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Banks' biggest bugbear: rising compliance bar

MAS paper on anti-money laundering actions highlights gaps in trade finance and correspondent banking

Singapore banks say they would strengthen processes in boosting compliance standards, with UOB stating broadly that it has beefed up employee training on anti-money laundering and terrorist financing.


THE stricter tone of compliance will keep the financial sector on its toes in 2016, with the latest guidance paper from the regulator on anti-money laundering actions taken by banks highlighting gaps found in trade finance and correspondent banking.

The Monetary Authority of Singapore (MAS) in October set out attention areas and sound practices undertaken by banks in preventing financial crimes linked to trade finance and correspondent banking. The observations on trade-related practices were taken from inspections done between 2012 and September 2015.

MAS pinpointed that some unnamed banks tended to issue letters of credit (L/Cs) with unnamed ports of loading and discharge for commodity traders if the trade routes were not confirmed at the point of L/C application. Banks should gather supporting documents to identify ports of loading as a follow-up, MAS said.

"Banks should follow up with their invoice financing customers to obtain commercial invoices and transport documents to perform verification checks to ensure that the trades are genuine," it added.

And while some banks conduct additional checks for transactions where there are, for example, discrepancies or ambiguity in trade documents, certain lenders do not have formalised guidelines on the parties that should be screened.

As for correspondent banking, MAS noted that banks should be more vigilant in tracking adverse news on respondent financial institutions, and do due diligence on branches and subsidiaries within a group, even though due diligence has already been carried out on the parent bank.

Singapore banks said that they would strengthen processes in boosting compliance standards, with UOB stating broadly that it has beefed up employee training on anti-money laundering and terrorist financing.

The great focus on trade-based anti-money laundering today also highlights how very difficult it is to track and identify, said Chrisol Correia, head of global anti-money laundering at LexisNexis Risk Solutions.

"These transactions involve several parties, maybe several currencies. Ship cargo can be bought and sold several times during the journey. The ownership of the ship might change. And some of the documents are still in bits of paper as well," he told BT. "As controls within mainstream banking or commercial banking increase, what that's done is to push criminals into other areas that may be slightly more porous. I don't want to criticise trade finance departments - they spend a lot of time and effort. But the complexity of their business means it's perhaps a little easier to hide."

But this comes amid broader concerns that big banks are "de-risking" to the extreme by bluntly cutting ties with relatively smaller clients, and that this could push legitimate activities into less regulated spaces.

At a banking conference in October, a top executive from Indonesia's largest bank, Bank Mandiri, said that its larger banking correspondents have retracted basic services such as cheque clearing and export bill collection.

Salary remittance from Indonesian workers has also been more actively queried by global banks, even though such payments are small and repetitive, Ferry Robbani, Bank Mandiri's head of international banking and financial institutions group, said during a panel discussion. He argued that the bank and others may be forced to deal with second-tier and third-tier counterparties, which would bring new sets of risk to the industry.

Certain emerging countries with a higher dependence on remittances could potentially suffer, said Mr Correia. "That would lead to exacerbating the situation that created extremism in the first place. If things like remittances are no longer possible (through legal channels), they are going to happen anyway through informal or illegal means."

Global lenders, in response, have said that smaller clients' businesses are simply not big enough to cover the escalating - and fixed - compliance cost that they must bear regardless of the size of the business.

A senior banker at a major US bank said that the lender has cut some clients in Asia, and that indeed, more questions are being asked by the bank to understand the clients. While stressing that the bank has not exited businesses with top-tier lenders in this region, he noted that some lenders and markets have not adapted to a stricter regulatory environment, and should do so to keep pace.

Observers note that there are blurred lines between efforts to prevent money laundering, and the heightened demands for a more fundamental form of compliance to avoid issues such as fraud - labelled by the industry as the "know your customer" process or KYC.

The larger point is that banks cannot be seen to be lax. With hundreds of billions in fines and penalties levelled at global banks since the financial crisis for wrong behaviour, lenders are desperate to keep on the right side of regulations. Big banks have been rapped for egregious misconduct that ranged from rate fixing, to violation of sanctions.

A report by consultancy Wolters Kluwer earlier this year said that regulators are "less inclined" to accept a lack of awareness or capacity as an excuse to not pick up on money laundering or tax evasion. "An institution is not able to simply claim ignorance of a client's misconduct and expect to avoid or mitigate regulatory sanction."

Little surprise, then, that its poll of some 130 risk and compliance professionals across the Asia-Pacific showed that many financial institutions see extensive anti-money laundering regulations as the biggest challenge to deal with in 2016.

A PwC report this year wondered if this "get-tough approach" is creating a climate of fear in the sector that may not nudge good behaviour as much as merely raise anxiety.

Still, the banker is optimistic that this risk environment is good to have. "It should have always have been there. It fell out from the reckoning. And I think banking, as an industry, will become safer."

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