Cash management: Payment risk

Laurence Neville
Published on:

Recent high-profile cases have drawn attention to the financial and reputational risks for banks of breaches of money-laundering regulations. Banks need to change their cultures, but they also need to invest in technology to better assess risks in the complex international payments system.

Over the summer, HSBC was hauled before a US Senate Committee. Then Standard Chartered was hit by charges from a hitherto unheard-of regulator. Both were for breaches of US sanctions on money laundering. The transaction banking world snapped to attention. Was this, bankers wondered, the start of a new campaign against the payments business, one of the banking industry’s most lucrative cash cows?

"The industry didn’t expect HSBC’s and Standard Chartered’s problems with the US regulators – at least they didn’t expect things to turn out the way they did," says Chris Cooper, managing director at Challenge Consulting, which counts leading transaction banks as clients. "It has created a febrile atmosphere and damaged confidence; there is a degree of concern that didn’t exist before and a fear that banks are in a minefield. They are now less certain about what’s going to be under the next foot."

One veteran transaction banker sums up the reaction of the industry. "Were we surprised by HSBC’s and Standard Chartered’s problems? Yes and no," he says. "Yes, because of the magnitude of the problems, how they were reported, and the size of the fines and consequences for these banks. No, because regulators continue to dig ever deeper into issues that have previously been considered to have been laid to rest. They are constantly roaming our offices and those of our peers. It’s not good for anyone’s business."

Certainly, the HSBC and Standard Chartered cases are far from unique. Over the past three years, Barclays, Lloyds, Credit Suisse, ING and ABN Amro have paid around $2.3 billion in fines to US regulators for breaches of sanctions. A number of other banks, including BNP Paribas, Crédit Agricole, Commerzbank, Deutsche Bank, UniCredit’s HVB unit and RBS, have said they are in contact with US regulators about similar transactions or are internally reviewing their records to check they are in compliance.

Given this recent history, some observers – such as Ed Shorrock, director of regulatory services at Baker & Partners, a Jersey-based law firm specializing in financial services regulation – characterize the moves against HSBC and Standard Chartered as just more in a series of actions by US regulators to target banks perceived to be abusing the privilege of using the dollar. "To use the dollar, banks have to play by the rules of regulators, which means assisting them to meet national security and economic objectives," Shorrock notes. "And because every single US dollar payment has to be cleared through New York, every bank has to play by the rules."

However, many others in the industry believe that the events of this summer amount to a fundamental change in how regulators pursue banks believed to have done wrong – and how they are punished. At the least, everyone in the transaction banking industry recognizes that the scale of the challenge facing the business in addressing compliance issues such as anti-money laundering (AML) is now out in the open. Similarly laid bare are the risks to broader banking groups of their transaction banking business, which have grown in importance and size since 2008.

 Frédéric Boulier, director of compliance, EMEA, at NICE Actimize, a financial crime, compliance and risk management solutions provider.
Frédéric Boulier, director of compliance, EMEA, at NICE Actimize
" AML is no longer [just] a compliance issue," says Frédéric Boulier, director of compliance, EMEA, at NICE Actimize, a financial crime, compliance and risk management solutions provider. "There has been a seismic shift in terms of regulators’ expectations of AML standards and the size of fines imposed for AML breaches over the past 10 years. With fines that could well exceed $1 billion, AML has now become a banking issue. That makes it a key priority for bank management committees and senior executives." This summer’s events cost Standard Chartered $340 million and HSBC has set aside $700 million to cover potential fines.

Reputational risk is as great a problem for banks as fines – perhaps even more so given the low standing of banks in the post-financial crisis period, notes Robin Booth, general counsel at BCL, a London-based law firm that specializes in regulatory enforcement and money-laundering compliance. "What reputation banks have left they need to look after. Clearly, as recent cases have shown, there can also be a significant impact on the share price when serious failures to meet AML requirements are exposed." Standard Chartered lost more than a quarter of its market capitalization in the 24 hours after it was accused of assisting $250 billion of money-laundering transactions.

For the transaction banking industry, HSBC’s headline-grabbing basic failures of compliance involving drug runners in Mexico were relatively unimportant. The more worrying aspects of the summer’s revelations were the sub-committee’s attacks on how HSBC managed its correspondent banking business. That concern was reinforced when, just a few weeks later, Standard Chartered came under fire from the New York state Department of Financial Services for similar infringements.