Addressing the risks of financial crime in M&A activity

As mergers and acquisitions (M&A) continue to re-shape the superannuation industry, there are numerous regulatory factors to be considered, experts have noted.

This was particularly crucial after the financial crime regulator, AUSTRAC, recently highlighted renewed focus on these industries with the spur of new activity. 

According to Deloitte’s Financial Crime Super & Wealth Report, due diligence was one of the top priorities when it came to consolidation, to identify potential risks and assess the maturity of compliance within the merging entities. 

“When financial crime risks are identified early, acquirers are better prepared to manage the risks and understand the time, cost and effort to manage any issues ahead of or following the transaction,” the report highlighted. 

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At the minimum, the report added, due diligence should include reviewing the organisation’s level of investment in financial crime resourcing and capacity to handle existing financial crime operations processes; assessing the training, compliance culture and governance, specifically regarding financial crime risk; and addressing identified deficiencies by international audits or independent reviews. 

Actions should extend beyond design and operation of the newly-merged entity to include consideration of the appropriateness of administration and the approach to existing customers. 

In the case of superannuation products, for example, it could extend to identification checks for certain events, such as early redemption, the report highlighted. 

“Issues and weaknesses in financial crime risk management programs require significant cost, time and effort to remediate, and can lead to significant reputational and financial impact if not properly managed,” it read.

“These factors can be hard to quantify and as such minimising the risk during mergers and acquisitions requires early identification and a detailed understanding of the target entity’s risks.”

Notably, mergers, acquisitions and divestments also presented a unique opportunity for organisations to invest in improved technology and platforms. 

This could include automation to streamline manual business processes, cloud computing and big data to consolidate data from numerous sources and enhance accuracy and accessibility of information throughout the organisation, and even natural language processing “to interpret meaning from the human language and process large volumes of data to judge whether member behaviour is suspicious”.

“If organisations fail to prioritise the management of financial crime risk ahead, during and following an acquisition, they may encounter legal, regulatory and reputational risks. This is against a backdrop of increasing regulatory enforcement activity with respect to non-compliance with financial crime laws,” the Deloitte report concluded.

“In addition to taking a holistic and thorough approach to the management of financial crime risk, an appropriate level of due diligence and rigour is needed to assess the compatibility of the businesses, ensure overall risk is appropriately managed and the transaction aligns with overall business strategy. 

“In some cases, the acquisition or divestment may even generate opportunities to realise efficiencies through the redesign of the operating model, streamlining of processes and implementation of new technologies.”