Anti Money Laundering: sorting out the bad apples…

By Richard Mossman | 5 June 2015

The banking industry is literally buckling under regulatory constraints. Dogged by scandals, banks are having to put checks and balances in place for every code of practice, from how they remunerate employees to how they deal with other banks. The latest is anti money laundering. In the last five years, global banks have been fined billions of dollars for failing to identify sources of funds.

American regulators are particularly prolific, targeting and fining European banks, which are active in countries subject to US sanctions. And those fines are escalating considerably. At a meeting of banking heads in London last year, banks were warned to become as au fait as possible with “how the US uses financial warfare against its enemies in a foreign policy shift that’s entangling lenders.”

Societe Generale has come under the spotlight recently and is in talks with US authorities over potential sanctions violations involving Iran, Cuba and Sudan. BNP Paribas is in a similar situation. The US Justice Department and other US authorities are pursuing France’s biggest bank for alleged violations against Iraq, Sudan and other countries and a fine of a whopping $10 billion. Perhaps not coincidentally, BNP Paribas’ chief operating officer has just stepped down.

There have been concerns that as the US authorities push up these fines, it could destabilise the banking industry in Europe, where regulators have worked hard in the last eight years to steady the ship. Societe Generale’s CEO, Frederic Ouida, came out recently to play down the systemic risk posed by these gargantuan fines, calling them “potentially manageable.”

Well, to appease shareholders and other stakeholders and prevent any potential runs on the market, that’s probably a sensible stance to take. But you can be rest assured that the banking industry is quaking at the thought of these damaging fines.

One thing is for sure, banks want to know how they can improve their processes to demonstrate they are adhering to the appropriate regulations, such as KYC (Know Your Customer) and having the right checks and balances in place to trace the source of their customers’ funds. They need to show they are working with the regulators to try and stamp out any potential illegal activity.

To do this, conducting thorough audits of their global operations is essential, even if the task is a long and arduous one. Sifting through the practices and procedures of their operations in different countries is essential to this, so they can flag up any potentially illicit activity.

But banks aren’t police forces. Whilst they have to demonstrate they are not actively conducting or condoning illegal activity, their responsibility should end there. Also, money laundering isn’t just a banking issue. Perhaps other industries operating in geographically sensitive areas should also be subject to the same surveillance. In the meantime, banks just have to make sure they are adhering to all the right practices and procedures, checking all the right boxes. But in the same vein, regulatory authorities need to make sure that they are not just scalp hunting – they need to approach the issue carefully so as not to destabilise the banks.

By Richard Mossman, Founding Director, Certeco

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