Banks falling short on money laundering regulations

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It’s about time.

In an effort to halt funding for terrorist activities in the aftermath of September 11th, Congress tightened up legislation to stem money laundering by requiring banks to perform “due diligence” to identify their customers. All suspicious activity was to be reported to government authorities.

Yet while the U.S. government has otherwise worked hard to become a leader in the global fight to combat financial crime, it seems too many banks are still doing as little as possible to comply with important money laundering regulations.

Today’s hearing is expected to provide mountains of evidence showing how HSBC has allegedly used its “U.S. affiliate to provide U.S. dollars, U.S. dollar services, and access to the U.S. financial system to high risk affiliates, high risk correspondent banks and high risk clients”. If these allegations are true, the actions of HSBC have left the U.S. financial system wide open to terrorist finance, as well as the criminal proceeds of corruption, organized crime, tax evasion and drug trafficking.

It comes as no surprise to the anti-money laundering community to find HSBC in the hot seat. On multiple occasions over the last decade, U.S. bank regulators have told HSBC to fix deficiencies in its systems. In February of this year, HSBC disclosed that it was under investigation by a swathe of government agencies in relation to multiple issues including anti-money laundering compliance, economic sanctions and tax and securities laws: the U.S. Department of Justice, NY County District Attorney’s Office, Office of Foreign Assets Control, Federal Reserve, Office of the Comptroller of the Currency and the Internal Revenue Service.

While the current hearing will present an opportunity for HSBC to answer these allegations, simply apologizing for past lapses in judgment will not be enough. Three steps need to be taken.

First HSBC must commission an external audit to look into how well it is managing money laundering risk. It must then publish the results. Other banks should do so as well. Given all that we have learned about the trustworthiness of banks in the past decade it is natural to no longer trust that they are actually doing what they say. (The recent Libor scandal, which resulted in the resignation of the CEO of Barclays, is the latest example of the banks apparent inability to regulate themselves.)

Second, if HSBC is found to have major breaches in anti-money laundering compliance, U.S. bank regulators must issue serious fines that will impact the bank’s bottom line and, if appropriate, criminal prosecution should be pursued. This is necessary to incentivize banks to change their reckless behavior.

Third, to close the loopholes that enable the banks and criminals to get away with money laundering, Treasury must require banks to identify and verify the ultimate owner of all bank accounts. In addition, Congress should pass the bipartisan Incorporation Transparency and Law Enforcement Assistance Act to stop criminals from misusing American shell companies to hide their identities to launder dirty money through the financial system.

Global Witness investigations have detailed how major banks including Barclays, Citibank and HSBC, have done business with corrupt senior officials from Nigeria, Angola, Turkmenistan, Liberia, Equatorial Guinea and Republic of Congo. Banks are the first line of defense against corrupt funds, but as long as they continue to accept the proceeds of state looting and grand corruption, as long as they continue to facilitate the money laundering that makes drug trafficking, organized crime and terrorist finance possible, they are fully complicit in these crimes and the poverty that persists in so many countries.

Until the U.S. tightens its laws, and regulators provide stronger, more consistent oversight and greater fines, it seems banks will be banks… and the U.S. will continue to be a playground for terrorist finance and the proceeds of crime.

Ostfeld, anti-money laundering policy advisor at Global Witness and a member of the Task Force on Financial Integrity and Economic Development

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