Watchdogs and Regulations: How Corporates can Keep a Clean Sheet

Examples of the tougher regime included the
record fine of US$8.9bn
that the US slapped on France’s BNP Paribas, while China put
executives of pharmaceuticals group GlaxoSmithKline
on trial for alleged bribery.

Banks continue to work towards compliance with many of the new global directives being issued by regulators post the global financial crisis. Anti-money laundering (AML) remains a key focus area for bank leaders and regulators, with banks and individuals facing potential threats of criminal prosecution for non-compliance in addition to the increasingly eye-watering fines.

The new record-high penalty imposed on BNP Paribas is only one of many large fines that the US regulators have levied for money laundering and sanctions breaches, and European regulators are also becoming increasingly aggressive when they discover similar incidents. The reputational as well as financial cost could seriously damage even the largest firms.

The United Nations Office on Drugs and Crime (UNODC) estimates that 2.7% of global gross domestic product (GDP), or nearly US$2 trillion, is being laundered every year. Singapore authorities prosecuted a record number of money laundering cases in 2013, seizing more than US$90m of suspected criminal proceeds during the year. The confiscations come on top of new laws providing fines of up to US$800,000 on firms and US$397,000 on individuals, with jail terms of up to seven years. The Reserve Bank of India (RBI) has also levied a US$1m fine on six retail institutions for violations of money-laundering and other regulations.

Collectively, these actions send out a clear signal that regulators are increasingly enforcing penalties for instances of non-compliance with AML and sanctions regulations. Many governments around the globe have already established comprehensive AML regimes; increasing awareness of the phenomenon and providing the necessary legal and regulatory tools to authorities charged with combating the problem.

In line with the actions of US regulators since they first began punishing and naming firms with inadequate controls, global regulators are also likely to continue to increase the size of fines. In response to the international pressures to clamp down on money laundering, corruption, fraud and terrorist funding, regulators are expanding their investigation teams and are handling an increasing number of reported potentially suspicious activities. In part, the increase in this cost is being reflected in the heavier fines that are levied.

The pace of change in regulation is also increasing as the international community responds to the work of the inter-governmental Financial Action Task Force (FATF) in particular, as well as other international bodies. Current changes include the imposition of risk-based assessment of customers and their business in China, a new set of 20 rules to be implemented by firms in Taiwan, and enhanced customer due diligence requirements in Australia, in each case with full compliance dates at the end of 2015.

With the FATF inspecting all regional countries compliance against their latest principles over the next three years we can expect more changes to follow; in particular further moves towards risk-based assessment.

What Should FIs Focus on?

Financial institutions (FIs) must not underestimate the complexity of providing global financial services. Firms that plan to branch out onto the global stage should be aware of the risks of conducting international business.

Financial firms must comply with sanctions imposed by individual governments or via global bodies, such as the United Nations, as part of the overall anti-money laundering and terrorist financing control.

Financial firms should also improve their IT infrastructure to detect and report suspicious activity. A firm’s AML solution should have the capability to filter against specific sanction requirements as well as satisfy its intended AML needs. Sanctions may be country- and industry-specific, or relate to trading in certain currencies. For example, although the US may have sanctions against conducting business with a particular country, there may be no restrictions on doing said business from another location, such as China. However, the firm must not use the US dollar (USD) as the settlement currency or it would still be in breach of the US sanctions. Firms need to be aware of all global sanctions to avoid the risk of fines and censure.

Another key aspect that a firm must understand and follow is the know your customer (KYC) control. By following KYC controls, a firm can reasonably verify whether their customers have earned the money they want to transfer overseas through legitimate means, and can reasonably assess the legitimacy of the reason for the transfer.

Across a branch network as large as a Tier 1 bank, it is impossible to manage and oversee these controls centrally unless a system is implemented to enforce and electronically document the compliance with KYC processes and procedures to administer management review of the large amounts being transferred. Although many authorities in Asia have implemented AML customer risk assessment guidelines that will help address this issue, financial firms should be proactive rather than wait for the target review deadline in their jurisdiction.

Over the next few years, regulatory changes around AML and terrorist financing are likely to occur at a faster rate than ever before. This will inevitably impose a requirement on all financial firms to monitor and report any suspicious activity to the regulatory authorities, usually backed-up with the risk of fines, regulatory sanctions and reputational harm.

Ensuring compliance with AML regulations is an enterprise-wide operation requiring distributed solutions accessing centralised data. Firms will need end-to-end AML solutions to detect flows of money laundering, thereby reducing risk across the enterprise.

Flexible rule sets and risk models that can cover all AML scenarios are also essential to meet regulatory conditions in every jurisdiction in which a firm operates, reducing compliance costs and providing enterprise-wide visibility and intelligent detection to accurately assess and respond to any potential threats and minimise risk to the firm.

All in all, a focus on the guidance and principles issued and regularly updated by the FATF is becoming increasingly essential as is having systems and processes that can be readily adapted to change.


Related reading