Bribery, Corruption, Money Laundering: Banks in the Crosshairs, Part 2

This is Part 2 of a two-part series from FTI Consulting. Read the first part here.

Governments and regulatory bodies increasingly expect financial institutions to man the front lines in the war against international corruption and bribery, levying significant fines against banks that have been used by criminals or have conducted business with sanctioned regimes. To survive in this environment, firms must up their game by implementing risk-based controls to account for both front-end client acquisition and back-end transaction risks.

This effort must be led from the top. Senior management must set the tone and be fully engaged in building the internal controls that can make their organizations less vulnerable both to missteps and the depredations of criminals.

However, given the complexities of global finance, and the cunning of criminals, these defenses need to be risk-based, with the institution’s finite resources devoted appropriately to businesses and jurisdictions with inherently higher risk profiles or weaker control environments.

Mitigating client risk
Client-onboarding rules and processes more be made rigorous before accounts are activated. This requires assessments that can indentify:

  • Politically exposed persons.
  • People with criminal backgrounds or connections.
  • People conducting business in sketchy jurisdictions and geographies.
  • Individuals acting as proxies for hidden players.

Criminals are continually changing their strategies, using opaque structures to hide the true sources and destinations of funds. It is therefore critical to employ experienced investigators to establish the identities of high-risk individuals and entities, especially when they come from countries where this data is difficult to verify.

Mitigating transaction risk
Banks should deploy technologies to filter suspicious transactions. There is a vast array of commercially available tools that can flag unacceptable transactions (such as identifying sanctioned country codes on transfer receipts). They can trigger alerts and automate watch lists for suspicious persons and transactions, and can also produce reports that are critical when an institution finds itself in the regulator’s crosshairs. But all these tools are only as good as the people who use them. Firms must acquire skilled staff to fine-tune the systems as well as to assess and act upon the alerts and reports they produce.

Taking these actions is a statement of good faith. Using up-to-date processes and tools, and staffing the risk-management function as diligently as possible will make regulators less inclined to punish firms that make the occasional, unavoidable mistake.

It’s Never That Simple
Because it’s nearly impossible to define the scope of the problem – that is, how much money is being laundered or moved around the globe by criminals and terrorists – it is hard for institutions to measure the effectiveness of their programs or assign an ROI to their investments. Consequently, they should be measured by what doesn’t happen – fines, reputational damage, remediation costs, and lost business – not what does.

Ultimately, it is unrealistic to think that the financial industry can take on the bad guys by itself. One hopes that the future will bring greater levels of cooperation between governments and the financial sector. Ultimately, that’s the only way to de-fund criminal interests, terrorists, and others who would seek to sabotage the world’s financial system and use it to further their own anti-social ends.

 

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.

Bribery, Corruption, Money Laundering: Banks in the Crosshairs, Part 1

Contributor Christine Moran

Contributor Christine Moran

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.

Contributor Peter Brooke

Contributor Peter Brooke

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.