I was surprised the other day when I met Pawel Kuskowski, CEO and Co-founder of Coinfirm, a start-up firm offering Compliance-as-a-Service. Pawel has been trained in compliance and AML, having worked with some of the world’s biggest financial institutions including AIG (Compliance Officer), UBS (Director of Compliance, Compliance and Operational Risk Officer) and RBS (Head of Global Anti-Money Laundering, AML). Why was I surprised? I was surprised by his opening line: “there is around $1.6 trillion of money laundering globally and less than 2% is caught by the financial system”.

WTF?

This is a guy who knows AML inside and out and he’s telling me the banks are that crap at AML? Banks spend billions on AML and compliance and risk. I know, as I’ve met so many of them.

I also know how difficult it is because AML, risk and compliance are the banes of bankers’ lives. For every person who works for a bank, they have at least two people checking that what they do is acceptable. This means that is a continual fight (or balance) between taking business and risk. For example, when a banker sees a good deal – we can make millions if we deal with this dodgy money transfer network in Mexico ­­– they will do whatever they can to get around the compliance rules to make it happen.

I say this from the experience of a very good friend of mine. He headed up global compliance for a systemically important bank, sat on most of the committees that deal with money laundering rules, and was hugely respected in the banking community. He told me a story about how his team had tracked and traced some dodgy dealings by their banking cohorts in Latin America and, specifically, Mexico. This had been reported to the CEO of their Mexican operations, the CEO of the bank for Latin America, the Global Head of Risk and the CEO, CFO and COO of the bank.

The report said something along the lines of: we have found some dodgy dealings in Mexico and LatAm that breach US rules for money transfers and payments. We recommend we stop dealing with ABC Inc therefore.

ABC Inc gave the bank about $10 billion in revenues and $500 million a year in profits for their Latin American operations so what did the bank do? Screw compliance. The bank kept the business and ignored the advice.

Ten years later, that bank suffered severe penalties for ignoring sanctions and money laundering rules from the powers that be in the USA. My friend lost his job and the bank said sorry. But were they really sorry? I don’t think so. It’s more like they were sorry they got caught, and there’s the rub: how can $1.6 trillion of money wash around the banking system untracked and untraced? Because the bankers want it that way.

If you don’t believe they do this, then consider this paragraph about how Deutsche Bank made $462 million disappear:

One of Deutsche’s clients, Italy’s Banca Monte dei Paschi di Siena, which, as the crisis raged (in 2008), was down €367 million ($462 million at the time) on a single investment. Losing that much money was bad; having to include it in the bank’s yearend report to the public, as required by Italian law, was arguably much worse … (Deutsche Bank) had come up with a miraculous solution: a new trade that would make Paschi’s loss disappear … Deutsche began to apply the practice to transactions around the world, totaling more than $10 billion that never showed up on its books and making the bank look smaller and less risky than it really was.

It reminded me of the comments made by Geraint Anderson, aka Cityboy, when he spoke at the Financial Services Club five years ago. His premise was that no one bothered unless they were caught: from 2006 to 2009, unusual share price movements preceded 30% of all UK mergers and acquisitions, a statistic that stubbornly refused to budge until the FSA started bringing cases to court. That’s why we’re seeing so many more cases today.

The same is true with AML, as I wrote three years ago:

The Financial Services Authority (FSA) did pretty much nothing about money laundering in the City. As their own report discovered, around 75% of City firm’s do not apply the tests required for effective AML: “Three quarters of the banks in our sample failed to take adequate measures to establish the legitimacy of the source of wealth and source of funds to be used in the business relationship …”

But really? Is it really so bad? Is it really true that 98%+ of money laundering is not tracked, traced and caught? If that is the case, it is because the banks have not been kicked hard enough to take action. So I asked Pawel to give me some evidence that these numbers stacked up. I was amazed at what he sent back to me:

UNODC – the foremost authority internationally and commonly cited in work

“Criminals, especially drug traffickers, may have laundered around US$ 1.6 trillion, or 2.7 per cent of global GDP, in 2009, according to a new report by the United Nations Office on Drugs and Crime (UNODC). This figure is consistent with the 2 to 5 per cent range previously established by the International Monetary Fund to estimate the scale of money-laundering. Less than 1 per cent of global illicit financial flows is currently being seized and frozen, says the report.”

