As part of an ongoing effort by federal and state authorities to crack down on global money laundering, the state of New York announced in late February that it will begin conducting random audits of bank systems. According to state regulators, the audits may also require senior bank executives to personally attest to the adequacy of their systems to detect possible money laundering.
The new anti-money laundering (AML) initiatives are part of an ongoing effort to strengthen banks’ compliance with US federal regulations. Under the Bank Secrecy Act (BSA), financial institutions are required to flag suspicious transactions that pass through their systems, which could possible be a front for money laundering activity. As regulatory scrutiny has tightened in recent years, the banking industry is scaling up its AML compliance procedures to help catch suspicious activity earlier. Banks hope that these efforts will not only help to reduce the amount of money laundering activity happening within the financial sector, but also to help reduce the fines imposed on the industry by the federal government.
The superintendent of the state of New York’s Department of Financial Services, Benjamin Lawsky, spoke about the problem of money laundering practices that help fund the illegal drug trade and global terrorism, as well as the US government’s response of tightening financial regulations on the banking industry, at New York’s Columbia Law School. “We believe there are likely widespread problems with transaction monitoring and filtering systems throughout the industry,” he said. “Improving those systems is critical to stopping criminal activity, including terrorism.”
Increased Scrutiny Leads to High-Profile Fines for Banks
The news of New York’s latest AML regulations comes after a number of the largest banks in the world have had to pay out hundreds of millions of dollars, in some cases even billions of dollars, in settlements with the US government stemming from lapses in financial transaction monitoring. These include the recent case against Standard Chartered Plc., a British bank that agreed to pay US$300m to the state of New York when its systems failed to flag millions of high-risk transactions that came through its network from the United Arab Emirates and Hong Kong.
Another UK-based global bank, HSBC, was also fined by US regulators over faulty money laundering procedures, in one of the most high-profile cases of recent years. HSBC agreed to pay American authorities US$1.9bn, the largest amount to be paid to-date in money laundering cases. During the settlement, bank executives recognized that their AML were insufficient and more stringent procedures needed to be put in place.
Although HSBC said it had spent US$290m on improving its systems to catch suspicious money laundering-related transactions, a US senate investigation into HSBC systems claimed that the bank had been operating as a conduit for ‘drug kingpins and rogue nations,’ after it was found that financial transactions with blacklisted groups in Iran, Libya, and Mexico had been allowed to pass through the HSBC systems.
In another case of insufficient anti-money laundering controls, JPMorgan Chase agreed to settle two felony charges of violating the BSA by failing to submit a Suspicious Activity Report during the time Bernie Madoff conducted fraud, from 1986 to his arrest in 2008. During this time period, the majority of Madoff’s Ponzi scheme assets were run through his JPMorgan Chase account, which held most of his client’s cash deposits.
Unlike the others, JPMorgan’s case was not directly related to international money transfers, but it demonstrates that AML regulatory scrutiny has increased across the board. As federal and state regulators continue to tighten regulations on AML compliance procedures, banks have scrutinized their business lines, and many have started to retreat from higher-risk businesses, such as the global money transfer industry.
Banks Shy Away From Money Transfer Business
Today, most banks have a list of countries where they refuse to clear international money transfers; for most banks, that list is growing. In February, the Merchants Bank of California closed the accounts of remittance providers and stopped clearing outgoing transfers to Somalia, due to the increased cost of dealing with markets that are at a high risk of money laundering and other illicit activity. This has effectively closed off an economic lifeline to the war-torn African nation, and Somali financial authorities have started taking steps to re-open many remittance channels that were closed in the past several years.
For Somalia and other countries that are deemed ‘high-risk’ (often due to suspicions that terrorist or drug organizations are running operations from these locations), prohibitions on receiving wire transfers and remittances from developed countries such as the United States can have a significant economic and social impact. For Somalia, like many other of the world’s poorest nations, international remittances account for a large amount of money flowing into the economy, often more than private investment or foreign government aid.
Banks, however, cite the increasing costs of complying with more stringent AML oversight enforced by both federal and state regulatory agencies, and the increasing peril of doing business with countries that are considered to be “high-risk”. In the short term, the new measures proposed by New York regulators may increase the compliance burden, further straining the relationship between banks and money transfer businesses. The international money transfer industry finds itself at a crossroads; more efficient, targeted regulation is necessary to encourage banks to continue to serve the sector, while still minimizing their risk of regulatory fines.