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Banks Launch Major Anti-money Laundering Drive

A staff reporter

29 January 2005

Major US, Swiss and other big banks have issued new guidelines to strengthen the global fight against money laundering. The guidelines, released in Zurich yesterday, are intended to ratchet up barriers against money laundering from corrupt national leaders and Mafia. Their publication of the Wolfsberg Anti-Money laundering Principles follows the deeply embarrassing revelation that so much of corrupt Nigerian dictator Sani Abacha’s millions was washed through European banks. The guidelines are meant to be harsher than those already implemented by the Financial Action Task Force. The banks hope they will act as a global standard of due diligence on money laundering. The dirty money industry is worth an estimated $590bn annually. The banks involved are ABN AMRO, Banco Santander, Barclays, Citibank, Chase Manhattan and its merger partner J P Morgan, Credit Suisse, Deutsche Bank, HSBC, Société Générale and UBS. If other banks of comparable size want to join, would they want a say in the formulation of the rules? Complinet asked Jochem Laarschot of ABN AMRO whether there was a policy for such evolution. "I’m not aware of an evolution policy. If a bank comes up with a good reason for a change, I expect there is room for such a proposal. Of course, as the world turns and the ways of the launderers change, there will have to be adjustments. But now the principles have been published, other banks should adopt them and promote them. It would be a little arrogant to say that the proposals cover all the elements, but they certainly cover most of them." Solicitor David Corker, the money laundering expert who in 1998 successfully defended the only person to have been prosecuted in the European Union for failing to observe the 1991 directive’s record keeping and transaction reporting requirements, believes that a more subtle agenda lies behind these developments. "The banks’ initiative is officially led. These private banks, led by UBS, have promulgated their principles to please the American authorities. Indeed, the Treasury is about to compel US private banks to comply with the Wolfsberg principles next week. This initiative was triggered off by the Abacha scandal, plus the fact that America wants to be seen to be leading the way again. "The principles are rather weak. Global know your customer requirements are far from onerous. They won’t add any extra costs to banks that already conform to the existing EU standard of 1991. However, the public won’t look at the detail; they’ll just pay attention to the big announcement." In the last two years, US financial authorities have been ‘targeting’ private banks more and more. The absence of any principles that do not pertain to ‘know your customer’ procedures seems odd. There are many other measures, like transaction reporting and record keeping, that banks can take against the launderers but the banks' decision to concentrate on only one area could be explained by the spectacular failure of the Federal Reserve and other regulators to introduce KYC legislation at a federal level last year. The banks themselves are not announcing any plans to draw up principles for any other areas of money laundering. Another question hangs over the new principles. They are promulgated by globally active Western banks in intimate contact with Western governments, but they are prescribing practices for banks everywhere in the world, including banks in less developed countries where the introduction of such safeguards would be impractical. Also they are voluntary with no penalties. Complinet asked Laarschot whether this situation resembled the attempts of Western bodies to impose their accounting standards on the third world. His reply was a brief one: "I think you have a point. Nevertheless, we want as many banks to sign up as possible." David Corker was more forthright. "The is one of the sponsors of this plan. In June they published two lists - one of 15 countries that did not comply with the FATF’s 40 recommendations, and the 35-strong tax haven list. Bermuda is on both lists, although I know from experience that its regulations are strict - at least as strict as those of the UK. In the eyes of the OECD there is a very interesting conflation between money laundering and tax evasion. One is unlawful, the other lawful. "The Western governments have always seen offshore states as an economic threat, but their fear of losing revenue as investors grow more sophisticated has ballooned in recent times. This is why they have been trying to tar them with the money laundering brush. Helped by the OECD, which is closely aligned with the interests of the great powers, they have decided to use the fear of crime to give them more economic muscle. It is no wonder that perfectly respectable centres like the Channel Islands and Bermuda are deeply upset about it." Solicitor Nigel Morris-Cotterill, editor of World Money Laundering Report, offered another view. “There is no doubt that there must be greater international cooperation, and greater cooperation between banks. If the banks can agree on standards and implement them, and maintain them, that will be a great leap forward. One of the main issues raised by those who are required to comply with counter-money laundering measures is that of the level playing field - one business will lose business because another just down the road applies less rigorous compliance