White-collar crime and digitisation

20 March 2018. Financial market scandals are caused by unlawful and intentional deception. This includes market manipulation, insider trading, money laundering, cybercrime, falsification of financial statements and other fraudulent acts. This amounts to a betrayal of investors’ trust, creates uncertainty and, if things go from bad to worse, is apt to jeopardise the stability of the financial market.

Milestones of forensic science

In management practice, forensic science is currently increasing more strongly and is being debated more frequently than ever before. The beginning of this exponential growth was marked by a US federal law, the Sarbanes-Oxley Act of 2002. After spectacular scandals, this law aimed to enhance the reliability of published financial information, among other things.

In the last five years, it has not only been the Big Four which additionally recruited hundreds of people for forensic services in the German-speaking area. Personnel bottlenecks regularly result in situations whereby it is necessary to fly in larger teams. Besides the auditing companies, the Office of the Federal Attorney General, FINMA, SIX, FIU, the Offices of Cantonal Attorney Generals and other institutions are also very busy with investigations.

Anglo-Saxon groups specialising in IT security have settled in Switzerland. More and more small consultancy boutiques haven been offering specialised services for some years. The continually improved equipment of in-house auditing departments with forensic expertise is also remarkable. Some companies have even set up their own in-house task forces. In addition, compliance and risk management departments have been extended, particularly since the Alstom ruling of 2011. The educational system can hardly keep abreast of the reorientation, so companies are desperately seeking new recruits.

This development cannot merely be traced back to waves of regulation or to digitisation. Above and beyond the financial market, people realised that it is worth tackling fraudulent acts proactively. Extensive studies provide evidence of the fact that on average, companies lose 5 per cent of their turnover every year. After all, only sensitised employees are capable of noticing deception in day-to-day business, to discover it in the course of checks and to react appropriately if their suspicions are confirmed. Also, this makes it easier to inject more preventive measures into everyday processes. The potential in this respect has not been fully exploited by any manner of means. Thus some recent calculations have revealed disgraceful record losses in Switzerland. This is a delicate learning process, which is often only initiated after financial losses, reputational damage, career setbacks or personal liability.

Human and artificial intelligence

In the wake of the slogan "Industry 4.0", intelligent software is becoming more important in investigations, in particular. It is not only on the financial market that artificial intelligence will assist us in the analysis of big data. Adaptive psycholinguistic programs are already in operation. They check our written and spoken words for emotions with ever greater precision – in real time, too - and make predictions. In this way, people who are at risk should be identified even before they commit an offence.

Artificial intelligence will serve us as a tool, and this will require interaction. However, there will still be a demand for specially trained and sensitised personnel with profound forensic expertise, for artificial intelligence has to be asked the right questions from the very beginning. Interconnections have to be examined, conclusions have to be verified and interpreted. Soon, dealing with sensitive data will be an even more urgent problem.

Understanding perpetrators’ courses of action

In the future, perpetrators will continue to see through auditing processes and systematically feign cooperation in order to instrumentalise any form of intelligence for their own purposes. Deception is an element of human behaviour. A perpetrator’s course of action, invisible emotions, motives, intuition, subjective perception and other factors that result in an offence cannot be recorded exhaustively. Therefore an even balance between modern technology and human expertise will also yield the best results in the future.

To prevent white-collar crime and the concomitant financial market scandals, it is essential to see through a perpetrator’s modus operandi and motives. People who understand perpetrators’ ways of thinking will be able to prevent and discover offences in a systematic way. Only those who know whom they are up against when the worst comes to the worst will be able to read tracks, assess risks and protect themselves effectively. This was the case in the past and will remain so in the future.

Dr. Alexander Schuchter is an HSG alumnus and has been a lecturer at the University of St.Gallen since 2010. Previously, he worked for one of the Big Four for some years. With his company, he now helps executives protect corporate assets on a sustained basis.

Photo: Fotolia / rimom