Many Banks Cut Clients Over Money Laundering Fears

http://robertkaplinsky.com/work/drug-money/
(credit: Robert Kaplinsky)

Many banks have cut clients over money laundering fears. With fewer clients, low interest rates and low volatility, there are less ways for financial institutions with multiple lines of businesses can earn money. Bank of America, Citigroup and JPMorgan Chase combined cut 50,000 jobs in 2014. Industry wide, some have reported 80,000 cuts. Profits are up at banks because of the job cuts, not because of improving economy.

One area that hasn’t seen a decline in headcount is Compliance. All compliance-related areas of the bank (Compliance, Legal, Risk, Controls, Audit) have all seen headcount increases. For many of the areas, skills from other areas of the bank is quite transferable. Knowledge as well.

But knowledge of AML is particularly lax. And, sadly, many of the top decision makers are not versed enough in AML issues to figure out a way to restructure the organization to keep clients. So, the only thing they can do is to cut clients.

While this might be good for the domestic banking industry, on the long run, this will be bad when these firms are trying to compete with their large Chinese competitors. The five largest Chinese banks have an edge on AML programs, should they choose to implement it: government support.

Because Chinese banks are essentially government owned, AML programs in these institutions can implement government level standards even with bank secrecy laws. This integrated approach is at the risk of bank secrecy laws, but it also means that even without knowledge of AML, top decision makers can decide to keep all clients and adjust AML programs as the government sees fit.

This issue has been playing out the last few years because the US has been seeking ways to punish Chinese bank clients through their correspondent accounts for revenue from counterfeit products they sell. The measure should really be tied to counterfeit products that are made, not those that are sold, but that’s especially difficult since the US government has no jurisdiction in production abroad. But US laws allow extra-jurisdictional reach on banking when correspondent bank accounts are in the US. But, of course, Chinese banks are against this. So is the Chinese government. On the other hand, the Chinese government doesn’t want their economy to be so heavily depended on counterfeit products. So, the conundrum is for the Chinese government. The US is enforcing the type of laws they would like to implement, but the punishment will be doled out in the US. If the Chinese government also pursues this, the punishment will be on both sides. And the Chinese government also has to look out for the short term economy, which is heavily depended on counterfeits.

So, at least US and European banks can breath one sigh a relief: the clients they are dropping must find banks within the western government jurisdictions because shifting the economics of counterfeit financing and transactions would provide more leverage to implement more stringent AML programs on the institutions that currently do not have such programs.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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