The consequences of non-compliance over the last few decades results in regulators worldwide have actively worked on anti-money laundering laws and regulations. The subjects of regulation are frequently organizations and businesses, such as banks and financial institutions, but are also aimed at industrial corporations, retailers, and many other businesses.
The Consequences Of Non-Compliance
Failing to comply with anti money laundering or AML and counter terrorist financing or CTF laws and regulations can have serious consequences. Such consequences include punitive fines, criminal proceedings, damaged reputations, and sanctioning – all crystal clear motivations to justify AML compliance efforts.
All the consequences listed above can lead to serious damage to an organization’s credibility and performance. Due to AML/CTF laws and regulations breaches, becoming a sanctioned party can be even more damaging. Becoming sanctioned by one or more global bodies considerably reduces, if not halts, an organization’s ability to cater to its international customers’ needs for performing global transactions.
Let’s look at three damage categories that organizations might face if they fail to comply with applicable AML laws and regulations.
The first and probably the most important damage category are regulatory fines. Regulatory rules are constantly evolving, and expectations increase regarding a reasonable risk-based AML/CTF compliance program. Examination and testing experiences also increase in number, frequency, depth, and intensity. The standard expected by regulators has largely shifted from accepting good or common practice to expecting the highest implemented standards as the norm.
In the 1970s, in the US, the enforcement actions of AML regulation were pretty lax. Many organizations, especially banks, widely ignored it. Nowadays, this has changed quite significantly. Enforcing the rule of law has become an incredibly high priority for regulators around the world. We can see this impressively in the number of recent enforcement actions for 2019.
According to an analysis by the Encompass Corporation, the US is at the top of the list. Their regulators have imposed 25 AML-related penalties adding up to 2.3 billion US dollars. British regulators took second place globally, issuing 12 penalties totaling almost 400 million US dollars.
France had the highest single AML fine of 5.1 billion US dollars. It was down to the Union Bank of Switzerland or UBS, after it was found guilty of illegally soliciting clients and laundering the proceeds of tax evasion. But even this fine still does not trump the 8.9 billion US dollars AML fine issued in 2014, which saw France’s biggest bank fined by US regulators for transferring billions of dollars on behalf of Sudan and other countries blocklisted by the US.
The average monetary fine was 145.33 million US dollars in 2019. Only under half of these were given to banks, meaning that the remainder was given to non-bank businesses and organizations. It is quite interesting because, historically, most of these fines have been given to banks. This year, the proportion was less than half, demonstrating that money laundering is now recognized as a general business issue, not just specific to financial services.
For example, regulators in the gambling and gaming sector were particularly active in 2019, handing out five fines, including well over 1 million US dollars, the highest being 7.2 million US dollars.
The second damage category is reputational risk. Senior managers know the importance of their companies’ reputations. Firms with strong positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. Their customers are more loyal and buy broader ranges of products and services. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earnings multiples and market values and lower costs of capital.
Moreover, in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations. Benjamin Franklin said it takes many good deeds to build a good reputation and only one bad one to lose. And this is especially true for money laundering. This area’s reputation is usually negatively affected by the announcement of a serious investigation into money laundering, usually connected with clients, transactions, or business dealings. There are many examples where money laundering has destroyed the reputation of companies. Danske Bank, 1MDB, Odebrecht, Petrobras, Siemens, and there are many more.
Legal Liability Risk
The third damage category involves legal liability risks. It includes, on the one hand, civil liabilities. The possibility of legal damages being incurred increases with more frequent civil class action lawsuits.
On the other hand, this also includes criminal liability. While it was once very exceptional, the prospect of criminal liability risks for money laundering weaknesses can no longer be discounted. The phrase “too big to jail” grates amongst many who advocate criminal prosecutions and individual criminal liability as the only way to ensure satisfactory focus and full compliance with AML laws, regulations, and expectations. And to give you one very prominent example. Greece’s former transport Minister was found guilty in 2017 of money laundering. He was handed an eight-year suspended sentence, probably due to his age, and given a personal monetary fine.
Risks associated with noncompliance with anti-money laundering laws and regulations, as well as how to deal with financial sanctions imposed by global bodies and the risks associated with ensuring compliance with them, should be high on the agendas of financial institutions’ boards of directors, executive management, and risk committees.