Ep. 116: Dr. Ahmed Yamen - Is Digitalization the beginning of the end for Financial Crime?

FULL EPISODE TRANSCRIPT
Adam: (00:00)
Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host, Adam Larson, and today I'm here to introduce you to the guest speaker of episode 116 of our series. My co-host Rouba Zeidan sat down with Dr. Ahmed Yamen, an Associate Professor of Accounting at the American University of the Middle East in Kuwait. During their conversation, they address whether digitalization is the beginning of the end for financial crime. With financial crimes in the rise, Dr. Yamen talks about how it is evolving and what the industry can do to limit the potential risks of becoming the next target. Let's listen to what he has to say now.

Rouba: (00:43)
Good afternoon Dr. Yamen and thank you so much for joining us for this episode of Count Me In.

Ahmed: (00:55)
Thank you for your invitation at the beginning, and thank you for IMA.

Rouba: (00:59)
So, a PwC survey published in March of last year found that fraud and financial crime are on the rise in the Middle East. The surveyed companies reported losses of sum $42 billion in the past 24 months alone due to financial crimes. Can such crimes impact the economy and if so how?

Ahmed: (01:22)
The PwC survey actually mentioned a lot of important numbers that can highlight that the Middle East is facing a great challenge toward fighting the financial crime. For example, 42% of the respondents are suffering from procurement fraud. Actually, the problem is that this percentage is double the global percentage. Also, 47% of the respondents reported an incident for customer fraud, and also 45% of the respondents said that there are many uncovered cases of bribery and corruption. The problem is not the percentage itself, which is 45%, but the problem is that this percentage is 15% higher compared to the global percentage. So all of these percentages in the PwC survey indicates that there is a problem. From my perspective, is this the only report that is saying that? No. If we look for example from Basel Index, according to the Basel Index 2020, the risk levels in the Middle East and North Africa are higher than the global average. If we go to other things like the previous studies for example, it reveals that financial crimes have continued to increase despite the tough policy measures put in place in developed and in developing countries. The last estimate is about 1.5 trillion, which is about 2% of the GDP in both developing and developed countries, are paid only for bribes, and this is actually a huge amount. I think that all of this highlights that we are facing a big problem, especially in the Middle East, compared to the overall average. But we can go back to the question: can such crimes impact the economy? Of course, yes. We have different numbers also that can prove that it has negative consequences in the economy. For example, according to the World Bank, in 2017 they said that the poor people in developing countries pay about 6.4 to 12.6% of their income in bribes. And also, the tax evasion, if we look for another continuing of the financial crime like tax evasion for example, we will find that in Europe, for example, it was estimated in 2011 that 860 billion annually is evaded. If this has a negative consequence, it can appear in Greece. You can see what happened in Greece. We will find that there is a big economic problem in Greece and this is apparently because of the tax evasion because the tax evasion is estimated to be equal one third of the total tax revenues. And by the way this one third is equal to its budget deficit. Because as we know, tax evasion is a main source of revenue for the whole government. So, if there is a reduction in the tax revenue it means that the government will not be able to do the public service. Also, if we look for the Panama paper leaks, it's also documented that the tax evasion is likely widespread and significant everywhere. So, from all this, we can say that financial crime can affect negatively the economy and has negative consequences on the economic growth. And if we focus on tax evasion, we can see that it affects the income distribution and allocation of resources. This is a very important thing for the economy.

Rouba: (05:34)
When we look at regional global economies, positive anti-money laundering (AML) ratings have a significant impact on a nation’s credit ratings and their ability to attract foreign investment. This affirms the fundamental importance of initiatives that are taken on at a national level to create a business-friendly environment where strategies to fight money laundering and terrorist financing are in place. But, when we look at the numbers, particularly in a report published by the firm, Refinitiv, which found that ¾ of organizations have fallen victim to financial crime in the last year – accumulating losses of $1.45 trillion, we have to wonder: are governments actually able to deter financial crime? I mean, yes it does impact them and it is huge, but is it deterrable?

Ahmed: (06:26)
Of course yes, the governments are able to deter the financial crime, but they should work on this. From my perspective, there are different things that the government should do in order to be able to fight the financial crime. The first important thing is the public governance. In any country, they should care about the public governance inside the country and if we are following the World Bank, we will see that they identified 6 main indicators for public governance. So, I think that any government should work on these 6 indicators. For example, we should improve the rule of law. We should work on the control of corruption. We should work on the irregularity of quality. And also two important things are the voice and accountability in the political stability. And in addition, the government effectiveness, and I will give more attention to government effectiveness here because we can improve it through the digitalization. This is one thing, to improve the public governance. The second thing which I believe is very crucial and very important is education. I will quote something by Sir Kevan Collins, he said that “an educated population is wealthier, healthier and more law-abiding”. This is very important. Investing in education is not good only for children, but it’s also good for economies and societies. So why? Because actually when the people are well educated, they will understand the negative consequences of financial crimes on the individual level and on the aggregate level. From my perspective, the government should work on improving its public governance, and should work on investing in education, and also the third thing is culture. Of course, there is a problem in the perception of financial crime. If we look at what is financial crime we see that they are calling it white collar crime. When I see white, what is white in this? It should be black collar crime. Because actually when you're saying that it's a white collar crime, the people's feeling towards financial crime is not the same as street crimes. Their perspective is not the same especially when the people feel that the government is not dealing with them in a fair way. For example, when someone evades from tax or something like that, the people are happy that they are doing this. They are not understanding that the negative consequences is such financial crime and of course, we need to know that the financial crime can lead to street crime in the future. For example, if we look at Becker's economic theory of crime, we will find that the people resort to crime only if the cost of committing the crime are lower than the penitence gained from it and they found that poverty increases street crime. If, for example, we have financial crimes, they will increase the pov...