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

March 29, 2021 | 29 Minutes

Dr. Ahmed Yamen is an Associate Professor of Accounting at the American University of the Middle East, Kuwait. He was awarded his PhD in Accounting from Ain Shams University (Cairo, Egypt) in 2011. He has been a Certified Management Accountant (CMA) since 2012. He is a member of the committee on academic relations in the IMA. His main research interests are financial crime, culture, accounting education and managerial accounting. He has published several research papers in different international journals, such as journal of international accounting, auditing and taxation, journal of financial crime, and journal of money laundering control. With financial crimes on the rise in the Middle East and around the world, he and Count Me In's Rouba Zeidan take a look at how such digitalization is arming the fight against the practice. Together, they dive into the world of financial crime, how it is evolving and what the industry can do to limit or potential eliminate the potential risks of becoming a target. Download and listen now!

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 poverty of the people. If poverty increases, then street crime itself will increase. I believe that we need to create what’s called the shame culture of committing such crimes. The shame culture is very important. In addition to all of this, the government should work on digitalization, because from my perspective if we try to digitalize all the processes, it means that the direct relationship between the people and the fraudsters or the perpetrators will decrease and this can affect positively the situation.

Rouba: (11:03)
We talk about awareness as well as a key factor and when you think of the private sector and the fact that 73% of organizations across the Middle East are actually very well aware about financial crime, and in Saudi it's actually 85%, but the adoption to the tools needed to protect companies is relatively slow, so while awareness is there, adoption and adaptation are a bit lagging, why do you think that is and what do you think is causing this delay?

Ahmed: (11:37)
I mentioned before that we need 3 things, the public governance and the education and the culture.

Rouba: (11:46)
Digitalization aka digitization – though they are relatively different from each other but frequently referred to in the same context – are transforming the fight against financial crime. The migration away from traditional paper-based processes has optimized both speed and efficiency for the finance and accounting profession. Even though digital transformation is paving the way for increased protection against corruption, exploitation and data breaches, such advantages are also presenting equal opportunities for criminals, I mean we are not the only ones benefitting from this. Can we really say that digitalization and the process of it can actually help to mitigate or prevent financial crime and if so, what needs to happen, beyond the elements that you mentioned; education, awareness and those three factors, what needs to happen in order for this to take place and be fully implemented?

Ahmed: (12:42)
First, I believe that digitalization is more important than digitization. Because digitalization means that we are transforming the whole business process into a digital thing. But digitization means that we are just converting the data into a digital format. So, I believe that we need to talk about digitalization as a whole, this is the first thing. The second thing, I did a study on the impact of the adoption of digitalization on tax evasion. I tried to test whether the digitalization would affect negatively the tax evasion, would deter the financial crime or reduce the financial crime, or it has no effect, it’s not significant, it’s insignificant, it will not affect any of these kinds of crimes. I did this test for 139 countries by the way and the findings was that there is negative relationship between digitalization and tax evasion, which means that the digitalization will help in reducing the financial crime and actually this result was the same results whether it was a government digitalization or business digitalization or even people digitalization. Whatever is the type of digitalization that we worked on, this of course will help in reducing the financial crime and to deter the financial crime. And as we know that depending on electronic cash for example or on the blockchain technology, I think will help in reducing such kind of crimes. For example, the blockchain technology, we can see that it has main characteristics that help to reduce the crime by the lack of centralization, the lack of information on users, the transaction cannot be undone, and this is of course very important, and also the autonomy. So all these characteristics of the blockchain technology I think will help to reduce financial crime in the future. Again, it is not a guarantee, we cannot guarantee that it will reduce, till this point, because we are looking at one side which is the victims, we need to protect the victims, but there is another side to the equation which is the fraudsters and the perpetrators. Are they trying to improve themselves or not?

Rouba: (15:28)
Yes of course they will. Some figures really are jaw-dropping for me. According to global records, only 1% of criminal proceeds generated in the EU alone, are actually confiscated by authorities. This pretty much states the magnitude of the problem, 1%? Is digitalization a promise of more efficient outcomes ahead?

Ahmed: (15:55)
1% is very low of course, and I think that if we are following the financial action task force, which sets the standards for anti-money laundering arrangements, it found that the regulatory regime is highly inefficient. I believe that digitalization will help to increase the regime efficiency. But we have another thing which is related to the allocation of resources, we are still wanting to focus the resources on the important thing which is digitalization. Also, it is very important to have skilled people in our system, who are able to highlight any problems. It is not only about having a system, we need to have qualified personnel. From my perspective, again, the adoption of digitalization will help in reducing the financial crime, but at the end, we need to look for the fraudsters and perpetrators, because also as you know, when we close one opportunity, they can create another opportunity.

Rouba: (17:07)
The Covid-19 pandemic and that sudden transition to remote operations exposed companies the world over to increased chances of cyberattacks. If we look at figures from June of last year and just for a period of three to four months, just into the pandemic, more than 2.57 million phishing attacks were detected, and that’s just in the Middle East. What can be done to curve that fraud triangle and prevent it from increasing during times of crisis?

