Regulatory noose tightens around banks’ money-laundering lapses
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Regulatory noose tightens around banks’ money-laundering lapses

Perish the thought: the US is seeking to sharpen personal liability against bankers falling foul of anti-money laundering laws, raising the spectre of bankers in jail. Financial institutions must urgently redouble their compliance efforts as recent lapses catapults the issue up the regulatory agenda.

The attention paid to anti-money laundering (AML) tends to rise and fall among the world’s banks.

Julie Conroy, research director at Aite Group
A survey carried out by KPMG in 2011 found that 62% of respondents cited AML as a high-profile issue, which, surprisingly, was down from 71% in 2007. In 2013 it is likely that interest in this topic has soared after a series of recent, high-profile AML enforcements. In April, the Financial Conduct Authority fined EFG Private Bank, a UK subsidiary of Switzerland-based EFGI Group, £4.2 million for AML failures. This followed the £8.75 million fine given to RBS-owned private bank Coutts last year for deficiencies in its AML procedures.

Three private sector banks in India – ICICI Bank, HDFC Bank and Axis Bank – are investigating possible AML breaches. And last week, the Hong Kong Monetary Authority announced it was doubling the size of its AML team after the introduction of a new AML ordinance in April 2012.

However, while AML is a global concern, the most dramatic of the recent AML cases have taken place in the US.

The most significant of these was HSBC, which was fined a record $1.9 billion in December. According to the Senate Permanent Subcommittee on Investigations, the bank failed to put in place adequate AML controls and consequently acted as a conduit for drug cartels, rogue governments and terrorists.

A 339-page report published by the subcommittee found that the bank had disregarded terrorist links, cleared more than $290 million in suspicious bulk travellers’ cheques, circumvented Office of Foreign Assets Control prohibitions in relation to Iranian transactions and serviced high-risk affiliates in Mexico, as well as opening “high-risk bearer share corporate accounts with inadequate AML controls”.

The fine included almost $1.3 billion in a deferred prosecution agreement as well as a civil fine of more than $650 million.

While the HSBC fine is particularly high, a number of other banks have come under the spotlight as regulators continue to focus their attention on AML enforcement.

In December, Standard Chartered was fined $327 million for a range of AML breaches, after another fine of $340 million earlier in the year relating to Iranian money-laundering charges. Last year also saw ING fined $619 million for moving money on behalf of Iranian and Cuban customers.

The banks in question might have paid large fines – but the cases have sparked controversy that some banks are “too big to jail”.

AML infringements have led to prison terms in other cases, such as Karen Gasparian, head manager of G&A Check Cashing, who was sentenced to five years in jail for violating AML laws.

In contrast, no criminal prosecutions have been brought against HSBC – a move which Lanny Breuer, the head of the US Justice Department’s criminal division, defended by citing the “collateral consequences” of prosecuting HSBC or revoking its US banking licence, an outcome he claimed could cost thousands of jobs.

Nevertheless, it is possible this philosophy might change. “The Office of the Comptroller of the Currency (OCC) has been under extreme pressure to explain why there has been no criminal prosecution,” says Julie Conroy, research director at Aite Group.

“In response, the OCC has said that its new guidance will seek to increase business line accountability – so if an institution is guilty of AML breaches going forward, there’s a risk that liability could extend to the personal level.”

As attention on AML continues, banks and regulators are continuing to push for higher AML standards.

In February, the European Commission (EC) bolstered AML rules in the EU with the announcement of the Fourth AML Directive, which focuses on preventing the financial system from being used for money laundering and terrorist financing.

The directive is intended to incorporate recommendations made by the Financial Action Task Force in February 2012. At the same time, the EC announced enhancements to the Funds Transfer Regulation, which sets out the information needed to secure due traceability of transfers of funds.

The new directive includes a number of changes to the Third AML Directive, including expanding the definition of a politically exposed person and covering the gambling sector more extensively.

In addition, it applies to dealers in goods when payments are made in cash of €7,500 or over, reducing the threshold from the previous level of €15,000. The new directive is in the process of being adopted.

AML is a priority in light of the recent fines – but complying with AML regulations is less than straightforward. The KPMG survey found that more than 70% of respondents found client screening and the handling of filter hits challenging or very challenging. It also found that the cost of compliance had risen by 45% in the last three years.

Aite’s Conroy points out that finding and understanding linkages between a bank’s customers are difficult enough for global banks operating in different jurisdictions.

She adds that this task is made all the more difficult because “sometimes the data privacy laws of the countries that you’re operating in prevent you from doing analysis across the data sets to find the types of linkages that regulators are expecting you to find”.

However, one area over which banks have more authority is their own control and command capabilities. Some of the recent AML enforcements have found that bank employees had deliberately circumvented the bank’s AML policies. This has led banks to invest more heavily in improving their own control mechanisms.

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