Legislation guides regulated industries in how to conduct and operate, and compliance departments are constantly faced with new regulations intended to prevent money laundering and combat terrorist financing. These sets of regulations, commonly referred to as AML (anti-money laundering) and KYC (know your customer), are enforceable in the vast majority of jurisdictions. A thorough knowledge of the account holder is essential, especially in identifying people who are the subject of sanctions, Politically Exposed Persons (PEPs), or those who may be of high risk to the bank’s customers and stakeholders.
What are the consequences for businesses that don’t comply with AML and KYC regulations?
“The primary means by which ethics and compliance requirements are imposed on companies is by government enforcement actions. Prosecutors use these enforcement actions, coupled with guidance, speeches and other pronouncements, mandating that companies implement a variety of measures as part of an overall ethics and compliance program.
Most of the enforcement actions reached by companies and government prosecutors involve deferred or non-prosecution agreements. Recently, the government has imposed compliance program requirements as part of guilty pleas.”
Michael Volkov, Corruption, Crime & Compliance.
From 2004 to 2010, 110 financial institutions in the United States were fined for AML failures, including lack of training. The most commonly publicized penalties for compliance failure are monetary fines. There has been no shortage of media coverage of major financial institutions such as HSBC ($1.92 billion) and Standard Chartered ($327 million) in 2012, and BNP Paribas ($8.9 billion) in 2014. Many other institutions have also been fined for smaller amounts over the years as well.
Besides risks to the institution, responsibility extends to individuals of those institutions. In a recent Thompson Reuters Cost of Compliance survey, a full 60 percent of all respondents expect the personal liability of compliance officers to increase in 2016, with 16 percent expecting a significant increase.
Criminal penalties for non-compliance can include imprisonment. In the UK, failure to disclose suspicious transactions is an offense that could result in a maximum prison term of 5 years in addition to fines. The same is also true in Canada. Prison terms for money laundering offences in the United States are considerably more severe, ranging anywhere from 5 to 20 years, depending on the nature of the offence. Although apparently not as common, the news media has noted cases of imprisonment for money laundering in Spain, the UK, and the US.
It is interesting to note that the offenses receiving prison terms were relatively smaller in magnitude when compared with those of the major financial institutions, which resulted in large fines but no prison sentences.
Why haven’t individuals affiliated with non-compliance at prominent financial institutions served any jail time?
Assigning Criminal Responsibility
There are a number of possible explanations that regulators are only levying large fines against large banks rather than pursuing criminal prosecution. One possibility is that it would be difficult to assign criminal responsibility to a specific individual or group of individuals, given the large corporate structure. However, there is a more likely a very different reason. A Breitbart article on the topic of money laundering specifically mentions that the US Department of Justice has chosen not to prosecute bank officers for fear of threats to the stability of the financial system as a whole.
What would be the point of sentencing bank executives to jail for failure to detect and prevent money laundering? One could argue that making an example of offenders could set the tone through deterrence. Take, for example, the story of Richard Bistrong. He was a successful international sales executive who received a 14-month sentence for bribing foreign officials to win their business.
Although Bistrong’s crimes do not fall under the categories of money laundering, Judge Richard Leon, US District Court in Washington, DC delivered an insightful statement during Bistrong’s sentencing hearing:
“Have you made a turn in the road for the better? There is no question about that either. But I have to be concerned about others, others out there right now who are aware of this case, who are aware of the cases in this arena and who may think they can pull conduct of similar nature or maybe even more egregious than that you engaged in, they need to understand, they need to be concerned that if they are caught, and even if they cooperate, they are going to do jail time because in this arena, that is the ultimate deterrence.”
While Bistrong’s criminal actions were quite intentional, money laundering facilitated by financial institutions is not always a deliberate act. Some may argue that sentencing bankers to jail would not serve justice, and while that may be true to some effect, regulators should evaluate the effectiveness of fines as a means of deterrence.
Clients Increasingly Expect Moral Bankers
Whatever the case, whether penalties for a failure to comply with AML and KYC regulations are financial or served through jail time, there is a clear need for financial institutions to ensure that the transactions that they process are all above board. The potential threat of facing fines or criminal prosecution should not be the primary motivation. Rather, “Financial institutions need increasing vigilance as regulators raise corporate integrity standards #KYC” financial institutions need to be increasingly vigilant as regulators continue to raise the standard for corporate integrity and as consumers and clients increasingly expect demonstrated moral behavior from their banks.
Currently, there is no set standard for gathering information necessary for AML and KYC compliance. Financial institutions are taking different approaches, but with all the new technologies and data available, there is hope for setting a standard that regulators are comfortable with, especially to help with multi-country operations that make compliance a complex undertaking.
In today’s marketplace, financial services companies operate in a highly regulated environment where the rules are being more strictly enforced. The traditional onboarding process for new clients is a time-consuming, labor-intensive, manual process involving multiple departments within the institution. This can lead to frustrating delays for customers and can put a strain on the business relationship.