This is Part 1 of a two-part series from FTI Consulting. Read the first part here.
The volume and pace of transactions in global financial markets – magnified and accelerated by new technologies – is mind-boggling. It has been estimated, for example, that every day there is $2.9 trillion worth of stocks, bonds and derivatives traded in U.S. financial markets. It’s easy to see how this makes monitoring both client onboarding and financial transactions monumentally difficult.
For instance, in recent months an internal Vatican Bank investigation found that it had not been adequately vetting account holders, allowing criminals to launder money and transfer large sums via proxies. Last summer, German regulatory agency BaFin found Deutche Bank, with over €2 trillion in assets, laggard in reporting suspicious transactions to police due to inadequate internal controls.
Governments and regulatory bodies are well aware of the difficulty of policing transactional activity, as well as violations of international sanctions against countries with ties to terrorism, or with poor human rights records. Understaffed and underfunded, these bodies would like to shift their burden to the financial institutions, seeing that as the only way to keep ill-gotten money out of the financial system and to de-fund criminals and terrorists. And they are driving this agenda with a flurry of fines.
U.S. enforcement authorities, flexing their regulatory muscles, recently have imposed fines for sanctions breaches on Lloyds Banking Group ($350 million), Barclays ($298 million), and Standard Chartered ($327 million). In the UK, the Financial Services Authority imposed a fine of £5.6 million on RBS for similar transgressions.
The U.S. Department of Justice and the Securities Exchange Commission are using the Bank Secrecy and Foreign Corrupt Practices acts to demand greater due diligence from all parties involved in transactions, holding them responsible for both sins of commission (such as facilitating money laundering or committing sanctions breaches) and omission (failing to implement sufficiently strong internal controls against either or both). In short, governments are making it clear that they will not tolerate what they deem to be reckless conduct on the part of financial institutions, or what they see as a weak commitment to abiding by international rules regarding sanctions and money laundering.
Financial institutions argue that the expectation that they can act as a branch of law enforcement is unreasonable. They cannot, they say, monitor every transaction or client with 100 percent certainty or make their businesses risk-free. They say the investment they must make in people, processes and technology to attempt to comply with regulations and avoid being implicated in financial crime places a massive strain on their resources. And, they point out, there is a limited pool of experienced people they can draw upon to lead, manage and run anti-money laundering and sanctions compliance programs.
In this debate, financial institutions are bound to lose. They have no choice but to get smarter about both client and transactional risk, and do more about them.
This will require top-level leadership, and a risk-based approach to mitigating financial and transactional risk. In part two of this article, we will discuss how financial institutions can do this.
Peter Brooke and Christine Moran are Managing Directors in the Governance, Risk and Regulation team at FTI Consulting, based in London.
Peter Brooke is an experienced Risk and Regulation Consultant at FTI Consulting, based in London. With a unique blend of in-house and consulting experience, Mr Brooke has worked in financial services for more than 24 years.
As a highly experienced Group Head of Compliance, Christine Moran is an energetic consultant at FTI Consulting. Based in London, Ms. Moran has a highly collaborative, grounded and commercial approach. She has a proven track record of building enhanced and effective compliance and regulatory risk arrangements in both retail and institutional businesses.