Banking has dominated the news for entirely the wrong
reasons. Alongside government bail-outs, regulators are cracking
down on fraud and money laundering. A financial crime round table,
headed by vendor Temenos, offers insight into the future of
tackling corruption in the banking industry. Farah Halime
reports.
“It is like looking for the fly on the elephant, not the
elephant,” David Hughes, head of banking and litigation at law firm
Berwin Leighton Paisner told RBI.
Go deeper with GlobalData
The surreal analogy presents the
flies as the money being laundered and the elephant as the
criminal. Processes are adopted to catch the flies, but are they
addressing the true problem of the criminals themselves?
A UK government estimate put the
total money laundered in the country at £25bn ($39.7bn) in 2003,
while the US is looking at “trillions of dollars” in
comparison.
An initial lack of a sound
regulatory framework has, arguably, triggered the volume of illegal
transactions taking place.
But with the extraordinary events
of the past 18 months, the stricter regulatory requirements have
become the norm in response. The passing of Basel III is the latest
in what the panellists attending the roundtable predict will be
increased regulation and monitoring of banks and their
institutional or individual clients.
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By GlobalDataRachel Hunt, EMEA banking research
director at financial services vendor IDC Financial Insights, said
25% of bank’s IT budget is now spent on compliance to prevent
financial crime, compared to 15% a few years ago.
Risk-based
approach
The risk-based approach (RBA) is a
management tool for developing and managing a financial
institution’s systems and controls and a by-product of the need for
increased compliance in the banking sector.
It is used by the Financial
Services Authority (FSA), the UK regulator, and the firms it
regulates.
The FSA said a truly risk-based
system will be cost effective, flexible and proportional.
“These features are essential for a
regulatory regime that seeks to deliver value for money while
successfully disrupting the criminals who would seek to use our
financial system,” the FSA said.
Hunt said RBA was favoured by the
very top banks in the industry who were buying into compliance.
But the only representative of a
bank at the round table, Peter Haener, executive director of
monitoring and surveillance at UBS, was apprehensive. He said the
RBA approach is limited as it focuses on only the big banks that
pay at least £10,000.
“It is not a valid approach,”
Haener said.
It is difficult to argue the RBA
approach should be anything but aimed at large banks, where the
capacity for fraud or money laundering and the sums involved are
highest.
UBS is a case in point. It has been
embroiled in a series of transactional nightmares with regards to
tax evasion. It only recently had a civil suit dropped against it
by the US Internal Revenue Service which followed the Swiss
government’s declaration it was on track to hand over details on
thousands of Americans clients suspected of using their accounts to
evade taxes.
Another point of contention is
whether banks actually comply with government regulation merely to
detect financial crime or merely prevent fines that are given by
consequence of non-compliance.
Ian Horobin, founder of consultancy
Omnicision that detects, prevents and manages financial crime, said
the key to compliance is not in prevention of fines, but the
necessity for ethical responsibility.
“The core is to know your
customers, compliance is a different question. Reputational risk is
a much higher agenda [for banks],” Horobin said.
Reputation and branding are wrapped
in financial crime. UBS’s brand, for example, has suffered the
effects of legal wrangles and debt repayment. According to
Interbrand’s top 100 global brands survey (see
Santander, Barclays join top
brands), the UBS brand value has fallen by 13%
from a year ago, ranking the bank in 86th place.
‘Know Your Customer’ (KYC) is an
essential part of this and includes the screening of customers to
draw out those that could potentially carry out illegal
transaction.
But the FSA advises that KYC should
be carried out on a risk-sensitive basis. For example, an old-age
pensioner opening a basic bank account is unlikely to require
extensive procedures to identify them and the nature of their
account usage, as long as sufficient monitoring arrangements are in
place.
Hunt said it is as much about being
able to read a customer and make a judgement as the ability to
obtain useful evidence.
But despite the lengths banks go
to, to prevent financial crime and the massive investments they
make, the panellists said it is impossible to avoid illegal
transactions completely.
‘No silver
bullet’
“Being pragmatic about it, there is
no silver bullet,” Horobin said.
“We are never going to be ahead of
the game. It is impossible to stop anything, but you can minimise
the risk.”
He said banks and financial
institutions are not playing catch up with organised crime, but
acknowledged it has evolved over the years, making it harder to
detect and manage.
Looking ahead, all four round table
panellists see increasing regulation as an impact to future
response to financial crime.
The centralisation of a bank’s
financial crime prevention unit was also cited as an important
factor for future growth in the sector. This has its benefits for a
bank by standardising the process to deal with illegal transactions
across the board.
But Haener questioned the extent of
centralisation that should be granted.
“There is a point where you have to
split the areas again because there are different ways to approach
fraud and anti-money laundering,” he said.
The panellists agree investing in
compliance should no longer be a tactical investment, but a
strategic one, which has Hunt said, is essential to any bank’s
ethical responsibility and commitment to regulation.
“Two things are certain: death and
tax; a third is compliance,” she added.
But there are loopholes still to be
closed in the industry. For example, peer-to-peer lending which
includes non-bank institutions like Western Union is not obliged to
comply with FSA regulations or any other regulator.
As payment transactions are often processed through non-bank
institutions, the potential for fraud and money laundering is
massive.
