I admit it, several of my friends launder money, and yours do to. The four cases below show just how easy it is for “innocent” people to assist in money laundering.

Your firm might be setup to fail its AML and will be until you resolve the key issue at the core of AML.

Right at the centre of finance is a dirty secret. Money launderers pay fat fees and serving them is very profitable for the firm (short term) and for the employees and directors.

A great man once told me that “things don’t just happen”, they happen because someone made them happen. Money laundering doesn’t just happen to firms, there is almost always a conscious decision to allow it, and sometimes to facilitate it.

Let’s look at some recent AML cases and you will see where I am coming from:

  • Wash trades – Deutsche Bank allowed clients in Russia to sanctions bust by buying shares in Russia for Roubles and selling the same shares in London for Euro/Dollars. It took several people in Deutsche to set up these trades which lacked any economic purpose other than to move money out of Russia.
  • PEP Checking – Coutts in Hong Kong didn’t check if clients were either PEPs or associated with PEPs for three years. If you don’t identify your PEPs and their associates you can’t effectively monitor their transactions on a risk weighted basis.
  • Money transfers – Banamex (part of Citibank) should have been letting clients transfer money from the US to Mexico but mainly allowed clients to transfer large amounts from Mexico to the US. Cartels used the remittance to move their funds into the US.
  • 1MDB – several private banks in Singapore (Falcon and BSI amongst others) executed huge transactions for clients who should have raised multiple red flags but didn’t.

I could go on listing cases but the cases above illustrate that in each instance, the traders, relationship managers or senior management had a direct interest in allowing money to be laundered.

Almost all AML failure is caused by conflicts of interest

A HUGE CONFLICT OF INTEREST

Financial services are bonus driven. Employees and directors fund their day to day expenses with their base salary. Bonuses pay for the high-end cars, exotic vacations and flying lessons

And the bonus culture goes all the way to the top of firms. If a salesperson makes big bonusses then their boss is going to be rewarded, and all the way to the CEO.

AML is no different from any other conflict of interest a regulated firm has, only the conflict of interest lies between the client’s activities and the law, not the firm and their client.

Usually, financial regulation exists to protect clients from the finical services firm. In the case of AML, it is the law that is trying to prevent the firm from serving their client

OPENING THE LID ON AML

The 1MDB case in Singapore opened the lid on private banking.

The CEO of Coutts in Singapore, Hanspeter Brunner, defected to BSI and took almost the whole office with him in 2009. For the full story, read the excellent Bloomberg article: The Charismatic Banker Who Led Singapore’s BSI Into the Abyss.

People connected to 1MDB rapidly became BSI’s largest and most profitable clients. Private bankers at BSI in Singapore got bonuses as big as SGD 5.5m and Brunner shared in their financial success.

Profit and bonuses were put ahead of compliance because the senior management in Lugano, Switzerland were only interested in their own profits and bonuses.

SINGAPORE’S SOLUTION

In June 2017 Ravi Menon, of Singapore’s MAS, said that the regulator had made a conscious decision to punish individuals more than firms. Smart move. You can fine HSBC $1.9bn but HSBC does not care, it doesn’t have feelings because it is a legal fiction. Shareholders carry the cost of fines but directors and staff still get their bonuses.

Singapore had been stung by criticism of its weak AML environment and cracked down on some of the Singaporean based players in Malaysia’s 1MDB theft (the Government of Malaysia denies any assets were stolen).

Singapore successfully prosecuted a number of bankers for money laundering and 3 people received custodial sentences. Yak Yew Chee of BSI settled for SGD 7.5m (which tells you something about his remuneration) in addition to his custodial sentence.

FIRMS ARE RESPONSIBLE FOR AML

Until regulated firms start taking AML seriously, they will keep getting fined. As long as the financial rewards encourage employees to facilitate money laundering then you can’t, and won’t, see a decrease in money laundering.

“Heads, I win. Tails, you lose.” AML can’t work like that

If a firm finds that employees are either facilitating money laundering or failing to implement/enforce AML controls then they have to take immediate and severe action. While many jurisdictions make it almost impossible to terminate employees, it is possible to withhold their bonus, and if the bonus is highly material to the employee, that punishment alone will be a warning shot to their colleagues.

The cynic in me tells me that if employees were made financially responsible for their AML violations they would become AML experts. You wouldn’t have to provide them with training because they would proactively train themselves.

The reason that we have to force employees and directors to attend AML training is because they really don’t want to do it!

ACTIONS, NOT WORDS!

If firms find their staff have either been negligent or wilfully assisting money laundering then the firm must take action and communicate this.

All employees should be extremely aware of the serious consequences of AML lapses or failures. This means that firms must have a clear commitment to AML in their employee handbook, in their initiation training and ongoing training.

Firms need an “holistic” approach to combatting money laundering. Our compliance system, GRC-Maestro, helps inform, educate and remind employees of their responsibilities but technology can’t deliver compliance without strong support from senior management. If you would like more information on how to align your firm’s operations with your AML obligations do email me. I would also be happy to refer you to our AML consulting partners in multiple jurisdictions.

Employees should be left in no uncertainty that they must be 100% AML compliant at all times.

CONCLUSION

In summary, pretty much everyone works for money (try not paying your staff and you will soon find out how many of them work for love).

If your firm pays big “performance” bonuses, it is under far greater risk of assisting money launderers. So, you either need to scale back on the performance bonus or make sure that any staff members aiding and/or abetting money launderer to use your firm is punished financially.

After you have removed the financial incentive to either promote money laundering or turn a blind eye then your firm’s AML risk profile will be dramatically improved. It is easier said than done but let’s start this discussion and see what we can achieve!

About the Author:

Adrian Pay has specialized in financial regulation for over 20 years, working in the UK, US, Hong Kong, Singapore, Japan and Luxembourg. He has lectured around the world on a range of regulatory, governance and AML topics and is passionate about learning and sharing his insights.

Adrian was a co-founder of LatentZero (now Fidessa BuySide) and is a Director of Dynamic-GRC, the leading RegTech solution provider: www.dynamic-grc.com

If you have questions, comments or suggestions Adrian can be emailed on: apay@dynamic-grc.com

Adrian Pay

Author Adrian Pay

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