Industry News

What It Takes for Banks to Nab a Criminal; Shareholders bear the costs of banks failing to spot financial crime

Paul J. Davies | Tuesday, March 21, 2017

The Wall Street Journal

Banking isn't really about moving money around: In truth it is an information processing business. On that score, information overload continues to dog the banks.

Danske Bank, HSBC, Nordea and Royal Bank of Scotland are the latest to be caught up in allegations of a $20 billion Russian money-laundering operation, reported in European and Asian media. The banks all said they were committed to combating financial crime.

What banks do all day is send and receive millions of messages, deposit records and settlement confirmations. Spotting the transactions of money launderers, terrorists and rogue states has become more complex in the digital age where data are greater in volume and travel further and faster and to more obscure places.

Some banks have been guilty of helping clients to do bad things like avoid tax or get around sanctions. Many have unwittingly been used by bad people. All must invest time and resources into improving their systems and controls to try to stop this.

Shareholders bear the costs for failure as shown by fines paid recently by Deutsche Bank in a Russian equity trading scandal and by HSBC related to money laundering in Mexico in 2012.

But each individual bank only sees part of what is happening across the network. More cooperation on sharing and analysis of banking information is required. While the Financial Stability Board helps regulators manage systemic risks across borders, the Financial Action Task Force only sets standards and encourages governments to implement them.

One problem is that data aren't always standardized or processed in the same way, which makes them harder to use. The financial crisis sparked lots of work to improve the collection and utility of banking information. For example, when Lehman Brothers collapsed many institutions had no idea they were even exposed to a Lehman subsidiary. The U.S. Office of Financial Research has since led the creation of a global barcode-like system of Legal Entity Identifiers to help banks and regulators understand who is who.

With better, more standard data, regulators and central banks can build more sophisticated tools for analysis of financial networks that will help identify the paths of payments across the whole system. The suspicious ones that travel furthest, make the most leaps between institutions or move in circles can then become easier to spot.

This also entails proper identification of offshore companies and other structures, an approach that might impinge on the privacy of celebrities or the superrich, but which, like security cameras throughout our cities, seems a small price to pay if people aren't doing anything wrong.

Current methods for identifying suspicious activity are still crude and throw up too many false or incomplete signals. The work to improve this is little different from the work to identify and combat systemic risks. Banks and global regulators should redouble their efforts to build better defenses.

This article was licensed through Dow Jones Direct.


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