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| Politically exposed
persons |
|
Regulators across Europe
are tightening the pressure on every participant in the financial
system to raise their anti-money laundering controls as fears
grow about terrorist financing. Banks are being forced to invest
heavily in new technology, staff training and improved compliance
procedures. These will feed through into improved due diligence
and quicker checking of customer profiles, and of sources of
funds.
Regulation of banks’ anti-money
laundering system is being driven by The European Union which
is currently conducting a consultation throughout the banking
community for a Third Directive on money laundering. This has
five key components.
First, banks must scrutinise
more closely the ‘beneficial ownership’ of funds.
Second, they are prohibited from opening ‘anonymous accounts,
anonymous passbooks or accounts in fictitious names’.
Third, they must give additional due diligence when customer ‘has
not been physically present for identification purposes.’ Fourth,
banks are discouraged from accepting correspondent banking
relationships with ‘shell’ banks, that is institutions
lacking a physical presence anywhere in the world. Finally,
banks must tighten their checks on politically exposed persons
(PEPs) and other individuals on international black-lists.
The investigation of PEPs
puts particular strain on banking technology as the term is
extremely wide-ranging. The Directive defines the PEP as ‘Natural
persons who may involve a reputational risk and who or who
have been entrusted with prominent public functions, such as
heads of State or of Government, senior politicians, senior
Government, judicial or military officials, senior executives
of state-owned corporations, important party officials and
close family members or close associates of all of these.’ |
| Scrutiny of the kind envisaged by
the Directive will expose banks to considerable expenditure
on technology. This will greatly exceed anything anticipated
by banking regulators, governments or the banks themselves.
The UK Government, for example, has advised banks and financial
institutions to budget £120 million to comply with its
money laundering laws. This is a gross underestimate, says
Martyn Bridges, a director of Bridges and Partners, a UK consultancy. ‘Those
figures don’t cover 10% of the true cost. The cost to
UK banks would be up to a billion pounds a year, assuming that
everyone complied, which they won’t.’ |
| Nigel Morris-Cotterill, chairman of
Anti-Money Laundering Network, speaking from Kuala Lumpur,
Malaysia, says that ‘one UK high street bank has already
spent $30m on technology. The £120 million is a drop
in the ocean compared to the technology costs that they want
banks to meet.’ Morris-Cotterill was not prepared to
name the bank. Jeremy Thorpe, the director of the British Bankers
Association responsible for money laundering, speaking from
London, said that the UK Treasury’s figure was a ‘huge
underestimate’ and he thinks banks should budget at least £250
million for compliance with the European Union Directive. |
| These massive banking budgets will
be spent on two forms of technology. The first, called rules-based
technology, enables banks to examine lists of individuals whom
the US Treasury and the Bank of England, among other international
financial regulators, have designated high risk money launderers
or terrorists. List-based checking is used by smaller banks,
or savings or mortgage banks says Morris-Cotterill. ‘It
is doubtful whether a savings bank needs this degree of sophistication.
They probably already.have sufficient data and they can interrogate
the database. They need relatively simple interchange facilities.’ |
| Smaller banks do not need their own
list-checking software, says David Douglas, chairman of the
UK consultancy Arbiter, which acts as an oursourcing agency
for banks. ‘Mortgage institutions with large quantities
of low value clients buy in list-checking facilities rather
than spend heavily on time and software. Once they have done
a search on all their existing clients, they are likely to
use the software only occasionally when they have new clients.’ |
| Global banks with multiple branches
in many countries which complete huge numbers of transactions,
require much more sophisticated systems. These are based on
mathematical algorithms and must be capable of monitoring transactions
against an account or customer history to see if a transaction
falls outside an existing pattern or creates a new pattern
that is suspicious. |
| This technology has been pioneered
by experts in artifical intelligence, says David Porter, the
head of risk at UK consultancy Detica. But Porter warns that ‘a
piece of software needs time to work out patterns of banking
behaviour. Until that is established, it is likely to be very
sensitive to suspicious reports and throw out numerous false
positives.’ False positives are results that are incorrectly
adjudged suspicious. Porter advises banks that regulators are
impatient with banks facing teething problems with their systems. ‘The
regulators will come down heavily if they find a bank neglected
to follow up a suspicious report, even if its systems are not
calibrated correctly and they are pouring out huge numbers
of reports which are almost all useless. Banks should not be
lulled into a false state of security by having the latest
technology. The people who can operate it are just as critical.’ |
| Ironically, the complications that
banks now face with anti-money laundering technology are substantially
of their own making. Today’s complex systems only replace
the tried-and-tested checks the bank manager used to apply
when he had a dubious customer. Paul Pacifico, a director of
Penumbra Partners, a London-based consultancy, says, ‘If
you look into a customer’s eyes, you can see if he is
honest, and if money he presents to you is clean. But that
contact has gone, so banks are forced to automate their checks.
Now they are having to find new ways of monitoring customer
transactions.’ The British Bank Association’s Thorpe
says the risk is exacerbated by growing turnover of bank staff,
which means tellers do not even recognise customers that they
do meet in the branch, let alone the majority that now come
nowhere near a bank’s offices. |
Banks who fail to make the investment
in technology and human resources appropriate to the gravity
of today’s heightened state of suspicion, face a two-fold
risk. First, regulators, like the UK’s Financial Services
Authority, are imposing heavy for systems failures. Second,
the institution who is fined will suffer damage to its reputation
among customers and counterparties. The worst outcome, but
least predictable, is the discovery of terrorist money in a
bank’s books. Banks would say that can happen in the
best-run institution.
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