Ahmed: (17:51)
If we are talking about the Covid-19 pandemic, we need to see whether the financial crime affects the pandemic or not at the beginning. I tested this also and I found that the tax evasion and corruption increased the risk of Covid-19. Because when the tax evasion increases, and corruption increases it means that the government are facing deficits. Of course, this deficit or budget deficit is affecting negatively the public health, because there isn't enough beds, there isn't enough resources for the people who are suffering, so it means that it increased the risk of the Covid-19 pandemic. This is the first thing. The second thing or the main question is, what can be done for the fraud triangle? Prevention during times of crises, let's talk about the fraud triangle itself. The fraud triangle has three edges, the first is pressure, the second is opportunity and the third is rationalization. And from my perspective most of the people who are committing these crimes want to rationalize to themselves that they need to do this crime. This rationalization can be for example when an employee wants to embezzle something from the company, so he is telling himself I want to do this action because they are not giving me what I deserve, I am doing a lot of work and not getting proper income, and so on, so he tries to rationalize the behavior. But, if we look deeply, inside the psychological aspect related to this fraudster, we will find that he might be affected by the person associated to him, or it can be because of his low self-control. This is for the rationalization part. The second part is the pressure. Of course, anyone wants to do a crime if he’s facing financial pressure. I believe that with poverty and with the inefficiency of the government, this might increase the pressure on people. Especially during the Covid pandemic, unemployment is for example increasing because of Covid. If unemployment increases it means that people are more under pressure, and this of course will increase the opportunity for more crimes. The third thing is opportunity. I believe that digitalization can reduce the opportunity for committing the crime, because opportunity means that there is a problem in the internal control system. If we use digitalization it can solve part of this problem. But again, this opportunity can also be increased if the fraudsters improves themselves also, because we need to talk also about the fraudsters. When we improve ourselves as victims, the fraudsters at the same time will also try to improve themselves.

Rouba: (21:23)
They are at the same pace, even faster.

Ahmed: (21:26)
Yes, yes, this is the issue. Again, I believe that we need to care about themselves and we need to think from the fraudster's perspective.

Rouba: (21:39)
Yes, that's a key factor, I think that's ultimately the biggest fear, that as much as we advance, they too are advancing. And look at all these latest developments in the FinTech industry. They are brilliant, unprecedented at any point in human history. They simplified so many financial transaction processes, the accounting profession is excelling because of it. It's really transforming the profession if anything. If we were to give a piece of advice to our audience who's mostly finance and accounting professionals, what can private sector companies do to ensure that they do not become the targets for financial crimes and even if they are targeted, that it is done in a way that they do not fall victims to it? And tag to that question, is investment in digital capabilities sufficient and how much reskilling and upskilling of resources, equally to those criminals are doing, are needed in the fight against financial crime in this highly evolving digital era?

Ahmed: (22:48)
First, investment in high technology is very important, it’s very important, especially in reducing for example one type like customer fraud. We notice that when you use high technology, the customer fraud is decreasing. But, at the same time, which is also very important, we should care about the internal control systems. We should give more attention to the internal control systems, to the corporate governance, in addition to having highly skilled people. We cannot depend on graduated people like before, since he’s graduated so it is okay, we can appoint him and that's it. No. This is not the case now. From my perspective, universities from all over the world should work on this. For example, in business schools, still till now, we are not introducing the machine learning. And of course, when we have graduated personnel, they are not well qualified now. My advice to the organizations is that they should appoint highly-skilled people who are able to collect suitable data, analyze it and define the anomalies and the variances. This is the most important thing. I believe that companies should be careful when hiring new employees, the capabilities of those employees should be high.

Rouba: (24:42)
But that also includes investing in existing employees and making sure that they too are accelerating along with that.

Ahmed: (24:49)
Yes, this is also very important, the training. I was surprised that the last years, and I understand this, there is a huge reduction in training costs everywhere. Even the training programs, if we are trying to find the training programs all over the world, we will find that there is a cut in the training programs.

Rouba: (25:12)
Yes, absolutely. That's the first thing that went, although it is actually more needed now than ever.

Ahmed: (25:18)
There is a cut in the training costs of course, but from my perspective to fault this problem we can depend on some websites that give online courses for example, so we can force the employees to take these courses, and these courses are free. So, we can cut the costs but at the same time we can make sure that our employees are improving themselves. Of course, I don't want to say examples of this, but we have many websites that can help. For example, if we are talking for the IMA, we have a lot of webinars. I think that these webinars can add value to IMA members and to everyone. And I believe that IMA is working on introducing some courses, and also these courses can help to improve the skills of people. I believe that yes we can cut the training costs, but we can find another way to improve the skills.

Rouba: (26:31)
Yes, when you refer to IMA there is an abundance of tools, that are accessible to IMA members maybe more specifically, but there are a lot assets that can be used, a lot of research. Beyond the periodic updates to the CMA program, you have a lot of assets that can be attained through the IMA portal and the website. There is so much information there, so much knowledge.

Ahmed: (27:02)
Of course, myself, if I am talking about myself, I attended many courses which added value to me and introduced me to new topics and kept me updated for a lot of things.

Rouba: (27:14)
Yes you are right, there are multiple ways, but I think that the life-learning approach of continuing to evolve, whether through webinars or...

Ahmed: (27:25)
There is a change, a huge change in education, even for our children, we can see that they are not going to school since one year ago. They are now learning online. To go back to our main topic, of course it is very important to invest in high tech, and it is very important to invest in our employees, in their skills, and it is also very important to appoint highly skilled people in the future.

Closing: (28:03)
This has been Count Me In, IMA's podcast providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard, and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.