AML and CTF: Are controls designed to mitigate risk also hampering firms?

Written by Emmanuel Ioannides on Monday November 10, 2014

The ‘over-zealous’ application of foreign money laundering rules means British banks are facing risks of slower growth abroad, while also meaning weaker economies are facing exclusion from global financial markets. Or at least, this was the signal sent by the BoE deputy governor, Andrew Bailey, on 4 November 2014, who said:

"We have no sympathy with money laundering, but we are facing a frankly serious international coordination problem," 

"We are seeing clear evidence ... of parts of the world and activities that are being cut off from the mainstream banking system. It cannot be a good thing for the development of the world economy and the support of emerging countries ... that we get into that situation." 

This is a view which is broadly in line with the FATF’s clarification on risk-based approach “case-by-case, not wholesale de-risking” released on 23 October 2014. Essentially, there needs to be a review of the international approach to money laundering and terrorist financing risk to ensure there is not a ‘one size fits all’ approach applied where it simply isn’t suitable.

Why?

It is important to appreciate that, while the application of money laundering rules cuts off money laundering threats from the mainstream banking system in one region, it invariably raises the same threats in other regions. 

These regions may be either less prepared/equipped to confront the threats, or might conceivably choose to manage money laundering threats by applying a more ‘elastic’ regulatory strategy, if you catch my drift (in the interests of taking advantage of the capital flight heading their way). 

Interestingly, in contrast to the focus on the broader international frameworks, there have been a number of recent events which impact on AML/CTF concerns too, but on a more local scale. For example, Spain and Ukraine have recently taken steps to strengthen their own national AML/CTF frameworks.

Other impacts

Of course, there are other areas within the financial market which are also affected by AML/CTF concerns and the ‘tightening’ of regulations as a whole. Costs incurred by firms tend to manifest in a way whereby they are passed onto customers (so, essentially all of us). 

This week we saw that one in ten HSBC employees now work in risk/compliance. Firms remain commercial entities so it would seem reasonable to suggest that they will have to find ways to pay for these additional ‘costs’. A similar thing was observed in the aftermath of the recent financial crisis, where EU regulatory changes increased costs in wholesale financial markets, which banks have passed on to their  customers.

Whilst increased AML/CTF controls will be agreed as making good sense, we should equally welcome more substantial governmental and regulatory incentives to increase liquidity. The market needs to be kept open with lending (and broader business) maintained.  

And this perhaps is the fundamental question – how DO we offer more market opportunities to firms within the existing framework of effective yet restrictive money laundering controls? Can the two aims be successfully balanced? I guess we’ll find out one way or another.