Banks’ anti-money laundering practices in Europe

Conduct risk, a broad topic covering money laundering, terrorist financing and sanctions busting, is a persistent sore for the banking sector and a latent credit risk. It has brought with it intrusive regulation and high related compliance costs, Scope Ratings GmbH reports.

The fallout from money-laundering and other conduct issues affects banks directly and indirectly. Fines, compliance remediation expenditure and higher funding costs have a direct hit on banks’ bottom lines. But it can also result in significant loss of trust among customers and other stakeholders, leading to lost or dented client relationships.

Uncertainty persists with regard to recent high-profile cases about how and when regulators and other authorities may penalise the banks. US authorities in particular have imposed very high fines for misconduct on offending European banks in the past. Danske Bank and Swedbank have taken the path of full co-operation with all authorities over the Baltic money-laundering saga.

“Headline risk will remain until these issues are resolved, which, given the number of investigations involved in different jurisdictions, could take several years,” Jennifer Ray, executive director in the financial institutions team at Scope Ratings, said. “While it is impossible to estimate the total of any fines that may be involved for these two banks, we believe it is in their interest to co-operate. To-date, the fines imposed on larger banks have been on a scale that they are capable of absorbing, however painful, and agencies have taken the level of co-operation into account.”

It is not easy to tell how good a bank’s anti-money laundering efforts are in practice. Each case, depending on the bank’s culture, structure, product range and geographical diversity, is different. Emerging technologies could be helpful.

“Banks do have opportunities to find monitoring solutions for many of these issues in time, using machine learning, artificial intelligence and related methods to pick up suspicious flows. But such solutions are expensive and require careful development and testing. Other useful initiatives may revolve around pooling of information between banks,” Ray said.

The EU/EEA bloc’s supervisory oversight of banks’ anti-money laundering efforts looks relatively weak when compared with that of other jurisdictions, particularly the US. But laws are being strengthened: the EU has adopted six AML Directives; the last three still in force. AMLD4 was transposed into Member States’ national legislation in 2017; AMLD5 will be transposed from 2020; AMLD6 will need to be adopted by the end of 2020.

In November 2019, the finance ministers of six EU countries proposed stronger and more harmonized legislation and creating for the first time a centralized bloc-wide authority that would deal with money-laundering issues and terrorist financing.

“This could be a completely new agency, or the role could be fulfilled by the EBA with strengthened powers and following an overhaul of its governance,” Ray said.

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