UK financial regulation updates
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This is a guest post by Tom Keatinge, who directs the Centre for Financial Crime & Security Studies at the Royal United Services Institute. He argues that outsourcing the job of fighting financial crime to the financial industry is turning out to be a losing formula.
It’s an unfashionable view to take, but I feel sorry for the banks. At this point you’ll be thinking “well of course you do, you worked for them for 20 years”. But before you label me an unrepentant apologist, hear me out.
Banks are, quite rightly, required to monitor the transactions they facilitate, and the customers they serve, for suspicious activity. In the old days, when transactions took days to process and there was time in a banker’s day for long lunches, this all seemed quite feasible. You knew your clients (often personally) and you could contemplate their requests between fine-dining appointments.
But today, banks are deluged in billions of transactions each month and clients are not just people and high-street shops — that they no longer know personally because they don’t have branches anymore — but include offshore shell companies in locations where not even the local authorities know who they are. Again, not an apology, just a fact.
All that difficulty seemed to lead banks to feel that meeting their regulatory requirements to help keep the financial system clean wasn’t worth the effort. But, as HSBC found out in 2012 when the bank became engulfed in a narco-scandal, it was actually worth a fine of US$1.9bn. That indifference also cost BNP Paribas US$9bn in 2014 and many others billions more over the years too.
Since these episodes, banks have all promised to try harder, spending billions on supervisory and screening processes. Of course, readers’ hearts won’t bleed at the thought of banks spending money doing things they are meant to do. And neither should they.
In recent years, ‘public-private partnerships’ have become en vogue. The UK formed its ‘Joint Money Laundering Intelligence Taskforce’ (JMLIT) in 2015 on the basis that getting everyone, from all sides, into one room to attack financial crime was a good idea. And it is. Banks have the financial data and law enforcement has the intelligence. Working together they should be a match made in heaven.
Yet, here’s the rub. Despite the billions spent by banks on recruiting staff and installing computer systems to keep their side of the bargain, what have governments done to equip themselves to respond to the enthusiasm of the banks? Not nearly enough, because the war on money laundering is far from being won.
Furthermore, expectations on banks have been shifting. The law in the UK requires banks to submit a suspicious transaction report if they suspect someone is engaged in, or attempting, money laundering or terrorist financing. Yet banks are increasingly expected to do more than this. Governments have designated them the sonic screwdrivers of crime-fighting. Task forces spring up via which banks are to stop human trafficking, stop the illegal wildlife trade and myriad other forms of criminality.
The latest example doing the rounds comes from the podcast of UK law enforcement’s Financial Intelligence Unit (FIU) in which it encourages banks ‘to ensure all their staff are upskilled’ to identify activity of County Lines drug smuggling and articulate these suspicions clearly within the reports they file with the FIU. Putting aside my aversion to upskilling of anything, what does this request actually mean? It would seem the cops are expecting bankers to become experts in county line drug smuggling. Isn’t that the job of the police? Would it not perhaps make more sense if the police had enough resources to investigate county lines themselves and to then come to the banks with information, leads and evidence that allows the banks to apply themselves and their data in support of these police led investigations?
Of course, banks are required to report suspicious activity, but it is not up to them to make an identification of whether the transactions are indicative of county lines or anything else. That’s the job of law enforcement — that’s the cop’s side of the partnership bargain that has been struck. Yet for those sitting in the financial crime departments of banks, it must increasingly feel as though they are the thin blue financial crime line.
In recent years, the response to financial crime has been turned upside down. An impoverished government service that is unable to meet the significant challenges it faces, has been leaning ever more heavily on the banks. But conflicts persist in these sorts of partnerships. Banks are far from paragons of clean living and virtuous service. And yet, under such a framework, they end up sitting at many of the tables that should be keeping them in check. Is it not time the government started investing some of its own money (or better still, the money it confiscates from the criminals) in fighting financial crime rather than depending on the proverbial fox to do the job for it?
