Poor AML policies and procedures cost banks millions

While the term “money laundering” may only be about 100 years old, the practice has continued for millennia. As far back as 2000 BC, records show Chinese merchants evading tax and smuggling funds to other countries. Officials from the lost city of Pompeii prosecuted pirates for plunder. And during the roaring twenties, the newly formed FBI hunted down America’s most infamous gangster Al Capone for his illegal funds.

The term “money laundering” aptly came from Capone himself, who bought launderettes and used them as a way of covering his illegal income. Today, money laundering – the process of making criminal or “dirty” money legitimate or “clean” – is a $2 trillion problem. Criminal cases are often connected to tax evasion, corruption, theft, or terrorist financing, as well as drug and human trafficking.

In this article, we’re uncovering how money laundering is evolving today, and what regulators are doing to tackle the global challenge.

Everyone has an obligation to report red flags, especially banks

Money laundering usually involves three stages: placement, layering and integration. “Placement” is the initial deposit of criminal money to a bank, trust, or investment firm. In the past, Swiss banks were notorious for harbouring these proceeds, with some films like The Italian Job celebrating the opaque privacy laws. However, this has changed since the 1980s. Today, it’s believed criminals tend to place dirty money in offshore accounts. While it is not illegal to use these vehicles – often based in the British Virgin Islands, Seychelles, or Panama – it is against the law to hide it. As UK minister Nadhim Zahawi is currently learning the hard way, these accounts must always be declared, along with the beneficial ownership.

The second stage, known as “layering” is when the criminal funds are moved around legitimate financial systems, such as banks. The more the money is moved, the harder it is to trace. Layering can be the most complicated and risky part of the process. Most importantly, it’s where financial institutions should catch criminals. When customers make suspiciously large deposits it’s up to banks to raise an alert, especially if the money is quickly transferred out again.

In December 2021, NatWest failed to act against one suspicious customer, Mr Fowler Oldfield, a jeweller from Bradford. Although Oldfield shouldn’t have been depositing more than £5,000 into his personal account each month, over a few years, £365 million flowed through. What’s more, £264 million was in cash that smelt damp and “musty”.  NatWest’s inaction was so serious that for the first time in history, the UK’s Financial Conduct Authority (FCA) prosecuted the bank in a criminal court. As Justice Cockerill convicted NatWest, she commented, “[…] Without the bank’s failures, the money could not have been effectively laundered”. The criminal charges levied against NatWest were, in part, due to technological blunders. Oldfield’s musty cash deposits were frequently registered by the system as cheques, making the laundering harder to track. We’ll cover the technological failings of banks in more detail below.

The final stage of money laundering is “integration”. This often means purchasing assets with laundered money. It could be anything from art to superyachts. At this point, it’s the salesperson or estate agent who should raise an alert if the source of money seems suspicious. In recent years, estate agents selling prime London properties have come under fire for not doing this. Catching money launderers requires a coordinated effort from regulators. For financial institutions, the cost of getting it wrong can be eye-watering.

Poor AML controls costs banks millions in fines

Recently, financial regulators clamped down hard on Anti-Money Laundering (AML) controls. Of the $5.37 billion fines issued globally in 2021, a staggering $5.35 billion (99.6%) were for non-compliance with AML regulatory standards. Often, these fines are related to outdated legacy technology and failures to upgrade software.

One example was HSBC. In December 2021, the bank was fined £91.3 million by the FCA for its “deficient transaction monitoring controls”. Specifically, there were gaps in the systems used to indicate suspicious activity and data accuracy. Since HSBC did not contest the findings, the penalty was reduced to £63.9 million.

More recently, Guaranty Trust came under fire for its inadequate AML controls. In January 2023, the bank was slapped with a £10.9 million fine for failing “to undertake adequate customer risk assessments, often not assessing or documenting the money laundering risks posed by its customers”. This was not the first time the bank had received a similar penalty, something the FCA was quick to note. As Guaranty Trust did not challenge the fine, it was also reduced by 30%. Implementing a regulatory change management solution that identifies gaps in company risk assessments and onboarding policies could have highlighted possible control issues.

