Overview

Anti-money laundering (and ‘CFT’ – counter financing of terrorism) has become both a political and an enforcement priority around the globe in recent years. Regulators and prosecutors have publicised the risks posed to the integrity of global financial systems by those seeking to launder the proceeds of crime or to finance terrorism.

In response banks have embarked upon programmes of de-risking. Now regulators and policy-makers are warning that broad de-risking is unfair, anti-competitive and disproportionate. The approach should be the management rather than the avoidance of risk. How does a firm navigate recent legislative changes, and the regulators’ AML focus, while managing risk in an effective and proportionate way?

The new environment: recent changes in the law, the regulatory picture, and an increase in levels of global co-operation

The Financial Action Task Force (‘FATF’) - an inter-governmental body established to set standards and promote measures to combat money laundering – is growing in stature and credibility and setting the tone for global co-operation in this area. With 36 current members (and ‘observer status’ held by the IMF, ECB, EBRD, World Bank and the UN), its approach is to publish ‘Recommendations’ for legislation combined with ‘Assessments’ of a country’s progress in implementing Recommendations. FATF’s expansion into Asia is marked: Singapore, Hong Kong are joining; Japan has been criticised while South Korea has been commended.

Announcements by European heads of state in the autumn of 2014 have given rise to the new Fourth EU Anti-Money Laundering Directive, which came into force in June 2015. It’s aim is to strengthen EU defences against money laundering and terrorist financing, and to enact FATF Recommendations. The key changes are: 

  • the Directive requires corporates to obtain and hold adequate and current information on beneficial ownership, including details of the beneficial interests held;
  • that information will be available to a wide range of people: regulators, financial investigators; even the press (those with a ‘legitimate interest’) will be able to obtain certain details of a corporate’s ownership;
  • less serious offences – including tax offences - are now predicate offences for money laundering;
  • there are additional precautions for PEPs (politically exposed persons), and due diligence and traceability requirements are increased; and
  • whistle-blowing is encouraged and there are hugely increased fines.

AML has been the subject of key enforcement decisions – and large monetary penalties - across the financial services industry: the UK Financial Conduct Authority’s £8.75m fine of Coutts in 2012, and their innovative action against the Bank of Beirut in March 2015 which combined a £2.1m fine with a 126-day restriction on taking on new clients; the US Department of Justice entered a Deferred Prosecution Agreement with global money service business, Moneygram, in 2012 – for offences including failing to maintain an effective anti-money laundering programme; and in January 2014, the US Office of the Comptroller of Currency (among other US Regulators) settled with JP Morgan Chase Bank for $461m for failing to report suspicious transactions connected to the Madoff Ponzi scheme.

Cross-jurisdictional cooperation is fast becoming the norm, with cross-border enforcement markedly on the rise: 

  • US enforcement action against China Construction Bank Corp in July 2015 for deficiencies in its AML programme;
  • a decision in July 2015 by the French financial regulator, ACPR, to fine Italian life insurer Generali €5.5m for failures in AML and CFT controls;
  • the FCA’s June 2015 £4m fine of Indonesian corporate Bumi for systems and controls failings around related-party transactions; and
  • US enforcement action against Commerzbank in March 2015 for alleged sanctions coupled with AML violations which resulted in a $1.45b fine.

The clear message is that enforcement action can arise in any jurisdiction in which a corporate does business – the ‘home’ regulator is no longer the only one to watch.

De-risking - the dilemma and the dangers

The terms of settlements and DPAs, combined with an attempt to respond to the new regulatory environment, have caused banks to de-risk their books, shedding categories of customers and business in sectors and countries considered to pose a high-risk of AML.

However, firms are now facing criticism from regulators for their approach to de-risking:

  • effective money-laundering risk management need not result in wholesale de-risking;
  • de-risking adversely affects particular sectors (including charities, NGOs, Fin Tech companies and money service businesses) and particular business activity, notably correspondent banking;
  • it forces customers towards smaller or more marginalised financial institutions with less resources available to combat money laundering; and
  • it undermines the principles of access to banking by precluding whole groups.

The FCA acknowledges that banks are seeking to comply with legal and regulatory requirements and that there is a fine balance to be struck. It has said that it requires banks to put in place and maintain policies and procedures to identify, assess and manage money-laundering risk. These policies and procedures must be comprehensive and proportionate to the nature, scale and complexity of the bank’s activities.

It seems likely that ‘appropriate procedures’ will be interpreted as requiring a firm to take an effective, judgment-based approach to accepting or maintaining individual business relationships. 

Broad and generic de-risking may bring adverse regulatory attention. The warning has been sounded that the FCA’s ongoing AML work will now consider whether firms’ de-risking strategies give rise to consumer protection and/or competition issues.

Next steps

  • Analyse your approach to de-risking, with a move away from generic to bespoke;
  • be ready to justify de-risking decisions to the regulator. The use of blended risk analysis (e.g. AML and ABC or AML and sanctions) may help in articulating risk management decisions;
  • look out for the following further developments:
    • further guidance from the FCA on how to approach de-risking; and
    • FAFT is gathering evidence in preparation of a report on the causes, scale and impact of de-risking. A FAFT report on terrorist financing is due this autumn, and the UK will be assessed by FAFT in 2016.