Global banks reel from FinCEN files fallout - Banking, Regulation & Risk -

Revelations lenders turned blind eye to money laundering have fuelled calls to overhaul suspicious activity reports system.

HSBC is among a number of global banks named in leaked files that show Britain’s largest lender allowed fraudsters to move millions of dollars of stolen money around the world, even after it learned from US investigators the scheme was a scam.

The FinCEN files – more than 2500 documents banks sent to the US authorities between 2000 and 2017 raising concerns about clients’ activities – were leaked to Buzzfeed News and have led to a series of news reports this week on banks participation in money laundering. Other banks named in the leaks include JPMorgan, Barclays and Deutsche Bank.

“These documents show how some of the world’s biggest banks have seemingly turned a blind eye to criminals moving dirty money around the world through their systems,” says Nigel Green, chief executive of deVere Group.

“It highlights once again that these major financial institutions need to do much more and with vigour to help prevent high-level financial crime, which is a serious global problem.”

Shares in leading global banks tumbled on September 21, on the back of the money laundering revelations in addition to fears about further Covid-related restrictions.

Sam Tate, a partner specialising in white collar crime at law firm RPC, says the leak could lead to a flurry of legal claims against UK banks by the victims of fraud and Ponzi schemes.

“Banks will be livid that this confidential information is in the public domain. Trust will undoubtedly have been undermined between the regulator and the regulated,” he says.

“We should not forget that these are the reports the authorities already know about from ostensibly more reputable banks. What of the less compliant European banks and other still unregulated entities?”

SAR overhaul looms

Most of the leaked files are suspicious activity reports (SARs) which banks use to report suspicious behaviour, but are not proof of wrongdoing or crime. Phil Rolfe, CEO of P2 Consulting, says the SAR system as it stands is flawed because it can be used as a defence by institutions, but is not robust enough to effectively crack down on financial criminality.

In order to improve the SAR system, banks need to provide more actionable data, Mr Rolfe says. “SARs are an essential part of intelligence gathering and while all financial institutions should seek to use them – many, unfortunately, still don’t provide clarity of insight and quantification of the potential impact,” he said.

The SAR system as it stands is flawed because it can be used as a defence by institutions, but is not robust enough to effectively crack down on financial criminality

Another issue is that regulators are not sufficiently equipped to process the large number of SAR submissions, Mr Rolfe adds. “Most financial institutions submit SARs in high numbers [but] the regulators are not well-resourced enough – so they stagger under the weight of the tsunami of SARs they do receive. This makes it all but impossible to log all cases, let alone properly investigate and filter out the real issues,” he says.

Reforms encouraged

Tim Adams, CEO of the Institute of International Finance, a global trade body representing the financial services sector, says the fallout from the leak should encourage further public-private sector co-operation and cross-border information sharing as well as the uptake of more sophisticated technology to better facilitate global anti-financial crime efforts.

“I hope these findings spur urgent action from policymakers to enact needed reforms. With respect to public-private co-operation, it is critical to strengthen the feedback channel from law enforcement to the private sector with regard to SARs that are filed, in order to target risk management in a more effective way.

“SARs provide a valuable source of intelligence, however, leveraging the combined powers of the public and private sector is the only way to curtail illicit flows and bring those responsible for these crimes to justice,” he says.

“There is a balance to be struck between managing financial crime risk and ensuring access to the financial system for legitimate customers. Globally, the SARs regime is one part of maintaining that balance and should be coupled with operational and tactical intelligence sharing.”

In January, the EU implemented the Fifth Money Laundering Directive which sought to bolster legislation to prevent the use of the financial system for the purposes of money laundering and terrorist financing.

HSBC said it has always acted in accordance with its legal obligations. “We do not comment on suspicious activity reporting,” the bank said in a statement, adding that it has embarked on a “multi-year journey to overhaul its ability to combat financial crime” since 2012.

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