There has been a lot of wailing and gnashing of teeth on the part of
UK commentators over the actions of Ben Lawsky, the Superintendant of the New
York Department of Financial Services, and the way he has dealt with Standard
Chartered Bank. (SCB)
However, an article in the Huffington Post of 20th August reveals that
Lawsky has made more friends than enemies by his actions.
"...Banks are upset with Lawsky
because he's clearly put down a marker that he's going to be an aggressive
regulator who defends the interests of New York state in a manner that goes
beyond the enablement of the federal regulators in recent years," said
Neil Barofsky, former inspector general of the federal Troubled Asset Relief
Program that followed 2007's market collapse..."
As the recent settlement in the SCB case has demonstrated, it is the
vital element of 'trust' in international banking that has been dangerously
eroded. As a result the New York Department of Financial Services has insisted
on its own officers being 'embedded' at SCB for the next two years to report
back to the regulator on the level of compliance being maintained within the
bank.
Such a requirement is a humiliating riposte to SCB because it
demonstrates only too clearly that the NYDFS does not believe their word and
doesn't trust them to maintain a compliance profile which the regulator can
rely on.
When a regulator states publicly that it cannot trust the word of one
of its regulated members, then we have reached a nadir in banking
relationships, because once trust has gone, then the institution is no more
than an empty shell.
On July 4th 2012, Lord (Adair)
Turner, chairman of the FSA, gave a clear and blunt message to the banks in a
speech entitled ‘Banking at the Crossroads: Where do we go from here?’
He made significant reference to
‘banksters’ and said that when banking is riddled with malpractice, its
“credibility shot”, and trust
evaporated, they have a major problem. Their excesses and failures are issues
to which competitors of the UK banking sector abroad are only too happy to draw
attention.
Maintaining the vital element of
'trust' is the crucial component of all banking systems. If 'Trust' is eroded,
then not only will the public be less likely to want to use the services on
offer, but global regulators will start to question the integrity of the
institution, and may impose higher standards or greater controls, and in the
most egregious cases, remove the vital banking licence completely.
Since 9-11, the 'trust' component in
global banking has gone through a paradigm shift in focus. In these days of
increasing vulnerability from terrorist and criminal intervention, it is now
necessary to be able to be assured of the regulatory integrity of the financial
institution which seeks to do correspondent business with you. Hence the
problems faced by Standard Chartered Bank. They had already given prior
undertakings to the NYDFS to conform and comply with compliance requirements.
They failed to perform this agreement properly and as part of their regulatory settlement,
they were required to accept NYDFS officers being embedded into their
organisation for up to two years, to make sure that they fulfil all relevant
compliance provisions, and to agree to permanently imposed oversight officers
who will report back to NYDFS. They are paying the price of not being believed
or trusted by the New York regulator and it must be hugely humiliating for the
bank!
This humiliation could have been
easily avoided if SCB had taken their regulatory responsibilities more
seriously. It is not as if they could have been unaware of the attitude of the
British lead regulator towards the paucity of banking standards of compliance,
and particularly within correspondent banking relationships.
In 2011, the British lead regulator,
the Financial Services Authority, had published a very hard-hitting report
entitled '...Banks’ management of
high money-laundering risk situations - How banks deal with high-risk customers
(including politically exposed persons), correspondent banking relationships
and wire transfers...' In the document, which did not receive anything
like to publicity it deserved, the FSA identified a series of risk elements
which British-regulated banks seemed unwilling to remedy or rectify. These
activities are key to these banks being acceptable to the US market, and their
failure to demonstrate any willingness to take the necessary steps to alleviate
such risks, place the individual banks
in direct conflict with the demands of global regulators, and in particular,
the demands of the US vis-a-vis correspondent banking relationships.
The FSA report demonstrated most
clearly how British-regulated banks were willing to ignore and flout US
requirements for gaining access to the US dollar-clearing system, and posed a
major area of conflict for British banking institutions with their US
counterparts in the future.