Around the world, AML fines are ramping up. Over the pond, the Securities and Exchange Commission (SEC) slapped US giant Wells Fargo with a $7 million fine in May 2022. The bank was punished for its inadequate technology. The SEC warned banks that it was “sending a loud and clear message to other registrants that AML obligations are sacrosanct”.

In September 2022, the Financial Industry Regulation Authority (FINRA) went further and issued strict guidelines on the potential penalties for violating AML rules, indicating that a crackdown is brewing.

Pressure is mounting for banks to implement RegTech

Keeping track of the complex matrix of AML regulations is arduous work for compliance teams. And it’s about to become infinitely harder. As the war in Ukraine sends tremors across the world and the Taliban uprising raises concerning questions, the pressure for banks to tighten up their AML controls to deter money laundering is mounting. It’s believed that around $2 trillion is laundered every year, but just 1% is detected and dealt with.

In the EU, the European Council introduced strict new AML rules in December 2022. Cash payments of over €10,000 will become impossible. There will be a crackdown on anonymous crypto wallets. And enhanced transparency over beneficial ownership will come into force.

The US is also imposing significantly more pressure on banks. In May 2022, the Treasury released its strategy to combat money laundering and terrorist financing.

China is also joining the movement. The country recently unveiled its “three-year plan for combatting money laundering and crimes” which amends the existing laws.

The universe of local, national, and international AML rules is compounding at an unprecedented rate. For humans, it will be impossible (and expensive) to keep up to date with every rule in every jurisdiction. The only way to do this is with Automated Regulatory Intelligence (ARI).

Automated Regulatory Intelligence monitors new and changing AML regulation

Across the world, we know there are hundreds of different rules and regulations targeting regulation and they are in a cost state of flux. The only viable way to monitor every changing rule is to use a regulatory change technology solution.

Automated Regulatory Intelligence (ARI) scans every source of regulatory content and can automatically detect the smallest change in AML regulations. Once detected, the solution can alert the compliance team and other relevant stakeholders of relevant changes.

With CUBE, your firm can have complete oversight of the entire Universe of AML obligations and assess your risk profile. CUBE’s ARI can identify gaps in your compliance programme and eliminate non-compliance blind spots.

AML controls can be lifesaving, especially for the most vulnerable

With money laundering, there is so much at stake. Pushing the multi-million fines and insurmountable reputational damage aside, banks that fail empower criminals. This is the most terrifying part of all. When the system doesn’t work, corrupt politicians, dictators, traffickers, drug lords and terrorists get away with their crimes. What’s more, they become wealthy. It’s an incentive for others to follow in their footsteps.

Recently, the extent to which UK money laundering has fuelled the war in Ukraine has come screeching into the spotlight. The UK government issued a stern report on systemic complacency within the financial systems. The report explains how money laundering, “undermines our national security by supporting corrupt and autocratic regimes around the world, subverts our rule-of-law systems to hide and protect ill-gotten assets, deprives the world’s poorest communities of resources, prices citizens out of our housing market and infiltrates our academic and democratic institutions”.

While it’s true that money laundering costs banks millions, the real victims are the most vulnerable. As well as the victims of war, there are many others who suffer. As of 2018, 40.3 million people are in some form of slavery across 199 countries. According to a Refinitiv report, this is partly the fault of “the banks who unwittingly allow slave masters to launder their profits”. In countries like India, the amount of money lost to tax evasion and money laundering could have funded 2,000 new schools for children. Offering education to all uplifts entire societies and empowers people to climb out of poverty. But as money laundering continues, these same children will likely end up working in horrific conditions for the very people depriving them of school.

To overcome the horrors of money laundering today, financial institutions must use the most comprehensive regulatory technology and ensure that effective AML policies and controls are in place.

Keep ahead of emerging AML regulations by speaking to CUBE.