Money launderers go unchecked

Money launderers go unchecked

KPMG says complacency could turn into a ‘ticking time bomb’ for banks

Many banks have been struggling just to survive the past few years, and a recent study shows while management is redirecting the bulk of attention and resources to propping up its institutions, focus on preventing money laundering is slipping, even as it remains a problem in Europe.

Money laundering, the concealment of illegally obtained funds, is a practice that various international regulators including the International Monetary Fund and the Financial Action Task Force on Money Laundering say is a global problem. They also, however, concede it is almost impossible to put an estimate on the amount of money laundering transactions that take place each year.

As more immediate problems confront banks, attentiveness to money laundering prevention has waned, according to a recent study conducted by business advisory firm KPMG. In 2011, just 62 percent of senior management polled said money laundering prevention is a top priority, down from 71 percent in 2007.

In the European Union, the directive “on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing” tries to prevent these crimes by requiring banks, real estate agents and other types of companies handling major financial transactions to investigate and report cash transfers exceeding 15,000 euros.

While reporting all transactions below this relatively small sum inevitably leads to loads of tracked banking activities, banks are advised to narrow the search for potential money laundering by identifying and further scrutinizing “politically exposed persons,” or PEPs as they are known in the industry.

Banks make use of automated, sophisticated algorithms when signing up new customers that can throw up red flags for customers who are more likely to engage in money laundering, said Maroš Holodňák, director of forensic services at KPMG. These alert mechanisms can be driven by geography, business activity profile or PEP status.

“PEPs tend to be high-ranking public officials resident in a foreign country or holding a high-ranking position within the executive, judiciary or legislature of a foreign country,” Holodňák said.

“The definition also includes the relatives of the PEPs and even their business partners. These individuals are perceived to be exposed to corruption attempts, therefore more scrutiny is required.”

Banks are not only distracted by more pressing problems, but the cost of monitoring for money laundering has gone up an average of 45 percent for most banks over the past three years, which could potentially push it even further down the priority list.

Holodňák said one of the ways to decrease costs is to set up shared service centers.

“Such centers exist within large financial groups. For example, three global banking groups operate their global hubs in Poland and in the United States; there have even been attempts to have these centers service non-group banks,” Holodňák said.

One of the biggest problems with money laundering monitoring in CEE is the unpredictability of the regulatory oversight from state institutions and bodies, which Holodňák said can often decrease the pressure on banks to invest in monitoring. He contrasted the situation here to the comparatively rigorous monitoring regimes in the United States and the United Kingdom, where he said penalties for noncompliance are high, thus raising the incentive to make the prevention of money laundering a priority.

“Underestimating the issue may be a ticking time bomb, as can be exemplified by Latvia of 2001-05, when enforcement actions resulted in withdrawing a number of banking licenses of local banks,” Holodňák said.

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