Among the findings were;
·
Some banks appeared
unwilling to turn away, or exit, very profitable business relationships even
when there appeared to be an unacceptable risk of handling the proceeds of
crime. Around a third of banks, including the private banking arms of some
major banking groups, appeared willing to accept very high levels of
money-laundering risk if the immediate reputational and regulatory risk was
acceptable.
·
Over half the banks
failed to apply meaningful enhanced due diligence (EDD) measures in higher risk
situations and therefore failed to identify or record adverse information about
the customer or the customer’s beneficial owner. Around a third of them
dismissed serious allegations about their customers without adequate review.
·
More than a third of
banks visited failed to put in place effective measures to identify customers
as PEPs. Some banks exclusively relied on commercial PEPs databases, even when
there were doubts about their effectiveness or coverage.
·
Some small banks
unrealistically claimed their relationship managers (RMs) or overseas offices
knew all PEPs in the countries they dealt with. And, in some cases, banks
failed to identify customers as PEPs even when it was obvious from the
information they held that individuals were holding or had held senior public
positions.
·
Three quarters of the
banks in our sample failed to take adequate measures to establish the
legitimacy of the source of wealth and source of funds to be used in the
business relationship. This was of concern in particular where the bank was
aware of significant adverse information about the customer’s or beneficial
owner’s integrity.
·
Some banks’ AML
risk-assessment frameworks were not robust. For example, we found evidence of risk matrices allocating
inappropriate low-risk scores to high-risk jurisdictions where the bank
maintained significant business relationships. This could have led to them not
having to apply EDD and monitoring measures.
·
Some banks had inadequate
safeguards in place to mitigate RMs’ conflicts of interest. At more than a
quarter of banks visited, RMs appeared to be too close to the customer to take
an objective view of the business relationship and many were primarily rewarded
on the basis of profit and new business, regardless of their AML performance.
·
At a third of banks
visited, the management of customer due diligence records was inadequate and
some banks were unable to give us an overview of their high-risk or PEP
relationships easily. This seriously impeded these banks’ ability to assess
money laundering risk on a continuing basis. Banks’ management of high money laundering
risk situations How banks deal with high-risk customers (including PEPs),
correspondent banking relationships and wire transfers.
·
Nearly half the banks in
our sample failed to review high-risk or PEP relationships regularly. Relevant
review forms often contained recycled information year after year, indicating
that these banks may not have been taking their obligation to conduct enhanced
monitoring of PEP relationships seriously enough.
·
At a few banks, the
general AML culture was a concern, with senior management and/or compliance
challenging us about the whole point of the AML regime or the need to identify
PEPs.
·
Some banks conducted good
quality AML due diligence and monitoring of relationships, while others,
particularly some smaller banks, conducted little and, in some cases, none. In
several smaller banks, a tick-box approach to AML due diligence was noted. Many
(especially smaller) banks’ due diligence procedures resembled a ‘paper
gathering’ exercise with no obvious assessment of the information collected;
there was also over-reliance on the Wolfsberg Group AML Questionnaire which
gives only simple yes or no answers to basic AML questions without making use
of the Wolfsberg Principles on correspondent banking. And when reviews of
correspondent relationships were conducted, they were often clearly copied and
pasted year after year with no apparent challenge.
·
Some banks did not carry
out due diligence on their parent banks or banks in the same group, even when
they were located in a higher risk jurisdiction or there were other factors
which increased the risk of money laundering.
·
A more risk-based
approach is required where PEPs own, direct or control respondent banks. We
found there was a risk that some banks’ respondents could be influenced by allegedly
corrupt PEPs, increasing the risk of these banks being used as vehicles for
corruption and/or money laundering.
·
Transaction monitoring of
correspondent relationships is a challenge for banks due to often erratic, yet
legitimate, flows of funds. Banks ultimately need to rely on the explanations
of unusual transactions given by respondents and this can be difficult to
corroborate. However, there were some occasions where we felt banks did not
take adequate steps to verify such explanations.
