Fri, Nov 6, 2020

Lessons from Anti-Money Laundering Penalties

As research reveals global anti-money laundering fines hit more than $700m in the first half of 2020 Duff & Phelps’ Nick Bayley and Julius Kania explore the long-term trends, including whether organizations have learnt their lessons and how regulators are changing their approach.

Fines for anti-money laundering (AML) rule breaches hit $706m (£547m) in the first six months of 2020, an increase of 59% on the total for the whole of 2019 ($444 m). This uptick, published in Duff & Phelps’ 7th annual Global Enforcement Review suggests that after a short lull, regulators are continuing their clamp down on anti-money laundering breaches.
However, by delving a little deeper, we can see a longer-term trend in terms of how this area of financial crime is being policed. Contrary to the recent headline figures, it seems total AML fine values are falling globally.

So, What Has Been Happening to AML Fines?

In 2018, several banks incurred heavy penalties of more than half a billion dollars. ING was fined $900m, US Bancorp $613m and Australia’s Commonwealth Bank $700m, all after fundamental failings in their AML functions.

Since then, the total monetary value of fines issued has fallen significantly. This is partially due to an absence of similar huge fines being handed down to the largest organizations. These massive fines had contributed to total AML penalties of $3.2bn in 2018, up from $2.1bn in 2017.

Of course, the number of major financial services organizations that can be handed such large fines is finite and it is perhaps unlikely they will be punished for the same failings again so soon. AML investigations and the related published fines often have long lead times and usually reference breaches made several years ago.

There is also, of course, the possibility that these major institutions have learned their lesson and have genuinely improved their management and control of AML risk. That, in conjunction with sending a wider educational message to the whole market, is what public enforcement action is all about.

Aside from this, we have also seen regulators actively exploring other enforcement measures that do not result in fines, such as restricting a firm from doing a certain kind of business or from taking on any new customers. Options like these provide regulators with quick, efficient ways to reprimand a firm and to incentivize firms address their shortcomings, without the need for lengthy enforcement action.

How Are Regulators Changing in Their AML Approaches?

To understand how AML enforcement is evolving, we should look at how this already differs across various regulatory regimes. The UK and US regulators have led the charge in enforcing AML rules and in levying major penalties. This year, however, other countries’ watchdogs are starting to bite: a number of AML fines have been handed out by Scandinavian regulators, for example, with the likes of Swedbank and Danske Bank both incurring huge penalties.

In fact, to give an idea of the extent to which US dominance has slipped in terms of total fine values, it accounted for just 12% of penalties incurred in the AML space in 2020. This was down from 45% in 2019 and from an overwhelming 97% of the global total in 2016.

What has not changed is the areas in which firms are failing. Our data shows this has held steady over the years, with the majority of fines consistently relating to customer due diligence, AML management, suspicious activity monitoring, and compliance monitoring and oversight.

Naturally, different regulators will focus on different aspects of AML compliance, but the consistency with which failures in customer due diligence appears in so many AML cases globally suggests this is an area with which most firms struggle.

New Suspects

Another trend, particular in jurisdictions like the UK, is that new kinds of businesses outside of the usual suspects are starting to be fined for AML failures. For example, new rules in the UK have seen accountancy practices, law firms and even estate agents being fined for AML failures, which, although small compared to the size of the fines imposed on banks, will send a strong message to those sectors.

What Does the Future Hold for Regulators and AML

It is perhaps no surprise to hear that COVID-19 will likely have a material impact on this area as well. For a start, it will be difficult for AML inspections to be as rigorous in countries where regional or national lockdown rules are in place; anecdotally, we have already seen some regulators suspend investigations to focus their resources on dealing with those more reactive cases.

Looking ahead, there may be a tendency for the authorities to combine AML prosecutions with other enforcement action, as this is where we still see the biggest fines. For example, this year saw the US Department of Justice fine Bank Hapoalim, Israel’s largest bank, $900m for a number of infractions. Of this total, only part related to AML breaches, with the rest linked to tax evasion and bribery charges.

Worldwide, we have already seen similar, multi-faceted fines for the likes of UBS in Europe, which in 2019 was fined $5.1bn by a French court for tax fraud and money laundering failures.

Crypto Challenges

From a broader standpoint, the regulations themselves are continuing to change and we recently saw virtual assets start to come under a regulatory framework in the EU. If they are to oversee cryptocurrencies and blockchain technology, regulators must figure out how to supervise these firms in practice.

This will be dependent on the regulators hiring the right people with new skillsets; most regulators currently have a serious skills gap in these unfamiliar areas.

While regulators continue to grapple with the technological evolution of financial markets and products, the world of AML regulation could witness its own upheaval in the wake of the recent FinCEN files that may confirm the alarming extent to which criminals are exploiting financial institutions. It will be fascinating to see what the fallout will be from this news, and what impact it will have on global AML fines over the coming years.

This article was first published in Accountancy Daily on October 28, and can be viewed here.

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