The questions one might ask now is, why is it that anti money laundering is so much in the forefront? To answer this question, let’s look at the top 3 driver for this.
Driver #1: Regulatory Risks and Damages
The first and probably the most important driver are regulatory fines. Regulatory rules are constantly evolving and expectations increasing as to what a reasonable risk based AML program looks like. Examination and testing experiences are also increasing 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.
Back in the 1970s, in the US, the enforcement actions of AML regulation was pretty lax and especially banks widely ignored it. Nowadays, this has changed quite significantly. Enforcing the rule of the law has become an incredibly high priority for regulators around the world. We can see this quite impressively at the numbers of recent enforcement actions for the year 2019.
According to an analysis by the Encompass Corporation, the U.S. are top of the list. Their regulators have imposed 25 AML related penalties adding up to 2.3 billion US-Dollar. British regulators took second place globally issuing 12 penalties totaling almost 400 million US-Dollar. France had the highest single AML fine of 5.1 billion US-Dollar. This was down to Swiss bank 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-Dollar 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 blacklisted by the US.
Looking across the board, the average monetary fine was 145.33 million US-Dollar in 2019 and only under half of these were given to banks. Meaning that the remainder was given to non-bank businesses and organisation. This is quite interesting, because historically, the majority of these fines have been given to banks, but this year the proportion was less than half, demonstrating that money laundering is now recognized as a general business issue, not just one that is specific to financial services.
For example, regulators in the gambling and gaming sector were particularly active in 2019, handing out five fines, all of which were well over 1 million US-Dollar and the highest being 7.2 million US-Dollar.
Driver #2: Reputational Liability Risks and Damages
The second driver for the importance of AML is the 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 that it takes many good deeds to build a good reputation, and only one bad one to lose it. And this is especially true for money laundering. Reputation in this area is usually negatively affected by the announcement of a serious investigation into money laundering usually in connection 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.
Driver #3: Legal Liability Risks and Damages
The third driver for the increased priority of AML are legal liability risks. This includes on the one hand civil liabilities. The possibility of legal damages being incurred is increasing 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” is one that 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 for money laundering. He was handed an eight year suspended sentence, probably due to his age, and given a personal monetary fine.
So obviously, we now have established significant grounds for why money laundering is so important for organizations. If you want to successfully run your business or work in a successful organization, you cannot hide from an establishing an effective anti-money laundering program.
Let’s also briefly speak about why money laundering is not only important, but why it should be a priority for senior management. And this is even beyond regulatory, reputational, and legal damages. Here are two additional reasons, why AML should be a priority for company leaders and senior managers themselves:
Driver #4: Costs
The first one is rising costs. AML compliance costs have continued to increase at a dramatic pace. This applies especially for financial services. A study from the Corporate Compliance Insights news outlet shows that the cost of compliance for U.S. and Canadian financial services firms are at around 30 billion US-Dollar in 2019.
Driver #5: Customer Experience
The second one is poor customer experience. Remember that the customer is king. This goes especially for services businesses. If they interact with an accused organisation, they will not want to use their services. They will simply move to a trustworthy competitor and the organisation will lose precious revenue.
Customers do not think about money laundering and compliance when making a purchase, as they expect it to be in place. Meaning, that because customers have the specific goal of purchasing a service, they stay far away from legal and compliance problems.
This means that successfully implementing AML regulations can put customers at ease. They do not want unnecessary problems which will affect a purchase, especially when it is out of their control. Trust between customers and businesses is vital, and they will be loyal if an organisation is transparent about compliance.
And here lies some sort of interesting conflict. On the one hand, the customer does not really want to bother with compliance and AML. On the other hand, compliance staff must oftentimes have multiple touch points with a customer to gather and verify information.
Perhaps this is not surprisingly, but a study has revealed that one in three organizations have lost potential customers due to inefficient or slow onboarding processes. It’s no wonder anti-money laundering has now become a top priority for many CEOs in the financial industry and for other businesses just alike.
You should not leave this chapter without a quote which is really infamous in the industry, and this book can definitely not be complete without it, you just have to have heard of it. Okay, so this quote it attributed to the former U.S. Deputy Attorney General Paul McNulty and he said “If you think compliance is expensive, try non-compliance.”