David Cameron’s vow to crack down on corrupt money in the UK property market has been headline news, and rightly so. In contrast, an historic new initiative to prevent corrupt money flowing through UK banks has largely gone unheralded. It needs attention - it is potentially a big step in the right direction, but it will only be as good as its implementation.
The UK banking regulator recently published rules which mean that a named senior executive will now be held personally responsible for their bank’s efforts to prevent corrupt officials using it to launder ill-gotten gains. This is something Global Witness has long campaigned for. We think that to stop repeated bad behavior by our banks, the individuals calling the shots must not be protected from the consequences of decisions taken on their watch.
The largely hidden truth is that banks play an integral role in enabling corruption, and it’s one of the big reasons why poor countries stay poor. If you have millions of dollars in dirty money to hide, you don’t stuff it under a mattress - you need a bank to handle the money. For example we’ve shown how Barclays, HSBC and other banks in the UK accepted millions from two corrupt senior Nigerian officials. Meanwhile a World Bank study of over 200 large scale corruption cases found that $56 billion of stolen funds was handled by over 140 different banks around the world.
Historically, as shown by our Banks and Dirty Money report, the UK financial sector has a poor record of complying with the anti-money laundering (AML) regulations. In 2011, a review by the financial regulator at the time found that 75% of banks were not doing enough, and as recently as November last year the new regulator found “significant and widespread weaknesses in most banks’ anti-money laundering systems and controls”. In other words, while some banks do a good job, many are leaving the door open for corrupt officials to launder their funds through the UK financial system.
A major cause of this has been skewed incentives for senior bankers. Banks can make a profit when taking embezzled and other illegally earned money, yet face little downside if they are caught out. On the rare occasions when penalties are handed out, they have typically been in the form of a fine for the bank as a corporation (the biggest to date in the UK being just £8.75 million for Coutts Bank in 2012). The actual people calling the shots rarely face financial consequences. As U.S. Senator Chuck Grassley commented following a major money laundering scandal involving HSBC in the U.S. “By allowing these individuals to walk away without any real punishment, the Department [of Justice] is declaring that crime actually does pay”.
The new UK Senior Managers Regime has the potential to rebalance these incentives. It is the product of a two year process led by a parliamentary commission tasked with addressing widespread misconduct at banks. The commission identified the lack of personal consequences for individuals as a root cause of repeated bad behavior by institutions.
Money laundering is one such area where this is
now being addressed. The regulator, the Financial Conduct Authority (FCA), now requires
each bank to identify a named executive to have overall responsibility for its efforts
to prevent financial crime, including corrupt officials laundering money. If the
bank fails to prevent such crime, that executive will have to show they took
reasonable steps to avoid that failure.
If they cannot demonstrate this, the FCA has can hold them personally
liable.
This is the first system of its kind in the world, for which the UK government
and the FCA deserve recognition. Done well, it could provide a credible
deterrent to UK banks violating AML regulations. But like any sound policy, it
will only be as good as its implementation. There are some important finer details
here:
- The regulator must be sure that
the responsibility is designated to someone sufficiently senior. Otherwise,
this promising new measure could simply reinforce an existing problem whereby
relatively junior managers are scapegoated for failures way above their pay
grade.
- The FCA must, with public
support from the Treasury and Prime Minister, impose penalties on the right individual executives when
banks violate anti-money laundering regulations. That could mean fines,
suspension, loss of bonuses and in severe cases criminal prosecution with the
prospect of jail.
- At present, not all foreign
banks will have to allocate this responsibility to a senior executive. Single Market rules mean that UK branches of
banks based in the European Economic Area will be excluded. As a result, the FCA will have to make sure
it uses other tools to enforce compliance by these banks, in a much more robust
way than it has done to date.
If these three things happen, the Senior Managers Regime is set to be a groundbreaking initiative in the UK’s efforts to tackle international corruption. The opportunity must not be lost - all eyes will be on the FCA and government to turn this potential into a reality.
