While 2019 saw a record volume of fines issued by global financial regulators (the second largest since 2015), 2020 has the potential to set another record, if several high-profile money-laundering investigations involving major banks in Australia and Europe come to a close.
Financial services enabling software firm Fenergo has published Another fine mess — A Global Research Report on Financial Institution Fines and Enforcement Actions, covering the period from October 2018 until December 2019.
Among the US$10.1 billion of fines issued by regulators globally in that period, 60.5% (US$6.097 billion) were imposed for violations of anti-money laundering and counter terrorist financing (AML/CTF) rules and incompetent know your client (KYC) procedures. Penalties related specifically to sanctions accounted for 38.7% at US$3.9 billion, all issued by regulators in the US.
2019 was the second-biggest year for fines by monetary value after 2015, when US$11 billion in AML-related fines were imposed by regulators globally. “As a result of several ongoing high-profile money laundering investigations involving major banks in Australia and Europe, 2020 has the potential to be even bigger, as regulators are expected to begin issuing enforcement actions,” the report writes.
APAC regulators have always been rather gentle in terms of size of fines (in proportion to the scale of businesses that they are penalising), and this year is no exception. Fines imposed by regulators in APAC in 2020 so far only account for US$7.46 million (0.07%) of total global fines.
The Hong Kong Securities and Futures Commission (SFC) has been the most punitive, with a fine of almost US$2 million to a brokerage firm for its failure to comply with AML and CTF rules. India, Pakistan and Taiwan were the most active in the region in terms of fine volumes.
Looking ahead, the enforcement activity is expected to increase, following highly publicized legal action against Westpac, a major Australian bank. The investigation relates to US$23 million AML/CTF breaches and failures to report US$11 billion in transactions alleged to be related to child exploitation.
Fenergo predicts that 2020 will see “significant enforcement actions issued as a result of several ongoing investigations in the Nordics, EU and Australia”.
Effectiveness of fines
The naming and shaming of financial institutions by regulators is meant to set an example and instil industry-wide better practices. The question remains whether this approach is effective in reducing the number of violations and in fighting financial crime.
Over the past few years, financial centres such as Hong Kong, Singapore and Australia, have all implemented their own senior accountability regime. The report grants that under the new personal accountability regimes being rolled out globally, C-suite executives have been prioritising compliance. And when faced with high-profile enforcement actions financial institutions usually respond by strengthening their compliance resources.
But it points out that “this manual approach is a highly costly solution that distracts personnel from focusing efforts on revenue-generating tasks”. Worse still: this costly and manual approach to compliance “has yet to prove its effectiveness”. Also, from a financial perspective, the fine values have historically been “barely a drop in the ocean for financial institutions”, the report adds.
“The scale and reach of these fines continue to pose difficult questions both for financial institutions and their regulators,” it continues, citing Graham Barrow, anti-financial crime consultant and co-author of the podcast The Dark Money Files.
“If the purpose of these fines is to force banks and other FIs to fully implement global policies and procedures in line with all regulatory expectations, then it appears that there is still work to be done,” Barrow warns. “Yet, at the same time, the spend on human resources in trying to ensure conformance has risen sharply and continues to do so. Something needs to change.”