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The bigger picture behind illicit money flows

The suspicious transactions were reported by the global names, led by Deutsche Bank, Bank of New York Mellon, StanChart, JPMorgan and HSBC.


THE latest report that slammed global banks for their part in channelling dirty money naturally stirred attention, with some international lenders having their share prices hit on the news.

But there are some issues that should be teased out to have a more informed discussion on the threats of money laundering.

For one thing, there should be more clarity on the basis of suspicious transaction reports (STRs), which formed the foundation of the data-driven investigation.

And while it may be an easy narrative to say regulators must further harden an adversarial stance against banks, the more realistic approach is for regulators to tighten relationships with banks to sieve out the bad actors that use complex networks to skirt detection.

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To recap, BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) went through leaked documents from the US Department of Treasury's Financial Crimes Enforcement Network (FinCEN) that effectively reviewed more than 2,100 suspicious activity reports (SARs) filed by banks and other financial firms with this agency.

These SARs were used by banks' compliance officers to flag possible suspicious global transactions between 1999 and 2017 that totalled just more than US$2 trillion. The suspicious transactions - possibly tied to money laundering and other criminal activities - were reported by the global names, led by Deutsche Bank, Bank of New York Mellon, Standard Chartered, JPMorgan and HSBC. The long list of banks that have submitted such SARs also included Singapore's own Big Three.

But it is key to understand the significance of such suspicious transaction reports, and what high numbers of SARs actually imply.

It is an established fact that banks have been caught for failing to stop large illicit flows, and have been censured by local and global regulators for such misdeeds.

Singapore does not need to look very far for examples. The 1MDB scandal that erupted in 2015 ensnared several local and global banks with domestic operations here. The Monetary Authority of Singapore (MAS) rightly said in 2016 that the scandal was a dent to the financial centre's reputation.

Looking back at the 1MDB investigations, MAS had rapped banks, even though they had voluntarily reported suspicious transactions to the regulator. The problem was the "undue delay", MAS had said.

This means that banks are highly motivated today to report proactively at the smallest stirring of suspicion.

In Singapore alone, some staggering 35,000 STRs - the local equivalent of SARs - are filed annually. With the heightened call for early detection, the number of such suspicious reports - here and elsewhere - are likely to go up in the next few years. But if the consequence is a box-ticking move, it may only add to the mounting digital paperwork.

One emerging issue now is to balance STRs that turn out to be false positives, with banks and regulators concerned that banks may penalise proper customers by excluding them. The reality too is that criminals are becoming more sophisticated in using complex networks.

So in actuality, the one that has the fuller, system-wide view of suspicious transactions, is the regulator. While banks can monitor transactions within their own network, they are unlikely to see the wider connections that would be needed to nab a large crime syndicate using various banks to dodge suspicion.

In Singapore, MAS and the Commercial Affairs Department in 2017 began partnering with some banks here, sending a system-wide view of STRs to individual partner banks. The banks - including the Big Three - then drill through their specific banking network to shut down more entities' accounts suspected to be funnelling dirty funds.

Such regulatory nudges reflect reality. There is a pressing need for proper network analyses in the race against swiftly evolving criminal typologies.

Today, banks here - and likely elsewhere too - now use machine learning to spot for red flags more effectively. Among other things, they look for entities transacting with tax havens or high-risk countries, entities with a low paid-up capital relative to monthly value of transactions; and those with common beneficial owners, directors, addresses, contact details, and counterparties.

Banks here also employ data analytics to try to unmask the owners behind shell companies breezily set up.

For added context, what these leaked SARs - and other similar forms of STRs - reflect are largely historical events that have already been brought to light, or are likely part of ongoing censures.

These 2,100-odd SARs made from 1999 to 2017 are also just less than 0.02 per cent of the SARs filed with FinCEN between 2011 and 2017.

Still, that they align with publicised events of misconduct - from illicit flows tied to 1MDB, to dirty money linked to drug cartels - makes the point that these have already been brought to the attention of regulators, which should be the intention of banks when they file SARs.

Over in Singapore, MAS said in response to the ICIJ investigation that it is "closely studying the information in these media reports". It added that Singapore's regulatory framework to combat money laundering meets international standards set by the Financial Action Task Force.

Meanwhile, the Singapore banks naturally emphasise how seriously they take money laundering risks. DBS, which, according to ICIJ, flagged a relatively higher number of SARs as Singapore's largest bank, further pointed out that "outside of sanctions on names or specific account freezes, it is generally very difficult to delay or intercept money in transit given the impact on legitimate business".

"So the normal process - which happens behind the scenes - involves subsequent investigations to establish suspicion, based on which the necessary action is taken," said a DBS spokesperson.

The regulatory work here also includes unmasking "corporate money mules" - hired local directors that allowed a company set up here to be used for money laundering - and ensuring that senior management at banks are made accountable for tardy behaviour. The approach should be viewed in totality to understand the work that goes on behind the scenes in dismantling criminal activity.

And if such suspicious reports made now are effective in preventing future misconduct, the evidence of better detection in time should actually be fewer STRs, but more accurate ones.

MAS in 2016 said such illicit-financing risks are "part of our karma" as an international financial centre.

The ICIJ report highlights how egregious money-laundering cases have been globally, though it does not necessarily cast the spotlight on the way forward in reducing them.

The relief though is that ongoing regulatory nudging and now, fresh investor punishment to haunt banks for past tardy misconduct, should give lenders renewed focus on ridding the system of illicit flows.

Karma comes around, and it should bite back harder this time.

READ MORE: Editorial: Cross-border efforts and guidelines key to combat financial crime

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