Banking StandardsWritten evidence from Global Witness

FURTHER FAILURES IN UK BANKING STANDARDS SHOWING NECESSITY FOR INDIVIDUAL CRIMINAL SANCTIONS

1. Summary

There is a widespread failure to comply with anti-money laundering (AML) regulations within the UK banking sector. This is a further example of the wider malaise in banking standards and culture. It is a serious problem presenting threats to the UK financial system and economy, as well as causing a massive human cost in developing countries. These compliance failures provide further evidence of the necessity for senior bankers to be held individually responsible for their actions and the actions of their banks, including through bonus claw-backs and criminal sanctions, in order to improve standards and culture.

This builds on a more detailed submission Global Witness made to the Commission in August 2012. We believe it is particularly helpful to highlight how the issue of AML failures has direct relevance to the debate on individual responsibility which has continued to develop.

2. The Extent of Anti-money Laundering Failures

There is a global anti-money laundering regime that requires banks to carry out checks on their customers and report any suspicious activity to the authorities. However, Global Witness has repeatedly shown how a poor culture of compliance within the banking industry and weak enforcement by regulators has allowed corrupt politicians to access the financial system to hide and process their ill-gotten gains.1

For example despite the shocking revelation in 2001 that 23 banks in London had taken over £900 million in suspect funds from Nigerian dictator Sani Abacha, a number of major UK banks subsequently took millions from other corrupt Nigerian politicians. This included at least £50 million from James Ibori (whose appeal against a UK prison sentence was quashed this week).2

These findings were reinforced by the FSA in a damning 2011 review into how banks deal with money laundering risks.3 It found that 75% of UK banks had failed to properly implement the money laundering requirements, including the majority of the major banks, and a third were prepared to take high money-laundering risks if they thought they would not be found out.

Yet the FSA/FCA has only taken action against a handful of banks for violating AML regulations.

On the rare occasions it has taken action this has been far too weak. For example in March 2012 the UK bank Coutts was fined £8.75 million by the FSA for failures that were described as “serious” and “systemic”, yet this is only 2% of its post-tax profits over the period of the failures.

In one of the most egregious cases, HSBC Group agreed to pay a record $1.9 billion fine by US authorities after admitting to systematic anti-money laundering failings, including laundering hundreds of millions of dollars for drugs cartels, terrorists and pariah states. A Senate Committee described its culture as “pervasively polluted”.4 Recent developments in the US suggest this settlement has yet to be endorsed by the supervising judge opening-up the possibility that a tougher sanction could be imposed including, at the most extreme a revoking HSBC’s US license. In August 2012 the New York banking supervisor threatened to remove the banking licence of the UK bank Standard Chartered after it was accused of helping Iran to evade financial sanctions.5

3. Significant Costs of Breaches in AML Standards

The failure of our banks to comply with AML standards presents serious problems. Not only does it make our financial system vulnerable to a wide range of financial crimes, it also creates significant risks to the UK economy through the threat of UK banks having their licenses revoked in other countries. Furthermore money laundering is not a victimless crime: it depletes state coffers, and drives poverty, inequality and suffering in some of the poorest countries in the world. For example, as a result of striking oil in the 1990s Equatorial Guinea has a per capita wealth higher than some European countries, yet because of systematic corruption by the ruling family 70% of the population live on under $1 per day. More broadly, developing countries lost six times as much in corruption, tax evasion and other illicit financial flows (US$859 billion) as they received in aid (US$131 billion).

4. Conclusion and Proposed Solution

It is clear that a woefully poor culture of compliance with AML standards is widespread among UK banks, and regulators are failing to enforce these standards adequately. On the rare occasions when they do impose penalties these are far too weak, and do not hurt the individuals responsible. This has resulted in an ineffective set of disincentives for the banking industry which needs to be significantly improved.

It seems evident from the transcripts of the Commission’s hearings and also press reports that it is considering the need to increase individual responsibility for senior bankers, and in particular the possibility of criminal sanctions. While the debate seems to have identified a genuine difficulty in distinguishing between extremely reckless business decisions and criminal behaviour, failures in applying AML standards are a much more clear-cut case of violations to UK legislation6 and the necessity to introduce criminal sanctions for senior bankers as a response.

Global Witness has five broad proposals for the Commission to include its final recommendations:

(a) Senior bankers should be held legally responsible for their banks’ money laundering performance

Someone at board level needs to be personally accountable for anti-money laundering compliance in order to make banks take these obligations seriously. In the most egregious cases, senior bankers should face serious criminal penalties, both fines and jail and at the very least be banned from working in the industry and have their bonuses clawed back.

(b) Increasing Sanctions on Banks

Sanctions for banks should be increased from the current levels being imposed in order to be more dissuasive and more proportionate to the offence. This is necessary in order to correct the current risk/reward ratio which encourages banks to take on risky customers.

(c) FCA should improve their supervision of how financial institutions are carrying out anti-money laundering due diligence

The FCA should use a wide range of tools to identify institutions with poor systems and controls. This should include carrying out mystery shopping exercises to test how well the money laundering laws are being implemented, as well as surprise spot checks of banks’ client customer due diligence files. Banks that fail in their obligations should be named and shamed.

(d) Take measures to ensure that banks adequately monitor high risk customers

Banks should be required to annually review the business they do with Politically Exposed Persons (PEPs): public officials who by dint of their position could potentially have opportunities to appropriate public funds or take bribes, or their family members or close associates). For high risk customers, such as senior foreign politicians, the burden of proof should be flipped, so that such customers have to prove that their funds are legitimate, rather than allow banks to simply find a plausible explanation for a customer’s wealth. At the moment if banks can find a slightly plausible explanation for the source of funds (eg unverified claims of a substantial inheritance) they can take it. Banks should review all of their PEP clients annually and where they cannot be sure this business meets the above stipulations, they should terminate the business relationship with these them.

(e) Include anti-money laundering failures in scope of recommendations

Global Witness believes that the scope of the Commission’s potential recommendation on individual criminal responsibility, along with any others, should include the issue of anti-money laundering compliance too.

3 May 2013