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October 1, 2013

Financial services a sector at risk, KPMG

The financial services sector is the most exposed of any industry to fraud, corruption, insider trading, negligence and bankruptcy, according to a study by KPMG.

The study entitled, Astrus Insights, was conducted by KPMG’s corporate intelligence experts who analysed 8,000 integrity due diligence reports.

According to the study, more than 40% of these reports were rated red, meaning there is a significant risk, and nine out of 10 of the highest risk reports were completed for banks.

"While some banks are doing their utmost to delve deeper into the backgrounds of those they do business with, we know that many are still applying a cursory review, only going as far as a sanctions check and an internet search for their research," KPMG head of forensic Alex Plavsic said.

According to Plavsic the study shows that these checks fail to identify nearly 84% of potential risks.

KPMG’s study found the greatest risk is the integrity of directors, shareholders and ultimate beneficial owners of a company.

Since 2009, negative information on individuals running or owning a company accounted for 68% of red flagged reports in the financial services sector, according to the study.

"In many jurisdictions it can be a challenge to accurately identify shareholders and ultimate beneficial owners. However, regulators have made it clear that financial institutions should seek to unmask the individuals behind the organisations they deal with," KPMG forensic partner David Eastwood said.

Eastwood added that it’s not legal entities but people those who pay or receive bribes, launder money or commit fraud.

The study also highlighted that third party risk depends on where financial institutions choose to do business, as certain geographical zones offer a greater risk than others.

The Middle East and North Africa, Central and Eastern Europe, including Russia, and Central Asia topped the list of location with the highest risk, the study found.

More than 70% of the reports examined by KPMG in each of these three geographical areas were flagged red.

Related link

KPMG: Astrus

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