AML skyscrapers

More jurisdictions around the world are levying punishing fines for money laundering breaches, but criminals are always innovating to avoid controls.

The US has blazed a trail in the investigation and levying of fines for money laundering over the past decade, and its efforts have encouraged other jurisdictions around the world to step up their efforts.

The US has multiple agencies — including the Department of Justice, the Office of the Comptroller of the Currency, and regional and federal reserve banks — focused on protecting the dollar and ensuring that anyone around the world who trades in dollars complies with its rules.

Over the past 12 years, $46.3bn in fines has been levied against financial institutions for money-laundering violations, according to Fenergo. The US issued more than two-thirds of fines the during this period, but the proportion is shrinking as other countries have followed the US’s lead to issue more punitive sanctions. France accounted for 11.2% of fines, Malaysia 8.4% and Australia 3.1% of fines between 2008 and 2020.

“Local regulators often take action after the US has started an investigation in their jurisdiction,” says Maíra Martini, research and policy expert on corrupt money flows at Transparency International.

Last year, the EU implemented the Fifth Money Laundering Directive, which sought to boost anti-money laundering (AML) legislation, while regulators in Hong Kong and Singapore have been taking a noticeably tougher stance on enforcement.  

“Where dollar-related issues arise, local regulators often follow the US’s lead and piggyback afterwards with their own investigations. The sharing of regulatory intelligence has also made it easier for local regulators to benefit from US investigations,” says Phil Rolfe, CEO of P2 Consulting and former head of AML at Royal Bank of Scotland.

The biggest fine last year was the $2.9bn levied against Goldman Sachs after it reached a deal with the US Department of Justice to settle a probe into the investment bank’s role in Malaysia’s 1MDB corruption scandal.

“The size of fines has been increasing. But, as quite a few of the top 25 global banks have now been fined, it’s unclear if the fines can keep growing,” Mr Rolfe adds. “There is no point in fining a bank more than it can realistically pay, as regulators want to promote financial stability and big bank closing would lead to the opposite.”

In the UK, the Financial Conduct Authority recently launched criminal proceedings against NatWest over allegedly failing to comply with money-laundering rules in a move that suggests an aggressive shift in approach. This is the first time the UK financial watchdog has pursued criminal action against a bank.

A cat-and-mouse game

As more developed jurisdictions step up AML efforts, criminals have shifted attention elsewhere. The ideal jurisdiction boasts a stable financial system with access to global trade routes combined with weak or ineffective regulations and controls.

Jurisdictions under increased monitoring by the Financial Action Task Force in 2021 include the Cayman Islands, Ghana, Morocco, Pakistan, Panama and Senegal.

“As a criminal looking to launder money, you want two things: secrecy and rule of law. You don’t want the rule of law for you, but you want the rule of law for your money so it’s safe and that’s what many of these countries offer,” says Ms Martini.

For large banks that straddle the world, the cat-and-mouse game with criminals looking to invest dirty money becomes a balance between how much the banks want to invest in AML systems and controls compared with how much the fine will be if they get rumbled — and the fines have been getting bigger.

In 2015, BNP Paribas pleaded guilty to criminal charges and agreed to pay a record-breaking penalty of almost $8.9bn for dealing with countries that were the subject of US sanctions such as Sudan, Iran and Cuba. It remains the single heaviest fine ever levied at a bank.

“If BNP Paribas realised they we’re going to get fined such a large amount, they would have thrown a lot more money at AML processes,” Mr Rolfe says. “Compliance is a cost of doing business.

“At one end, banks are trying to generate new business and compliance procedures can be a barrier to new business. Because if you make it really difficult for criminals to get in, you’re making it really difficult for everyone to get in. There’s this constant tension between people trying to drive income, and people trying to stop the bad guys getting in.”

The AML departments at many large banks now employ thousands of people. In 2017, HSBC reportedly employed 6000 globally involved in compliance functions. NatWest, Barclays and Deutsche Bank each employ more than 2000 people globally in financial crime prevention, Mr Rolfe estimates.

“Banks tend to decide how much they will invest in compliance on a year-by-year basis. If they spent a certain amount a previous year, they might spend less the following year,” Mr Rolfe says.

“At the present time, banks’ ability to generate income is tight and senior management is trying to cut down on costs; and so asking for 5% more every year to spend on compliance is a difficult conversation to have, particularly if the bank hasn’t previously been fined.

“While there is a global desire to prevent money laundering there are barriers to sharing sufficient information to combat the issue. Global institutions compete with each other and so sharing any information is counter intuitive. And the prize is so big that the criminals will always keep innovating [to avoid the AML controls],” he says.

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