·
We found little evidence
of assessment by internal audit of the money-laundering risk in correspondent
banking relationships; this is unsatisfactory given the high money-laundering
risk which is agreed internationally to be inherent in correspondent banking.
In light of the recent Standard
Chartered Bank findings, and in particular their willingness to flout US
regulatory requirements with reference to doing business with Iran, it is
extremely doubtful whether SCB was an individual rogue element within the
British banking environment. A much more likely interpretation is that such
conduct was endemic among many banks. When viewed in context with the other
recent findings against Barclays Bank and HSBC, it is obvious that there is a
wholesale refusal to provide good compliance with US requirements.
Every single one of these FSA findings
would bring British-regulated banks directly into conflict in a number of vital
ways with the requirements of the US Patriot Act 2001, and in particular;
Section 311: Special
Measures for Jurisdictions, Financial Institutions, or International
Transactions of Primary Money Laundering Concern
This Section allows for identifying
customers using correspondent accounts, including obtaining information
comparable to information obtained on domestic customers and prohibiting or
imposing conditions on the opening or maintaining in the U.S. of correspondent
or payable-through accounts for a foreign banking institution.
This Section amends the Bank Secrecy
Act by imposing due diligence & enhanced due diligence requirements on U.S.
financial institutions that maintain correspondent accounts for foreign
financial institutions or private banking accounts for non-U.S. persons.
To prevent foreign shell banks, which
are generally not subject to regulation and considered to present an
unreasonable risk of involvement in money laundering or terrorist financing,
from having access to the U.S. financial system. Banks and broker-dealers are
prohibited from having correspondent accounts for any foreign bank that does
not have a physical presence in any country. Additionally, they are required to
take reasonable steps to ensure their correspondent accounts are not used to
indirectly provide correspondent services to such banks.
Section 314 helps law enforcement
identify, disrupt, and prevent terrorist acts and money laundering activities
by encouraging further cooperation among law enforcement, regulators, and
financial institutions to share information regarding those suspected of being
involved in terrorism or money laundering.
To facilitate the government's
ability to seize illicit funds of individuals and entities located in foreign
countries by authorizing the Attorney General or the Secretary of the Treasury
to issue a summons or subpoena to any foreign bank that maintains a
correspondent account in the U.S. for records related to such accounts,
including records outside the U.S. relating to the deposit of funds into the foreign
bank. This Section also requires U.S. banks to maintain records identifying an
agent for service of legal process for its correspondent accounts.
Allows the Secretary of the Treasury to
issue regulations governing maintenance of concentration accounts by financial
institutions to ensure such accounts are not used to obscure the identity of
the customer who is the direct or beneficial owner of the funds being moved
through the account.
Prescribes regulations establishing
minimum standards for financial institutions and their customers regarding the
identity of a customer that shall apply with the opening of an account at the
financial institution.
America has already demonstrated her
willingness to use her powers under Section 311 of the Patriot Act to deny
dollar-clearing facilities to foreign banks which contravene US requirements.
Eighteen foreign banking institutions have already been subject to US
intervention. What these actions demonstrate is an overriding need for a method
of enabling a new form of compliance identification.
At present, every foreign bank which
seeks to enter into a correspondent relationship with a US-based bank for the
purposes of clearing US dollar transactions is required to self-certify their
processes and procedures as providing compliance with US requirements.
The counterparty's acceptance of such
self-certification is entirely dependent upon the honesty and the integrity of
the bank providing the information, but in reality, there is very little if any
independent corroborative proof that the information provided is indeed
accurate or true. In the light of the FSA report, it should be doubted that
much of the information is really accurate.
No wonder the US regulators don't
trust our banks!
1 comment:
Another good one Rowan and the magic words appear near the foot of the article - "self-certification". If the FSA have learned anything it to dump this dopey provision.
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