Stop ticking boxes and take action on money laundering

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DESPITE the considerable efforts of finance centres, such as Jersey, the battle against money launderers is failing, according to a former head of the Financial Action Task Force.

Financial crime expert David Lewis says that regulation needs to be augmented by a greater emphasis on investigation if the tide of economic corruption is to be turned. Peter Body reports…

David Lewis, who was the executive secretary of FATF for seven years, told Jersey’s annual economic crime and compliance symposium that worldwide regulators had the wrong emphasis.

‘The current focus on anti-money laundering has been failing because everyone’s just been ticking boxes, and no one is actually taking effective action,’ he told the JEP after his presentation.

‘We have created a culture of compliance, where businesses are spending a small fortune, or even a large fortune of about 300 billion euros a year spent by financial institutions on compliance, but it’s not helping to tackle money laundering.’

Mr Lewis, the Paris-based managing director and global head of AML and forensic investigations for the giant US firm Kroll, said that institutions thought compliance was all they needed.

‘They are just responding to supervisors and regulatory agencies who don’t have a good understanding of the risks or the real threats and are not themselves well qualified to do the job.

‘Therefore, often they are promoting the wrong kind of behaviours, and we see increasing fines on banks that are just “priced in” and become a cost of doing business. They are not actually driving the cultural changes we need.’

This is exacerbated by the lack of resources in financial intelligence units worldwide. Mr Lewis told the symposium that, globally, there are about 160 of these units totalling 6,000 staff. That is half the number of staff one bank, HSBC, has working on compliance.

‘We have one bank that has more resources going into this than all of the financial intelligence units globally, and I think that’s a problem,’ Mr Lewis said.

As a managing director at Kroll, which has a Jersey subsidiary, Mr Lewis sees his role as advising on the money-laundering code and co-ordinating efforts globally to tackle money laundering and terrorist financing. That covers both the regulatory aspects, but also the criminal justice system, and people often lose sight of the fact that there are many regulations and requirements on firms, some of which may not be attractive to them, although a lot are.

‘Countries also need to invest more in financial investigation, in reinforcement and asset recovery in good times and going to court in bad times, and that doesn’t often happen,’ he said.

‘These days, there is a lack of balance and resources put into solving the problem by the private sector, which grossly outweighs the resources available in the public sector. As a result, we’ve created all this information, all these suspicious transaction reports, about 34 million a year globally, and they are just going into black holes.’

The financial crime expert told the Jersey audience that there was, therefore, a need to get back to basics and appreciate why we have to focus on money laundering. That, he said, was because it is this money that fuels human trafficking, the illegal wildlife trade, environmental crime and drug trafficking. It was not just about regulatory compliance, he added, but also about acting on dirty money that was also fuelling the war in Ukraine as well as many other serious crimes.

Yet, for many firms, compliance is just something they have to do and not what they want to do.

‘This is starting to change, and some global banks, such as those in Jersey, understand,’ Mr Lewis said. ‘There has been a cultural shift in the big global financial institutions but I think that in the small and medium-sized institutions, there isn’t the understanding yet. Some still wonder about the need to know who their customers are, but why wouldn’t you want to know that? Or where there is a need to report suspicious activity, why wouldn’t you want to do that?’

While insisting he is not a tax expert, Mr Lewis pointed out that the very narrow perception by some of the difference between tax avoidance and evasion was not helping to solve the main problem of money laundering.

‘In many respects, because you’re conflating something that might not be everyone’s cup of tea – tax avoidance – with serious crimes, and then expecting one solution for all illicit financial flows from terrorist financing to a company trying to optimise its profits by using tools available in its jurisdiction, that is not always very helpful. Taxpayers might not like it, and different governments might find it popular to take action against it but while it’s legal, it’s difficult to blame firms for it.’

This is an age-old perception, according to Mr Lewis, and it has had a disproportionate effect on places such as Jersey. But when you look closer at what is happening in the Island and elsewhere, the measures in place are often much greater than the public might expect.

‘There is almost certainly much more tax evasion and avoidance happening in the UK and Delaware than there is in Jersey, he said, but that does not get the same attention.

Mr Lewis said that this did not mean that there was not a problem in Jersey, and he said that the situation needed to be addressed. But it was, he stressed, an international problem and no longer one going on in palm-fringed islands.

Another difficulty, according to Mr Lewis, is that businesses and supervisors often do not speak the same language.

‘The results of FATF evaluations show that most supervisors in most countries are failing to understand the risks or take a risk-based approach to supervision so their approach is to promote zero-tolerance,’ he said. ‘If that were successful, you would just have to close the financial system, so that’s not very effective either. I can’t talk for Jersey and the relationship between the regulators here and the firms but, generally speaking, regulators are lagging behind by not speaking the same language as firms. That also has to do with the lack of resources and understanding, and it’s taking a while for them to put proper regulations in place. Now they have to get better.’

In the case of Jersey, the international move towards transparency of company ownership and who is ultimately behind both companies and trusts is considered a threat to the Island’s economy and similar economies.

‘They are having to adjust to a more transparent way of doing business, which makes it a bit more difficult to do compared to what they used to be doing. But I think it’s a journey they have to go on,’ he said.

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