Any banker who has been around for the past 20 years or so will tell you how much easier his or her job was when they decided to join the industry. At the same time, the number of frustrated customers seems to be rising exponentially, many claiming that their bank, which preaches ‘relationship banking’ is too often overly intrusive and treats them like criminals, even if they have been known to the institution for a long time.
The truth is that the financial services industry has metamorphosed materially in the new millennium and challenges have increased at an incredible pace, not least in the area of financial crime. An increased emphasis has been made on consumer rights, primarily due to the lack of level playing field between the practitioner and the consumer, leading to a number of cases of unfair treatment of customers.
Data protection regulation has also worked strongly in favour of the financial services customer and financial services institutions are now faced with the eternal dilemma of having to ask sufficient questions to really ‘know their customer’ while not crossing the fine line that makes them breach ever more onerous data protection rules brought about by the most recent EU regulations.
In this scenario and evolving consumer preferences resulting from technology, globalisation and other factors, financial crime has been consistently on the rise. Likewise, regulation has heightened the obligations of financial intermediaries for controlling the risk of them being used as conduit to assist in the laundering of gains obtained by illegal and criminal means. This is by no means deplorable and should in fact be hailed by all industry stakeholders of good faith, including bank customers, however, it is also a fact that banks must now be more intrusive.
The latest EU directives and FIAU implementing procedures encourage a risk based approach which is aimed to ensure that financial services intermediaries place their efforts where most necessary. It must be ensured by all stakeholders that the banker–customer relationship remains transparent and the banker must ensure that energy to combat financial crime is targeted towards areas of major risk. A carpet bombing approach, where everyone is considered guilty until proven innocent is not the way forward, on the other hand customer cooperation is paramount to help keep the system healthy.
But what exactly is financial crime? A very interesting and lay man definition of this area comes from the Interpol’s website. This states: “Financial crime ranges from basic theft or fraud committed by ill-intentioned individuals to large-scale operations masterminded by organised criminals with a foot on every continent. These are serious criminal activities whose importance should not be minimised as, over and beyond their social and economic impact, they are often closely linked to violent crime and even terrorism.”
Examples of financial crime, which is significantly entwined with what has traditionally been known as white collar crime, could include theft, fraud, blackmail, corruption, insider dealing, market manipulation and money laundering.
Whether the proceeds of crime or illegal activity are coming from fraud, drug trafficking, tax evasion or any other source, the perpetrator can only enjoy such ill-gotten gains once these are given sufficient legitimacy. As a result, banks need to protect themselves and their customers not only from the perils of direct criminal action but also from serving to assist criminals in their endeavors to clean proceeds of their activity. It is for this reason that financial intermediaries need to know their clients’ circumstances enough to make reasoned decisions about the flows of funds through their accounts.
Whether the entity is a bank customer or the bank itself, participating in the act of laundering money is a criminal offence punishable by fines and imprisonment.
Money launderers will go to great lengths to hide the true origin of their funds, often being prepared to lose part of their monies along the journey in exchange for apparent legitimacy. The process will generally involve three steps. The first of these is called ‘placement’ and involves moving the cash from its source using different methods, which could include asset purchase, blending with legitimate fund flows, currency exchanges and other means.
Money launderers will go to great lengths to hide the true origin of their funds
Following placement, the funds will go through what is known as ‘layering’. In this part of the process, various techniques will be used to make it more and more difficult for authorities to trace the illegal origins, very often by selling and purchasing financial or virtual financial instruments, as well as other financial assets. The money laundering process is completed through ‘integration’, this involves the moving of the laundered assets into the economy, mainly through the banking system. Transactions used during this process could include trade finance, property dealing, luxury goods and others.
The financial system is unfortunately also fertile ground for the financing of terrorist activity. Terrorism, which may be considered as one of the world’s modern plagues, requires funding which can obviously not be passed through the system in normal legitimate ways. Consequently, terrorist groups will devise different ways for raising and distributing money, often aiming to disguise the purpose of the flows such that they look like mundane financial transactions that would normally fly below the radar.
A similar challenge for financial institutions comes from a myriad of financial and economic sanctions issued against states, entities and individuals, for various reasons. Once again, such sanctions are often issued for the protection of society, however, they can be very onerous on both financial institutions as well as end customers. A quick internet search will illuminate the readers of this article as to the serious consequences faced by a number of multinational banking groups for breach of international sanctions.
The high penalties suffered by some of the big industry players have now resulted in a severe shrinking of the pool of correspondent banks, with very unwelcome outcome for players with a more restricted international reach, once again this is resulting in increased scrutiny on international fund flows, irrespective of their size and nature.
A good analogy for the financial services dilemma can be seen in the aviation industry. People who travel by air often complain of long queues and sometimes even rather embarrassing situations at pre-boarding checkpoints, however, the benefits of such checks are very often much better appreciated when one remembers the horrible scenes of deadly terrorist attacks committed through air travel.
For the bona fide financial services consumer, banks that are sufficiently equipped with knowledge about their customers can avoid very serious abuse, which more often than not may ultimately result in negative consequences for the customers themselves. It is therefore beneficial for customers to be transparent and cooperative with their bankers, while bankers should clearly understand their responsibilities and not make it unduly difficult for consumers to access banking services.
Simon Grech is the Anti-financial Crime Executive at Bank of Valletta.