OECD – The Organisation for Economic Co-operation and Development

“Fighting international tax evasion is important because it is a major source of illicit financial flows from developing countries. Sub-Saharan African countries still mobilise less than 17% of their gross domestic product (GDP) in tax revenues…Progress in OECD countries in repatriation (stolen assets) has been modest, however, with only a limited number of countries having frozen or returned assets.”

Global Financial Integrity – Illicit Financial Flows from Developing Countries: 2004-2013

“Every year, roughly $1 trillion flows illegally out of developing and emerging economies due to crime, corruption, and tax evasion—more than these countries receive in foreign direct investment and foreign aid combined….developing and emerging economies lost US$7.8 trillion in illicit financial flows from 2004 through 2013, with illicit outflows increasing at an average rate of 6.5 percent per year—nearly twice as fast as global GDP.”

UK Government – UK national risk assessment of money laundering and terrorist financing

“Money laundering can undermine the integrity and stability of our financial markets and institutions. It is a global problem. The European Commission’s 2013 impact assessment of the EU anti-money laundering/counter terrorist financing legislative framework points to global criminal proceeds potentially amounting to some 3.6% of GDP; around US$2.1 trillion in 2009. The best available international estimate of amounts laundered globally would be equivalent to some 2.7% of global GDP or US$1.6 trillion in 2009. Both money laundering itself, and the criminality which drives the need to launder money, present a significant risk to the UK. The laundering of proceeds of overseas corruption into or through the UK fuels political instability in key partner countries. The NCA judges that billions of pounds of suspected proceeds of corruption are laundered through the UK each year. Money laundering is also a key enabler of serious and organised crime, the social and economic costs of which are estimated to be £24 billion a year. Taken as a whole, money laundering represents a significant threat to the UK’s national security. The government’s 2013 Serious and Organised Crime Strategy set out plans to make it harder for criminals to move, hide and use the proceeds of crime.”

UK Government – Action Plan for anti-money laundering and counter-terrorist finance

“This Government has done more than any other to tackle money laundering and terrorist financing. More assets have been recovered from criminals than ever before, with a record £199m recovered in 2014/15, and hundreds of millions more frozen and put beyond the reach of criminals….

“The UK remains the largest centre for cross-border banking, accounting for 17% of the total global value of international bank lending and 41% of global foreign exchange trading. The size of the UK’s financial and professional services sector, our open economy, and the attractiveness of the London property market to overseas investors makes the UK unusually exposed to international money laundering risks. Substantial sums from crimes committed overseas are laundered through the UK.3 There is no definitive measure of the scale of money laundering, but the best available international estimate of amounts laundered globally would be equivalent to some 2.7% of global GDP or US$1.6 trillion in 2009…”

But AML efforts still cost money: an estimated $7 billion annually in the U.S. alone for implementing AML regulations from the international Financial Action Task Force (FATF). The cost is disproportionately more in smaller countries such as Mauritius, which has 1.3 million people and 25 government officials working on AML implementation — more AML bureaucrats than the country has opticians — and that’s not counting bank staff who carry out customer investigations.

This reminded me of the two books that constantly appear in my thought stream when I think about the global economy, money, debt and trade flows: Debt and Treasure Islands. I’m not going to repeat all the details again here, apart from reiterating that debt is used to create power over nations and tax avoidance is the method by which powerful nations remain powerful. Or that’s the treatise of those two books anyway.

In fact, when I see a headline like this one from Tuesday: The world is becoming a more corrupt place but the UK remains one of the “cleanest” nations, I do have to laugh wryly. You see, we are not blatantly corrupt. You cannot buy a government official directly. But you can offer the officials banker a billion-dollar account, give ten million to the party in power and then it’s amazing how you can bend the rules.

What’s the solution? Is there one? More on that tomorrow …

Posted on: January 26, 2017