Paranoid about launderers (and rightly so)

Since the big headline fines of Standard Chartered and HSBC for money laundering
last year, there have been a lot of things rumbling in the background.

In particular, the backlash from such activity has been
quite notable, with HSBC throwing money service providers off their payments network
last November and Barclays doing the same more recently.

These movements are leaving prepaid card networks and money
transmitters high and dry.

Then there is the squeeze on virtual currencies after
Liberty Reserve was shut down for millions of transactions allowing billions of
dollars to move on behalf of the criminal underworld, leading to questions over
other money networks such as Bitcoin and how they might assist criminal activities.

What is intriguing about these movements is that there is
obviously a problem here, and the problem is that there will always be criminal
activity.

There always has been.

Whenever an authority tries to create rules, rue breakers
will appear.

When the USA tried to outlaw alcohol, bootleggers proliferated;
when China tried to squeeze the QQ economy, the use of QQ coins tripled in a
year; and whenever the authorities try to shutdown money channels, new channels
will inevitably appear.

In fact, it is an accepted view that as we try to shutdown
fraud, fraud will always exist.

In the same way, as governments try to stop money laundering
on behalf of drug runners and terrorists, there will always be money laundering.

The question is how to most effectively minimise fraud and
money laundering, how to ensure the avenues for fraud and money laundering are
closed and how to track, trace and convict those engaged in money laundering.

And this is where it is most disappointing.

For example, whenever I hear about fraud, there’s always a result
that someone says: “yes, we know who commits this fraud but, because we now
live in a global world of crime, the fact that Russian criminals use Chinese
servers to target credit card lists in Europe and then transact those cards
with fraudulent transactions in America makes it impossible to catch the
criminals.”

Oh.

Now apply that to money laundering and guess where the
greatest concentration of laundering occurs?

A few highlights from the FSA’s report on money laundering
in the UK, June 2011:

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 we
visited failed to apply meaningful enhanced due diligence 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 Politically
Exposed Persons (PEPs).

Three quarters of the
banks 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.

At more than a quarter
of banks visited, Relationship Managers 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.

Nearly half the banks
in our sample failed to review high-risk or PEP relationships regularly.