The regulation of financial crime has a frustrating history over the last 20 years. Ten years on from the crisis, the right remains elusive while its capacity to damage both the sector and society as a whole has increased.
Back in the early 2000s, at the dawn of the FSA, I was a Supervision Manager when some of Abacha’s treasure, stolen from Nigeria, was finding its way through the financial system. One of the FSA’s statutory objectives was the reduction of financial crime, and Abacha stimulated much discussion about an imminently harsher climate for money laundering and financial crime generally. Looking back, however, it’s difficult to argue this has really happened. There are several reasons, good and bad:
1. Aside from market abuse, the FSA could do little alone and needed to work with other agencies. This proved complicated and time-consuming, a reminder of how inherently difficult concerted action is when more than one agency, each with its own pressures is involved.
2. Large amounts of money can be laundered through small institutions – see the recent case of Danske Bank in Estonia referenced in the link. In a world of finite resources, this made it extremely challenging to identify and prioritise higher risk firms.
3. Unlike other aspects of regulation, with financial crime, regulators are constantly up against conscious opponents, deliberately exploiting the system. The way fraudsters have adapted to and leveraged the internet (despite the attempts at placing security around it) would be a fascinating case study. Combatting conscious opponents, often clever and well-resourced, requires a different mind and skill set, which for a regulator are hard to acquire and harder to keep.
4. The nature of financial crime has become more varied and complex. A few example: (i) the growth of terrorist finance means small amounts can sometimes cause more damage than large; (ii) globalisation has increased both the incentive and potential for tax evasion and money laundering, witness the Panama and Paradise papers; and (iii) the further opening of London as an entrepot for international wealth has encouraged Russians among others to see the City as a convenient home for their assets, however acquired.
And if the problems involved in regulating financial crime are bigger and less tractable than 20 years ago, they have also become more important to solve.
For more on this, it’s worth looking at the series of articles in the May/June edition of The World Today (Chatham House), particularly those by Sean Hagan of the IMF and Robert Barrington (Transparency International). After almost a decade of austerity, this has played its part in accentuating inequality and reducing trust across society.
There are some promising routes forward, including the recent FCA TechSprint on AML, but no-one pretends the answer is a quick, cheap or obvious.
Yet some kind of sea change is needed. With the forthcoming FATF assessment of the UK’s financial crime regulation and the approaching due date for us leaving the EU, it’s surely time for the industry and regulators to do some fresh thinking.
Danske Bank’s chief executive has resigned after Denmark’s biggest lender acknowledged that about €200bn in questionable money flowed through its small Estonian branch in one of the largest money laundering scandals ever uncovered.