Why financial institutions must comply with anti-money laundering laws?
By SSA ZAIDI Moneylife
Money laundering and crime are interconnected; it is the crime that thrives on money laundering—if money laundering is blocked or detected it will lead to discouragement of crime
To answer this question, we need to first understand what money laundering is and how it can rip through the socio-economic fabric.
Money laundering is like the sting of a cobra that injects poison into the socio-economic structure making it numb and thereafter leading it to a slow and agonizing death. Like a cannibalistic creature, it feeds on the foundations of the organization weakening it to such an extent that its downfall is the only eventuality. BCCI is a glaring example. Like fertilizer nourishing the soil, 
it nourishes criminal activities.
Criminal activities generate a lot of illegitimate funds (proceeds of crime) that cannot straightway mingle with the legitimate money in circulation in the country. It provides criminals with the financial strength to fund and expand their illicit activities.
So to reduce the generation of illicit money the supply of this fertilizer has to be stopped and blocked—stop the flow of money laundering and criminals will be devoid of a very effective channel to launder dirty money. Money laundering and crime are interconnected; it is the crime that thrives on money laundering—if money laundering is blocked or detected it will lead to discouragement of crime. It is the illegally sourced cash that needs to be legitimized by mixing it with legitimately earned money. Crime generates dirty money and money laundering washes that dirt to make it look clean. It is a service that criminals use to move funds from the place of origin to a distant place, where it may be rather difficult, though not impossible to trace its origin. So if dirty money is not there money laundering will not be there and if money laundering service is not available then it will discourage criminals and will lead to lesser crime.
To help prevent this, various nations have established anti-money laundering (AML) laws that regulate how certain types of businesses interact with their clients. We are now at a stage where financial institutions are committing criminal offences and assisting their clients in the process of money laundering on a regular basis. The regulators and law enforcement agencies do not appear to have the will or resources to prosecute those involved criminally. Many financial institutions either turn a blind eye or positively collude with clients to place suspect finance in offshore jurisdictions through shell companies, with nominee directors making it very difficult to discover the true beneficial owner.
The Cayman Islands Monetary Authority (CIMA) has officially revoked the banking license of one of the largest multinational banks (Cayman Islands Branch). This follows recent reports that the bank has handed million-pound pay packages to more than 200 staff in a year that saw it fined 1.2 billion pounds for money laundering. In an exclusive disclosure to Cayman Net News last September, CIMA concluded that the bank was conducting business in a manner detrimental to the public interest, the interest of depositors or of the beneficiaries of any trust or other creditors, and that the direction and management of its businesses has not been conducted in a fit and proper manner.
According to the British press, the UK Bank’s chief executive, picked up 7.4 million pounds in pay and perks as a reward for bumper profits. Similar seven-figure payouts went to 78 of his British-based staff. Such massive sums indicate that “culture of entitlement” was alive, and kicking, in the Bank. Lamentably compliance culture did not exist.
Compliance culture needs to be created: If the senior management says—and it was widely reported in newspapers—that compliance people tell us how not to do business, but one has to take one’s own call for business growth, this implies an encouragement to the employees not to bother about compliance but concentrate on promoting business and business growth. Unfortunately, this is a mindset that seems to focus on business growth at the cost of violating the regulatory and compliance requirements. Moreover, if for such digressions penalty paid is a fraction of huge profits made (Cayman Islands Branch of this bank made profits of 13.7 billion pounds for 2012, while the US financial regulators fined it 1.2 billion pounds), then why bother about implementation and ethical conduct. This is indeed a sad state of affairs!
If financial institutions complied fully with FATF recommendations especially in relation to PEPs and reported their suspicions/knowledge then the recovery of a large part of the world’s dirty money would have been possible and the beneficial owners behind them identified.
Banking industry that accepts business from high risk customers must have systems, controls and practices to manage that risk. Despite occasional aberrations, India has consistently maintained a robust Anti Money Laundering (AML) system. Historically, the country’s strict foreign exchange laws and transaction reporting requirements, together with the RBI’s Know Your Customer (KYC) policy guidelines make it difficult, though not entirely impossible for criminals to use banks or other financial institutions to launder money. Large portions of illegal proceeds are usually laundered through the alternative remittance system called ‘hawala’ or ‘hundi’.
Banks are in the first line of defence to make sure that proceeds of crime do not get entry into the country. Purpose of RBI directives, IBA guidance notes and the Prevention of Money Laundering Act is to put in place systems that help ensure the realization of that objective. However while these policies and directives look good on paper, in practice as is revealed by many cases of violations recently reported, it has apparently failed to ensure that AML risks are addressed appropriately. Poor implementation of the prescribed policies and procedures exposes banks to risk of handling the proceeds of crime. These failures attract a strong penalty from the Reserve Bank of India.
One of the objectives of PML Act, RBI and IBA guidelines are to protect the financial soundness and integrity of the Indian financial system. This includes ensuring that criminals do not get access to financial system and that money circulating in the Indian economy is clean.
But we should understand that it is not only a sound system that can take care of all these ills. Ethics is an integral part and in my opinion it is something that cannot be taught but can certainly be shown and if the organization is really serious about it, then it has to percolate down from top management. They have to behave in a way which is demonstrably ethical and such ethical practice over time becomes culture. So a robust control system coupled with a culture of zero tolerance for flouting norms can ensure that a Financial Institution stays firm like the mighty oak during the most turbulent times.
(Saiyid (SSA) Zaidi is a training and development consultant as well as external subject matter expert at the Educom Group Banker’s Academy in New York.)
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