The latest report by the FSA makes for some very sorry reading indeed.
The report entitled '... Banks’ management of high money-laundering risk situations - How banks deal with high-risk customers (including politically exposed persons), correspondent banking relationships and wire transfers...' is a shocking denunciation of the way in which a series of simple regulatory requirements have become so widely flouted by the financial sector.
The FSA states in the preamble to its Executive Summary;
'... As a result of this review and our concurrent casework, we have referred two banks to our enforcement division after identifying apparent serious weaknesses in their systems and controls for managing high-risk customers, including PEPs. We are considering whether further regulatory action is required in relation to other banks and further cases may be referred to enforcement...'
What the FSA has found in its survey is that a great number of those banks inspected '... appeared unwilling to turn away, or exit, very profitable business relationships when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable...'
Consider the following scenario! A Client Relationship Manager from Megabank plc is chatting to a new client referral.
CRM: '...How much did you say you wanted to introduce to us, Your Excellency..?'
Client: '...My dear chap, just call me Mustafa...'
CRM: '...Thanks Mustafa, I think you mentioned something in the region of 100 million, was that pounds or dollars..?'
Client: '...Well, it's in dollars right now but we were hoping you could arrange for it to be converted to Sterling and Euros. We are not anxious to upset our US friends who have only recently transferred the latest tranche of their humanitarian aid package to out Treasury. Our President is anxious to keep them onside..!'
CRM: '...I see no problem in making the conversions using some of our own facilities abroad. Our Wealth Management Division has branches in a number of interesting foreign jurisdictions...'
These institutions appear to have lost sight of the primary point of the AML Legislation and Regulations, which is to prevent and forestall money laundering, and in recent months we have seen an exceptional amount of money exiting the Middle East as the Arab Spring has started to take effect. Have these banks somehow lost sight of the fact that many of these millions may be the proceeds of the looted Treasuries of countries seeking to overthrow years of cruel dictatorships, or just as likely, the rake-off from foreign loans and aid packages made to countries with difficult political situations! This what the FSA means when it talks about '... when there appeared to be an unacceptable risk of handling the proceeds of crime...'
'... Over half the banks we visited failed to apply meaningful enhanced due diligence (EDD) measures in higher risk situations and therefore failed to identify or record adverse information about the customer or the customer’s beneficial owner. Around a third of them dismissed serious allegations about their customers without adequate review...'
Client: '...You may have heard some rather unhappy stories about our President and his family in the news recently. I assure you they are not true, merely planted by enemies who have no respect for our President's wisdom and love for his people...'
CRM: '...We understand only too well how such unfair allegations can be made against men of impeccable reputations, please do not concern yourself...'
If over half of the banks reviewed were willing to adopt these cavalier attitudes towards high-risk clients, then it is clearly time that much more stringent oversight was brought to bear on them. It is not before time, these institutions have a long time to get used to the effect of the regulations. However, it seems not to have mattered one iota.
'... Three quarters of the banks in our sample failed to take adequate measures to establish the legitimacy of the source of wealth and source of funds to be used in the business relationship. This was of concern in particular where the bank was aware of significant adverse information about the customer’s or beneficial owner’s integrity...'
How might we begin to describe this kind of response to regulation? Is it merely an accident, or perhaps just coincidence?
Difficult to maintain that kind of argument in the face of the statistics. No, the answer is the same old typical arrogance which has been demonstrated by so many financial institutions towards financial regulation ever since the days of the South Sea Bubble.
You doubt my memory?
After the South Sea Bubble in 1720, Parliament passed legislation outlawing the short-selling of stock. Did this stop the boys in the City from doing it? No, of course not, except now, they could not write down their deals for fear of providing evidence of short-selling. So they had to stand by their verbal agreements. Hence the motto of the Stock Exchange 'My word is my Bond'.
Many people think this phrase is proof-positive of integrity and honest dealing, when in reality it is the proof of a thieves charter!
No, it's just good, old-fashioned arrogance, borne out by the observation made by the FSA;
'... At a few banks, the general AML culture was a concern, with senior management and/or compliance challenging us about the whole point of the AML regime or the need to identify PEPs...'
How can any regulator possibly deal in a fair and reasonable way with a regulated member who challenges the entire basis of an important piece of legislation? The only way will be to do as the FSA assert at the end of the Summary;
'... We will, where appropriate, use our enforcement powers to reinforce key messages in this report to encourage banks and other firms to strengthen AML systems and controls and deter them from making decisions which do not take adequate account of money laundering risk...'