November 19, 2018 Andrew Tarpey



News headlines about financial firms being fined large sums for anti-money laundering (AML), Know Your Customer (KYC) and sanctions violations have become commonplace in recent years. From JP Morgan to Deutsche Bank to HSBC, some of the largest and most profitable banks in the world have been hit with regulatory fines for inadequate AML controls or lackluster adherence to compliance requirements. But just how much have firms paid for these compliance failures? Fenergo, a company specializing in client management solutions, recently conducted an analysis using data from regulators and news organizations. It found that, worldwide, firms have paid $26 billion in fines for their regulatory failures in the past decade. Among the facts noted in the research are the following:

• 90% of the fines levied for AML violations were issued by the United States ($23.52 billion);

• Europe has issued a total of 83 fines during that time for a total of $1.7 billion, mostly coming from the FCA, the United Kingdom’s financial regulator;

• Regulators in the Middle East have issued just a tiny fraction of what their American and European counterparts have, totalling just $9.5 million in fines in the past 10 years;

• The largest single fine levied against a bank by one regulator was the $8.9 billion fine imposed on French bank BNP Paribas by the U.S. Justice Department in 2014 for sanctions violations;

• United States regulators have fined European banks nearly five times the amount that they’ve fined American banks.

There was once a time when, in order to comply with AML regulations, banks had the latitude to engage in their “best practices” when implementing their AML programs. However, such broad generalizations of what constitutes AML compliance are a thing of the past. All developed countries in this post-September 11 era have stringent protocols that they require financial institutions to adhere to when it comes to anti-money laundering and countering the financing of terrorism (CFT), and the failure of banks to measure up to this can cost them enormously.

Maintaining a strong, compliant AML/CFT program consists of many factors, but among the most important are conducting appropriate due diligence on one’s clients and monitoring transactions for instances of suspicious or potentially illegal activity. The failures of some of the world’s largest banks to ensure compliance with these matters are staggering, and in some cases consist of a blatant, reckless disregard for the law. The Fenergo report shows that the great majority of AML-related fines were issued for sanctions violations, and here we’ll take a look at some of the most egregious and costly violations.

• BNP Paribas: In 2014, BNP Paribas, France’s largest bank, agreed to pay $8.9 billion in fines for violating U.S. sanctions laws by concealing billions of dollars in transactions for clients in Cuba, Iran and Sudan between 2004 and 2012, using various complicated schemes in order to conceal the true nature of the illegal transactions. The bank routed illegal payments through banks in the Middle East, Europe and Africa in order to conceal both the involvement of the sanctioned entities and BNP Paribas’s role in the transactions. These third party financial institutions were told not to mention the sanctioned entities’ names in the payments which entered the United States’ financial system, and information which would have revealed the identity of the blacklisted countries was removed from wire transfers. As evidence of how brazen BNP Paribas was in its disregard for U.S. sanctions laws, after payments to Cuban entities were blocked when they reached the United States due to the U.S. embargo against Cuba, the bank stripped wire messages that contained references to Cuban entities and resubmitted the payments as a lump sum so as to conceal from the authorities BNP Paribas’ Cuban ties.

• HSBC: HSBC Bank agreed to pay $1.92 billion in fines to U.S. regulatory authorities in 2012 for lapses in its AML program which allowed Mexican drug cartels to launder hundreds of millions of dollars through HSBC accounts. The compliance program was described as “woefully inadequate” and “incredibly lax” by U.S. Justice Department officials, and things got so bad that the United States Senate held hearings and produced a 300 page report that detailed HSBC’s compliance shortcomings. These included the failure to label Mexican accounts as high risk despite Mexico’s notorious problems with drug trafficking and gang activity, thus enabling hundreds of millions of dollars connected to drugs and money laundering to flow from Mexico into U.S. accounts. In addition, HSBC also admitted to processing financial transactions on behalf of entities in sanctioned countries such as Iran, Burma, Libya, Sudan and Cuba. Similarly to BNP Paribas, HSBC routinely altered wire messages which would have alerted U.S. officials to the connections to the sanctioned countries.

• Standard Chartered: The British bank Standard Chartered also found itself at the center of a controversy surrounding the evasion of U.S. sanctions in 2012 when it paid $327 million to the U.S. Justice Department and $340 million to New York’s state banking regulator to settle allegations that it moved millions of dollars through the U.S. financial system on behalf of entities in Iran, Burma, Sudan and Libya. Just like BNP Paribas and HSBC, Standard Chartered removed information from payments coming into the U.S. that would have revealed that they stemmed from sanctioned countries or entities. This was done to circumvent Office of Foreign Assets Control (OFAC) regulations, prompting New York’s banking superintendent to label Standard Chartered a “rogue institution”.

Why do so many successful, profitable financial firms have such trouble complying with legal requirements when it comes to sanctions and anti-money laundering? There are many answers to that question, but one reason may be that doing business with money launderers is lucrative for banks. Money launderers can be subject to large amounts of fees and transaction charges, and the senior management of banks may often be focused on the financial benefit and look the other way when it comes to its legal requirements and ethical obligations. Another reason could be that members of senior management may have worked most of their career in a corporate culture where AML requirements weren’t as strict or deemed to be a priority, so obligations in this area can be brushed aside or treated as optional rather than the serious matter that regulators have deemed them to be. Regardless, it’s clear that many firms need to clean up their act when it comes to ensuring compliance with regulations designed to thwart financial crimes.

For more information on this topic please contact Southpac Group.

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