The effectiveness of controls implemented by banks to stop money laundering and terrorist financing are coming under increasing scrutiny from global regulators, as ever more rights-aware societies push to see financial criminals, among them corrupt bankers, behind bars.
This means that the days of “banking blind” are over, Martin Woods, a financial crime officer at information service provider Thomson Reuters, recently told Moneyweb.
Banks are essentially banking blind, Woods explained, when they allow nominee parties to bank on behalf of third parties, who remain anonymous as a result. Commonly known as trust and company service providers (TCSP), these nominees are often used in the conduct of money laundering activities.
Money laundering is when criminals direct the proceeds of their crime towards more legitimate business practices or assets, in order to disguise their true origin and avoid prosecution. When banks are implicated, they could be indirectly funding terrorist atrocities or trade in illegal drugs.
The Channel Island of Sark was wrapped up in TCSP and tax evasion scandals in the late 1990s when it was found that its 600 inhabitants held 15 000 company directorships between them, according to this BBC article. In an October 2010 report, the International Monetary Fund (IMF) found that the British Virgin Islands had seen more than 800 000 company incorporations since 1984.
Heads must roll
Recently, large global banks including BNP Paribas, HSBC, Standard Chartered and Credit Suisse have been slapped with massive fines for facilitating money laundering and terrorist financing.
On Monday, the Wall Street Journal reported that French bank BNP Paribas had agreed to pay a nearly $9 billion (R96 billion) fine for violating US economic sanctions against Sudan, Iran and Cuba by using satellite banks to disguise its role in illicit transactions.
“This is a staggering sum of money that could hurt shareholders and may even cost employees their jobs,” said Woods. According to the WSJ article, it is the largest fine ever paid by a bank for violating US sanctions and comes at a time when the country’s Justice Department “is eager to prove no financial institution is ‘too big too jail’”.
“The public appetite in America is to say, who is accountable? Who is going to prison for this?”, Woods commented. Even among European regulators, Woods said there had been a paradigm shift towards holding senior bank managers criminally liable for conducting untoward business.
“The public wants to see bankers held responsible for their actions, even if they have already left the bank. They don’t want to see pension funds, which may for example hold significant shares in BNP Paribas, take the hit. Individuals who took decisions and embarked on certain courses of action are not held accountable in the way the public feels they should be,” Woods continued.
Banks should know their customers
This highlights how crucial it is for banks to have adequate Know Your Customer (KYC) controls. “It is incumbent on banks, in the provision of international financial services, to ensure they know who is pulling the strings and not only those pretending to make decisions. The nominee may be sent to prison one day, but these sub-criminals are only assisting the real criminals to hide,” Woods added.
In April, South Africa’s Big Four banks were collectively fined R125 million for failing to implement anti-money laundering (AML) controls. Woods said that one of our major banks told him that the “US dollar clearer” had recently knocked on its door and asked questions about AML controls.
“All US dollar transactions in the world are cleared in the state of New York. If you transact in dollars or are a bank offering dollar-based facilities, you are embracing both the Federal laws of the US and those specific to the state of New York,” he explained.
Discussing the globalisation of AML risk, Woods pointed out that it was in fact the Manhattan District Attorneys Office that started investigations into major European banks on the basis that it had jurisdiction, since all dollar transactions are cleared in its state. He said it was important that South African banks transfer confidence, rather than risk, to international banks by complying with global AML standards.