CDM, money laundering and blockchain settlement

The week on Risk.net, March 22–29, 2019

7 days montage 290319

Patchy response to Isda’s back office of the future

Some banks are quiet, while clearing houses seem split on uptake of Isda data-standardisation project

FCA steps up anti-money laundering spot checks

UK watchdog changes its fincrime head amid speculation AML spot visits increasing because of a critical FATF review in 2018

Japan looks to DLT to combat rise in settlement fails

Decision to shorten settlement cycle likely to hike fails caused by confirmation mismatches

 

COMMENTARY: The importance of trophy hunting

The UK’s Financial Conduct Authority (FCA) seems to be taking money laundering more seriously: not before time. Risk.net looks this week at the reasons behind its increased AML spot checks. The move of long-standing financial crime head Rob Grupetta to take over claims management looks like, at best, a kick sideways, and the creation of new posts supervising financial crime and AML precautions could mark a new seriousness in this area.

Not before time. The Danske Bank scandal of 2018 revealed the extent to which cosy links between large and influential banks and supervisors could have allowed billions of dollars in dirty money out of Russia via the banking systems of Denmark and the Baltic states; this week, news broke that Swedbank may also have been involved.

This sort of story will cause a few qualms in the FCA’s head office in Stratford in east London. The regulator received a polite but forceful missive from the Financial Action Task Force (FATF) late last year over exactly this issue, citing weaknesses in overseeing AML at a firm level, which has been linked to the reshuffle. The regulator owes its very existence to the failure of its predecessor, the Financial Services Authority, which exerted a slightly lighter touch on the UK banking sector before the 2008 crisis.

The FCA was supposed to be different, but it emerged this week that it has not brought a single prosecution for money laundering in the last year, despite explicitly being given power to do so under AML regulations, and promising to make it a priority as far back as 2017. This puts it behind even the hapless Serious Fraud Office, which, to its credit, does actually try to prosecute major financial crime cases, even if convictions are rather rarer.

Has the FCA inherited too much of its predecessor’s attitude that the job of the regulator is to advise and support rather than prosecute and punish – to be a gardener and not a trophy hunter? Certainly its record on prosecutions and fines, compared with post-crisis US regulators, is striking (although in its defence, the US is very different from most European regulators, not just from the UK, on this issue).

Danske Bank highlights another area as well where the FATF found the FCA to be falling short. Large-scale money laundering cases are almost inevitably going to be international, and the FCA has not been hitting the mark on co-operating and data sharing with regulators elsewhere. This must be a priority for the regulator’s two new financial crime heads, Clive Gordon and Jennifer Long.

With Brexit delayed but still likely, it’s going to be more difficult in future to keep cross-border information flows going; and the UK may be outside the EU’s impending fifth AML directive, potentially making it a more attractive target for flows of dirty money from abroad. A trophy head or two on the wall at Stratford would be a useful deterrent – and international co-operation will be the way to get them.

 

STAT OF THE WEEK

Litigation and misconduct charges reported by the seven large UK banks increased 20% to £6.5 billion in 2018, led by mis-selling fines.

 

QUOTE OF THE WEEK

“One-off political events such as Brexit or the fiscal cliff in the US are notoriously hard to decipher by traditional quantitative models” – Joseph Simonian, Natixis Investment Managers

 

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