With the public accusation of money laundering against Standard Chartered, and its subsequent settlement with the New York State Department of Financial Services, it got me thinking – how do the regulators ensure banks are playing by the rules?
Without infinite resource at their disposal, regulators currently have to focus their attentions on a select number of cases. If we look at the UK industry for example, with 250,000 or so Suspicious Activity Reports raised every year, and millions of Suspicious
Transaction Reports, this is one big challenge! Given they can’t realistically inspect every single transaction, the regulators have to allow some degree of trust in the banks that report into them whether they like it or not. This creates an uncomfortable,
but necessary, relationship between the poacher and gamekeeper. Ultimately the gamekeeper must trust the poachers not to go and shoot millions of protected species off-season, bagging large profits whilst rendering the ecosystem unstable. They certainly wield
a large stick in the form of fines and possible legal action, but with potentially large gains, and the chance of it going unnoticed, how resilient is this approach?
Ultimately, I’m not convinced things are going to stay this way forever. Governments all over the world have seen the dangers of letting the banking sector self-regulate, and are eager not to let this happen again. They’ve given the regulators the power
to punish, but this doesn’t necessarily equip them with the ability to detect erroneous (intentional or otherwise) compliance reports submitted by the banks that hide the true picture. In my world, I would love to see the regulators independently looking at
the transaction data from each of the banks for anomalies, and patterns predictive of fraud, money laundering or criminal networks operating intra or inter-bank. Yes, the banks already largely do this, but a second independent and consistent layer of corroboration
is a necessity in my view. It would also provide an opportunity to compare and contrast the aggregated activities of banks in similar peer groups – a very common fraud detection practice. Eventually the regulators will become centres of analytical ‘best-practice’,
providing hands-on advice to the banks on their watch, and be able to disseminate the knowledge they’ve amassed across the financial services industry. At the very least, this would allow them to better prioritise the unworkable number of cases they are receiving
at the moment.
If the US accusations are correct, this hands-on approach would have yielded alerts worthy of investigation years ago, reducing the negative impact not only for Standard Chartered but also the banking sector as a whole.