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...