measures. “It will be interesting to see, however, how the proposals work in practice - if the banks wanted to put in place stringent measures, they could have already done so. But any move towards a global compliance system to identify movements of illicit cash across a financial services group is to be welcomed. However, there remains the problems of trans-national data protection which may make it difficult to put in place any truly global reporting and analysis system.” These guidelines for private banking relationships, the implementation of which is the management’s responsibility, are detailed in 11 main principles: Client acceptance: general guidelines This first principle provides checking procedures banks must conduct before opening an account for individuals, companies and trusts. They must ensure that source of wealth and funds can be identified and ascertain the identity of clients and beneficial owners with valid official identity documents. The principle also highlights tasks banks must perform for accounts held in the name of money managers and similar intermediaries, or can be managed by an attorney or other authorised signers on the client’s behalf. The bank must consider whether walk-in clients or relationships initiated by electronic means require a higher degree of due diligence prior to account opening. This principle also details due diligence tasks to perform and oversight responsibility. Client acceptance: situations requiring additional diligence or attention This second principle details cases where banks must pay particular attention before opening an account. It covers identity requirements for numbered or alternate name accounts, the obligation to scrutinise clients and beneficial owners resident in and funds sourced from countries identified as having inadequate anti-money laundering standards or representing high-risk for crime and corruption. It also includes due diligence procedures for entities located in offshore jurisdictions and scrutinisation processes for public officials and clients or beneficial owners whose source of wealth comes from activities known to be susceptible to money laundering. Updating client files This highlights the responsibilities for private bankers to update the client file on a defined basis or when there are major changes. The private banker's supervisor or an independent control person must review relevant portions of client files regularly to ensure consistency and completeness. The frequency of the reviews depends on the size, complexity and risk posed of the relationship. Practices when identifying unusual or suspicious activities Banks must have a written policy of procedures to identify and follow up unusual or suspicious activities, which must comprise a definition of what is considered as suspicious or unusual. The identification process can include the monitoring of transactions, contacts with concerned clients and the use of third party information such as newspapers or the internet. The private banker, the management or the control department are required to investigate any unusual or suspicious activity and decide to continue the business relationship with increased monitoring, to close the account, to report the transactions to authorities if there is no plausible explanation to operations. Monitoring Banks have the responsibility to set up an efficient monitoring program according to this principle. The private banker, who decides to open an account, must be familiar with significant transactions and increased activity in the account and especially aware of unusual or suspicious activities. This monitoring can be supported through the use of automated systems or other means if necessary. Control responsibilities Institutions that adhere to the principles must provide a written control policy that establishes standard control procedures for individuals or departments in the firm that have controlling responsibilities. These include the private banker, independent operations unit, compliance and internal audit. The control policy covers issues of timing, degree of control, areas to be controlled, responsibilities and follow up. Reporting Regular management reporting on money laundering issues must be established in the bank. It must detail the number of reports to authorities, monitoring tools, changes in applicable laws and regulations, the number and scope of training sessions provided to employees. Education, training and information The bank must set up a training programme on the identification and prevention of money laundering for employees who deal with clients and compliance staff. Regular training will also include measures to identify clients and follow up on unusual or suspicious activities. These employees must be aware of any major changes in anti-money laundering laws and regulations and all new staff must be provided with guidelines on the anti-money laundering procedures. Record retention requirements The bank must define record retention requirements for all anti-money laundering related documents, which will be kept for a minimum of five years. Exceptions and deviations The bank will establish an exception and deviation procedure that requires risk assessment and approval by an independent unit. Anti-money laundering organisation Banks must have an independent department responsible for the prevention of money laundering. This can be the compliance or legal department or an independent control unit. Additional reporting by Chris Hamblin and Sandra Pointel.