As money-laundering is a cross-border problem, banks and regulators need to take a global approach to control the risks effectively.

In March, the UK private bank Coutts & Co was hit with a £8.75m ($14.16m) fine for taking "an unacceptable risk of handling the proceeds of crime"; the highest ever penalty from the UK regulator for anti-money laundering (AML) breaches. The following month, the Office of the Comptroller of the Currency (OCC), the US Federal regulator, imposed a robust and prescriptive enforcement action on Citibank over AML weaknesses. Both actions are indicative of a global crackdown on money laundering and demonstrate an increasing emphasis throughout the international financial community on firms’ own responsibilities to mitigate this type of risk.  

The Arab Spring of 2011 provided a reminder that dictators can be among the world’s wealthiest people and brought the very real risk of money laundering back to the attention of the international wealth management community. Increasing globalisation and instability in world order have created a situation in which jurisdictions with weak controls risk exposing themselves and the wider financial services community to money laundering. Whether or not there has been a real, or just perceived, increase in the volume of financial crime as a result of this, regulators around the world have certainly stepped up their game to drive improvements in regulated firms.

Although they vary from jurisdiction to jurisdiction, any country with a credible financial services industry will have regulations and guidance around the necessary controls to manage higher risk client relationships, including politically exposed persons (PEPs). There is a dangerous misconception that tightening controls means raising the bar higher in terms of who is or is not let through. Of greater importance is ensuring that controls are comprehensive, robust and have real teeth.

More than box-ticking

AML oversight needs to be embedded in every aspect of a business, not least in the context of new products and business development. Too often firms assume that AML is a box-ticking process, which is a fundamentally flawed assumption. AML needs to be an evolving process of frequent and thorough review, felt at all levels of the business, especially where higher risk clients or business lines are concerned. 

The control framework becomes much more challenging for global firms who face a global task. All of the jurisdictions in which a bank operates should be subject to the same rigorous onboarding procedures, unless internal barriers are in place to restrict a customer’s movement within the firm’s network of offices and businesses. However, this is not always the case in practice. This can open up the possibility that higher risk clients, including PEPs, will gain access in jurisdictions with weaker controls and then migrate to other jurisdictions in which the bank has a presence. Therefore, even jurisdictions that operate tough controls are not immune to access by higher risk customers.

A global problem needs to be tackled by a coordinated approach from jurisdictions around the world, which is easier said than done. While the UK and the US now operate essentially equivalent standards, those across the EU have not always been consistent. Where inconsistencies exist, so do weaknesses. Following a recent European Commission report on the effectiveness of the EU’s AML regime, European standards are likely to become more closely aligned to the UK’s risk-based approach and the regime is to be widened to combat new threats. Hong Kong’s regulator has also recently begun a consultation to develop a new, improved set of guidelines on AML, while the Financial Action Task Force (FATF) has published several papers recently reminding the financial community of the need for consistent, coordinated international AML efforts.

Global regime

Despite these good intentions, global coordination on AML does not exist in any formal sense and this will never be truly possible in the absence of a global regulator. The FATF, once a heavyweight force, no longer has the power to sanction, and without any similar body to take its place, success in combating money laundering will depend on every country individually playing its part and ensuring that it is not the weak link.

A seamless global regime may be a pipe dream, but a strong degree of international co-operation is possible, as evidenced by the coordinated efforts to tackle terrorism that have emerged on the political landscape over the past few years. If the threat of terrorist financing can put robust AML controls at the top of the agenda internationally, then this will be the first battle won, if not the war.

Nick Matthews is a member of financial services consulting firm Kinetic Partners, specialising in forensic advisory.

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