Are Banks Enablers or Victims of Financial Crime?

By Prof. Robert Barrington, Centre for the Study of Corruption, University of Sussex

Not many years ago, banks, law firms and accountants were trusted institutions, staid but solid, a key part of the social fabric. Today, it is hard to find a headline that does not cast those very same institutions as morally bankrupt, wealth takers rather than wealth creators, and the professional enablers of financial crime—in particular, money laundering.

The charge against the banking industry is that time after time, scandals have shone a light on malpractice, and yet there is neither an acceptance of the problem nor an appetite to reform. In fact, through successful lobbying, the banks have—it is alleged—rigged the system in their favour.

This comes on top of the mistrust and resentment that has remained after the financial crisis of 2008. How can it be that crimes were committed, and yet nobody is held personally responsible?

These are generally categorised as “economic crimes”—which are defined in the UK Government’s Economic Crime Plan (2019-2022) as fraud, money laundering, embezzlement, bribery, corruption and terrorist financing. Those are a lot of crimes to fit into a single term, and banks might be expected to have different attitudes to each of them. For example, a bank could be strongly against financing terror attacks but benignly tolerant of a large corporate client paying bribes in a distant part of the world.

The most recent of those scandals—the FinCEN Files—seems to illustrate an anti-money-laundering (AML) system in which regulators have set unenforceable rules that banks deliberately evade. It reflects a pattern that has emerged over the past decade of banks having prioritised commercial interests over regulatory and legal requirements. The scandals have encompassed HSBC in Mexico, Deutsche Bank in Russia, Barclays’ “elephant deal” in Qatar, Goldman Sachs in Malaysia and JPMorgan Chase clearing the funds of organised crime gangs, to name but a few. Scandal has followed scandal, and the case against the banks looks overwhelming.

But there is also a case for the defence. It runs something like this: The globalisation of financial markets brings huge benefits to society, facilitating the free movement of goods and people. The dirty money—estimated by the United Kingdom’s National Crime Agency to be £100 billion annually in the UK and by the United Nations (UN) to be up to $2 trillion globally—is a drop in the ocean among all the clean money. That makes it hard to find, even with the best will in the world.

And the banks—they themselves would argue—have certainly put in the resources. Citigroup’s recent annual report told the world, for example, that “Citi employed roughly 30,000 risk, regulatory and compliance staff as of year-end 2019, out of a total employee population of 200,000”. That is 15 percent of the headcount, compared to around 4 percent in 2008.

Alongside the needle-in-haystack theory, the rotten-apple theory is often rolled out as a defence. Yes, bad things occasionally happen, but this is despite the best intentions of the bank’s compliance teams and certainly not in line with corporate policy—dirty money that slips through the cracks, or fraud or bribery, are the result of a few rotten apples in an otherwise sound barrel.

So what is really going on here? Are the banks the perpetrators or the victims of financial crime? It is beyond dispute that the proceeds of corruption and organised crime flow primarily through the banks’ coffers. Banks are a key part of the money-laundering chain, and to that extent, are undoubtedly facilitators and enablers. The key question is the extent to which they are complicit, either by actively processing dirty money because the returns and relationships are so lucrative or passively turning a blind eye. We can see they are enablers, but are they complicit enablers or unwitting enablers?

Understanding the nature of the problem and who is responsible is not merely an academic exercise. There is a growing acceptance that the global anti-money-laundering architecture is not fit for purpose. But whether it needs to be abolished entirely and replaced, substantially reformed or merely incrementally improved is still up for grabs. Critically for the banks, what is therefore also up for grabs is the role that they themselves will play in the system going forward. In one scenario, they might shape and lead it; in another scenario, they might have severe restrictions imposed against their will.

The current AML architecture—enshrined in national legislation but derived from the approach of the OECD’s (Organisation for Economic Co-operation and Development’s) Financial Action Task Force (FATF), a patchwork of US legislation including the USA Patriot Act and European Union (EU) directives—puts banks in the front line of defence. In the UK, for example, banks are responsible for filing Suspicious Activity Reports (SARs), maintaining compliance systems and liaising with the authorities through a seat at the table of the Joint Money Laundering Intelligence Taskforce (JMLIT) and the Economic Crime Strategic Board (ECSB). This gives them a multi-layered role with inherent conflicts of interest; they are the developers of regulatory policy and providers of information to law-enforcement agencies while at the same time being providers of banking services to their customers and potentially complicit in the crimes their systems are designed to prevent.

By and large, the banks have helped to design and defend this system. As systemic loopholes have become ever more apparent, few banks have put much effort into closing them. For example, it has long been evident that secrecy jurisdictions such as the British Virgin Islands play a disproportionate role in money laundering. Yet banks have been absent from the global campaign, led by the British government, for beneficial-ownership transparency.

Rather than address the question of whether the system itself is fit for purpose, the banks’ focus has been to manage regulatory risk by building up their own compliance systems. There is no reliable cost for how much the global banking industry is spending on AML compliance, but the very bottom end of the estimates are $5 billion annually. Ironically, this seems to have failed to deter or detect the money-laundering activities while creating a stifling bureaucracy for banks and their day-to-day customers. This flawed approach encapsulates the banks’ AML failures: Standard retail customers who are ultra-low risk are treated as suspicious, while risky high-net-worth customers sail through the system unchecked.

It is hard to believe that this approach to AML really works for the banks, unless you subscribe to the conspiracy theory that they have designed the system to fail so they can pursue lucrative business opportunities. In reality, the current system damages their reputations. It irritates retail customers. It adds cost. Society does not benefit. Only the criminals and kleptocrats seem to prosper. Banks may feel that with a seat at the table of bodies such as the JMLIT and ECSB, alongside huge compliance operations, they are active contributors to the solution. But after so many scandals, society sees them as the problem, not the solution.

In many areas of corruption, it is possible to be both the victim and the perpetrator. For example, in paying a bribe, a company may be the victim of a system that requires “facilitation payments” while at the same time breaching anti-bribery laws by making such a payment. Similarly, with regard to financial crime, bankers can be both the victims—whose systems have been exploited to launder money—and perpetrators—whose complicity has allowed the money to be laundered.

It is a nuanced picture, but by and large, banks acknowledge only half of it: They view themselves as the victims of financial crime. If they were willing to conceive of themselves as perpetrators as well, a solution is more likely to be found that works for society, the banks and their customers.