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Smashing Financial Crime: how are we doing?

I watched a TV programme a couple of nights ago on how US special forces operated to combat terrorist operations in Iraq. 

They put all their intelligence agencies in a hangar in the operations zone, conducted nightly operations and fed every scrap of intelligence continuously into a large database, so building up an increasingly complete and dynamic view of their adversaries’ movements, tactics and plans. 

The intelligence guided where the next nightly operations were sent, who they targeted and how they approached each nightly operation.

I wondered whether this might be a useful analogy for how a modern anti-money laundering or anti-fraud operation might be organised, where data about a transaction which looks unusual is spotted by an industrial-strength technology and where the customer’s account data is rapidly retrieved, patterns studied, forensics carried out. Customer transaction monitoring would be intensified until the operation can decide whether a criminal investigation is needed.

The Financial Action Task Force (FATF) is the international body whose goals are to set standards and promote implementation of measures to combat money laundering, terrorist financing and related threats to the integrity of the international financial system.  It works in co-operation the G20’s Anti-Corruption Working Group (ACWG) whose 2015-16 Implementation Plan is in full swing.

Surely, I thought, there I would find some clues to what is actually going on in financial services financial crime fighting?

Beneficial ownership

Hundreds of billions of dollars of corrupt proceeds are considered to be beyond the arm of the law due to lack of transparency about who the beneficial owners are.

While the ACWG urges its members to adhere to its Beneficial Ownership Transparency principles and implement FATF recommendations, it also exhorts financial services institutions, bank and non-bank, to identify beneficial owners as an important Know Your Customer principle.

 But as the mechanisms used to hide beneficial owners are not typically illegal in the jurisdictions in which they operate, it can be difficult for banks to carry out what they are being asked to do.

And, as dealing with business entities whose ultimate owners are not known risks regulatory censure, the effort to force banks to comply can have the opposite effect to the one intended, motivating bank risk-avoidance, rather than informed risk-taking.

Private Sector Transparency

Many well-intentioned companies struggle to comply with the volume of regulation and complexity across and within jurisdictions as they enter new markets and conduct cross-border business dealings.

Again, the ACWG urges its members to educate their private sector on anti-corruption ethics and compliance best practices. And again, it asks them to consider the role of the financial sector in preventing and detecting inflows of corrupt funds.

I interpret this to mean that it expects banks to improve their anti-money laundering performance by implementing better financial crime prevention systems, changing internal culture and rigorously monitoring compliance with their own AML processes.  

What is the role of our own UK regulator in all this?

The unintended consequences of banks’ compliance with these principles are currently the subject of some sharply critical comment from some progressive commentators.

When the FCA recently fined Bank of Beirut £2m for weak AML controls and stopped it from dealing with High Risk jurisdictions for four months, the Centre for Global Development objected that:

- the measurement of ‘high risk’ was based on Transparency International’s Corruption Perception Index, itself a measure of public sector corruption, not money laundering risk

- that none of the twelve sources used to construct that Index involved perceptions of money laundering risk

- that the score of 60 or below used to define ‘high risk’ meant that 80% of the 175 countries in the index were ‘high risk’ and that there was no sharp increase in the risk of money laundering occurring at that ‘high risk’ cut-off point.

In short, the regulator, it argued, was using a poor proxy and, dependent on your point of view, has the opposite effect than the one intended.  Countries starved of correspondent banking relationships have to find other, less transparent ways to transact their business.

‘Financial Abandonment’

Separately, the serious effects on Developing Countries’ economies of bank de-risking strategies are highlighted, where particular sectors and even countries are exited from banks’ books. 

Recall that de-risking is a bank’s mitigation to the risk of regulatory censure and penalties. It means unwinding positions up to and including getting out altogether.

One sector impacted in this way is Money Transfer, where it is claimed that only the largest operations have escaped the denial of bank accounts. Global remittances of $400bn are said to be at risk from reduced competition, the conduct of humanitarian aid and recruiting staff overseas.

Equally, the withdrawal of correspondent banking services from developing countries’ banks is claimed to reduce access global capital and damage trade financing, a practice labelled ‘financial abandonment’ by Bank of England Governor Mark Carney.


Bloomberg Business in February branded the FATF ‘this incompetently authoritarian global organisation’ and pointed out some of the malign, unintended, effects of its policies and programmes:

- US money transfers to Somalia cut off by a Californian bank of about $180m. Remittances to Somalia are understood to account for around a third of its GDP

- FATF compliance is expensive for poor countries and the benefits, so far, are deemed to be heavily outweighed by the costs

- That the combination of these pressures will drive ‘grey’ money further underground rather than bring it to light.

It pointed out that FATF members, many of which are also G20 Members, are themselves far from fully compliant in respect of their own policies.

On this last point, the US Justice Department would concur, at least to the extent of some of the largest global banks.

The Guardian newspaper reported in June that HSBC Switzerland had received a record £27.8m fine for ‘organisational deficiencies’ which had enabled money laundering by its clients.

The US Justice Department prevented full details from entering the public domain as they would have showed money laundering procedures ‘have flaws too bad to be revealed’, pointing out that they would be helpful to criminals intending to launder money.  

It did however reveal that ‘understanding of money laundering and financial crime red flags continues to lag’ in some parts of the bank; that ‘lack of due diligence’ exposes the bank to ‘serious money laundering and sanctions risks’.


So, returning to that television programme as our text book example.

Can we say with confidence that the forensics out there in the global financial world are collaborating, bringing names to light, sequestering ’grey’ money and restoring it to its rightful owners?

It’s clear enough that technology and the tools have been invented and, in many banks, deployed to good effect.

It’s also true that hundreds of millions of dollars of dirty money are being identified and intercepted.

And yes, we can be sure that the rich countries are promoting cleaner global business and financial practices loudly and clearly.

But it seems also that the regulators risk punishing the innocent.

That some of the bigger banks are finding it tough to shake up their culture and practices quickly and thoroughly enough.

And that the international machinery, despite its intentions, drives bank risk-aversion and may simply stimulate new ways to launder money.


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