Welcome to this special podcast series, In Conversation with K2 Intelligence FIN: Jeremy Kroll on GRC Risks, Strategies, and the Future, sponsored by K2 Intelligence FIN. This week I visit with K2 Intelligence FIN, Chief Executive Officer (CEO) Jeremy Kroll on GRC Risks, Strategies, and the Future.

Over this week, we are reviewing the current Governance, Risk, and Compliance (GRC) landscape, GRC at work, GRC and the investment community, GRC and K2 Intelligence FIN and will conclude with a look at GRC then and now. In Part 3, we consider GRC and the investment community.

It turns out that the investment community should be one of the biggest users of GRC platforms and technologies, particularly when we examine recent events around risk exposure in anti-money laundering (AML) and other illicit activity. Private equity is built to grow businesses and GRC is a key component as a solutions system. One regulatory area that Jeremy Kroll pointed to was AML, “AML was something you might hear about because of narco-traffickers and that some of the big money center banks were in trouble because they were banking drug dealers. After September 11th, everything changed. There was a wellspring of professionals entering the field,  either they entered it because they wanted to serve in government or they wanted to pivot in their careers and go from being an auditor, a lawyer, an in-house risk manager into this whole area of fighting terrorism, through tracking, tracing, and reducing the threat of illicit finance. It only picked up steam and in part because of the whole financial collapse and crisis in 2008. Even beyond that, I think what happened was that the regulatory and enforcement bodies both in the United States and Europe have really committed to cracking down because there is money laundering going on.”

Other factors included the explosion of growth in the Foreign Corrupt Practices Act (FCPA) and trade sanctions enforcement. Even “Know Your Customer” (KYC) can be seen as a natural extension of these developments. Companies needed to respond and one of the ways was through a more robust GRC program. Overlay RegTech, FinTech and now ComTech and you begin to see why there is such an investment community interest in GRC.

One of the things which COVID-19 did was accelerate trends (sometimes exponentially) which were percolating along prior to the spring of 2020. Prior to the COVID-19 pandemic environment, private equity firms were already interested in GRC investments due to the positive demand drivers of the space including: (1) Stakeholders demand for high performance along with high levels of transparency; (2) Ever-changing regulator and enforcement environment; (3) Management challenge of exponential growth of third-party relationships; (4) High costs of addressing compliance risks and requirements; and (5) Mission critical yet inefficient risk management. Here Jeremy Kroll pointed to the financial sector where “non-compliance with AML and KYC accounted for greater than 60% of total global penalties against Financial Institutions in 2019, totaling $8.35 billion in fines alone!”

Jeremy Kroll believes the investment community has addressed the challenges associated with these risks in a variety of different methods. One of the first ways is through venture investing in new emerging technologies, “which we recently saw with Clearlake Capital and Blackstone joining Insight Partners as investors in Diligent Corporation, a governance software and solutions provider.” Jeremy Kroll pointed to “other software or technology company investments we seek, like Fenergo, and of course advisory companies have also seen private equity investment.” There is also the human capital solutions, so hiring teams to manage the operational aspects and execute on these matters.

Moving forward, in the COVID-environment, Jeremy Kroll believes “a new thesis may be emerging relating to the speed with which the pandemic shuttered an 11-year bull market and will potentially expose new fraud schemes.” Basically, in prior downturns, fraudulent activity was exposed shortly after market and unemployment disruptions. Yet profit pressure at financial institutions has forced some financial institutions to reduce staff or reassign personnel at a time when applications for government relief programs are flooding in, heightening banks’ compliance risks, and pronouncements from the Office of the Comptroller of the Currency of the need for continued vigilance. Of course, with the work from home (WFH) phenomenon, “large portions of the population for the knowledge worker population has been implemented on a scale not seen in the post-industrial age. This has made every home device or wireless connection a potential cyber risk entry point for malicious actors. Unsecured networked systems and devices open the opportunity for cyber criminals to access a distributed network of confidential internal and client information.”

All of this has led Jeremy Kroll to conclude that investment firms are looking to invest in companies that can help mitigate these risks more than ever in a post-COVID 19 environment and that an increased innovation and growing number of solutions emerging. Please join us tomorrow where we look at GRC and K2 Intelligence FIN.

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