibility that such an assessment is somewhat grounded in reality. Yet, underpinning this all is the experimenter’s bias; the observer-expectancy effect. Risk managers believe that they will find financial crime in industries traditionally considered to be high risk, and they likely will. Yet, what they don’t expect is illicit payments cleared internationally under the guise of medical equipment provision (Interpol). Risk managers are effectively left with results that conform to their basic hypothesis regarding where their risk exposures lie while neglecting to investigate those aspects of their business that do not conform to the traditional definition of “high risk.” Yet, the reality is that financial crime is pervasive, dynamic, and often exists on such a scale that even the most apparently safe industries and regions are open for exploitation. To ignore this fact is to ignore both the reality of financial crime today and the information resources necessary to stymie these illicit flows.

Challenging Common Wisdom

It’s no secret that the vast majority of financial crime goes undetected (UNODC). It’s this gap between the actual volume of illicit flows and those that are caught, that should be of the greatest concern today. Yet, when considering a path forward to bridge that gap, one will undoubtedly run into a wall built of overburdened compliance departments, and outdated technology. The fact of the matter is that this myopia is institutional. Regulatory guidance dictates where key risks are, and institutions focus on those risks. As a result, these areas are where most illicit flows are likely to be detected, thereby reinforcing the notion that these areas are the riskiest. Experimenter’s bias fundamentally occurs when expectations influence outcomes. It creates an obstacle to the discovery of new knowledge which, in this case, could enable the detection of a larger portion of financial crime globally. Criminals don’t exploit “high-risk” industries simply due to an adherence to tradition, but instead, they aim to exploit systems with poor controls and poor monitoring.

Readjusting Perspectives, Reallocating Resources

Contained within these unidentified flows is a data set that is likely a veritable treasure trove of information and a wealth of knowledge concerning new patterns of criminal activity, new information on how niche industries may be exploited, and most importantly, it contains the information necessary to successfully combat these financial misdeeds in the future.

What is required is a shift in the way that banks manage not simply clients and industries perceived as high risk, but more importantly their risk assessment, risk prioritisation, and resource allocation methodologies. Banks must be open to challenging their preconceived notions about risk and be proactively acquire new knowledge on the risk exposures they face.

In practice, this means:

  • Continually assessing the institution’s risk exposure at every level, and ensuring that this assessment is derived from quality investigatory data analysis, and not simply rote memorisation of common wisdom.

Elucidate is a financial crime risk management company enabling banks to benchmark and price FinCrime risk through risk assessment, data analysis and scoring.

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