A KPMG study on the risks companies take when entering into business relationships suggests the financial services sector is the most exposed of any industry to the threats of fraud, corruption, insider trading, negligence and bankruptcy.
The firm's Astrus Insights report analysed around 8,000 integrity due diligence reports. It found nearly half of reports conducted in the financial services sector raised 'red flags', while nine out of 10 of the highest risk reports were completed for banks. These reports included serious risks such as directors or shareholders on sanctions lists, or associated with fraud or corruption charges.
Alex Plavsic, KPMG head of forensic, said many banks were still applying a cursory review, only going as far as a sanctions check and an internet search for their research.
'This is not sufficient. Our analysis shows that these checks typically fail to identify nearly 84% of potential risks. Indeed, in some cases, checks are only being carried out after the institutions have already signed the contract with a third party,' Plavsic said.'
The single greatest risk identified by the study was the integrity of directors, shareholders and ultimate beneficial owners of a company. Negative information on individuals running or owning a company accounted for 68% of red flagged reports in the financial services industry since 2009. Fraud was also the most prevalent risk uncovered, exceeding all others including money laundering, regulatory violations and business disputes.
Certain geographical locations were found to be greater hotspots for third-party risk than others. The Middle East and North Africa topped the list, accounting for 72% of all red-rated reports, followed by Central and Eastern Europe (including Russia) which accounted for 71%, and then Central Asia (70%).
David Eastwood, KPMG forensic partner, said: 'Financial institutions face competing commercial and regulatory pressures, with the potential of tapping into high growth areas quickly countered by regulatory fines and sanctions if things go wrong. While many are doing their best to compete in the new world, too many are still overlooking the risks.'
