Cleaning up compliance to tackle money laundering
Posted: 10 February 2017 | Steve King, Head of Corporate Compliance, Travelex | No comments yet
Money laundering is a huge issue in FX with at least $800 billion laundered each year. What can be done to prevent it and raise standards?
Everyone in finance is talking about compliance, but for the still cash-heavy FX industry there are even more rigorous requirements. Cash is associated with different risks because of its use as an instrument of money laundering, which remains a major challenge for the international banking industry.
Estimates by the UNODC (United Nations Office on Drugs and Crime) put the amount of money laundered globally each year at 2-5% of global GDP, or $800 billion – $2 trillion. Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem governments have pledged to address. This money is the proceeds of illegal activity, such as drug trafficking, tax evasion and people smuggling.
Organised criminals are not dealing in small amounts or transactions at the counter. This is bulk cash, comprised of thousands of transactions. As a result, there are particular challenges that arise from wholesale banking, compared to retail, particularly when buying back from high risk jurisdictions. Controls need to be applied around where that cash has come from to identify trends associated with organised crime.
To do this successfully, both the wholesale cash provider and the financial institution have to be able to rely implicitly on the process and controls of their partner. Historically, money laundering techniques were reliant on a paper exchange exercise. That’s not enough in a modern world. Criminals are becoming more sophisticated, and compliance has to evolve to keep pace with the changing risks. High risk jurisdictions for drug trafficking are particularly challenging. This is a market built entirely on cash, meaning there are more potential points of entry into the legitimate cash cycle.
You might ask why this is industry’s problem to solve, rather than law enforcement. Money laundering materially affects people’s lives. It can undermine economies, with developing nations particularly vulnerable. Companies have both a legal and social responsibility to properly engage with this challenge and take ownership of the solution. We have to be as diligent as law enforcement in tackling criminal activities.
As the world steps up action against criminals using financial services, compliance standards are continuously rising. The first step in any market is the regulator, which needs to look at the risk profile in their jurisdiction and understand where they are on their journey to compliance with the international standard. Working closely with regulators and law enforcement, it is then down to individual financial institutions to examine their own processes.
Reliance on the controls of other institutions, which was legalised in the third money laundering directive, will become a thing of the past with the fourth directive. Everything must now be treated with a risk-based approach, and as a result, many banks need to update their compliance processes. This is a sea change for banks in emerging economies, and either requires significant investment and upskilling or working with a partner to achieve compliance.
Increasingly, we are seeing a move beyond a traditional vendor or supplier relationship to one of true partners. Both parties need to know as much about their partner’s business as their own, including details of all clients so they can be monitored for trends that are indicative of money laundering. This ‘total transparency’ approach, one which has been adopted by central banks, gives visibility of the whole chain. Moving beyond know your customer, or even know your customer’s customer, we are now in a world of needing to know your customer’s business, and their customer’s business, and so on. Every part of the chain needs to take responsibility for their role in maintaining cash compliance.
Cash is a hygiene factor for many banks – they need to offer the product to their customers but many can’t source foreign banknotes themselves, so are reliant on a partner that can help them meet international compliance standards. Five years ago, there were lots of banks supplying wholesale banknotes, but following regulatory crack downs that saw a number of banks heavily fined, many providers faced a significant cost to bring their banking systems up to standard. Instead, many chose to de-risk and exit the market.
However, getting cash to these markets is still vitally important. Despite the rise in the use of technology, the number of banknotes in global circulation continues to increase 3% year on year. Cash underpins many local economies; it’s the primary form of payment for goods and services by the local consumer in-country and transactions between regional businesses.
We mustn’t make the mistake of thinking that cash, or the related compliance requirement, is going away. Banks need to step up, review their current compliance processes, and those of their supply chain. Only by working together as a global industry can we combat the international challenge of money laundering.