May 31, 2016

The Federation Internationale de Football Association (FIFA) has been subject to accusations of corruption for decades. With the awarding of the 2018 and 2022 World Cups to Qatar and Russia respectively, those accusations reached a new peak. It was the filing of an indictment in the United States against a number of FIFA officials that has once again brought into question the effort made by the banking industry to prevent the use of its services for criminal activity and the efficacy of existing controls. This is just one of a seemingly endless list of banking scandals related to Anti-Money Laundering (AML) and Know Your Customer (KYC) failures. Given the battle the industry is waging to restore public trust and credibility, action is required. So what has been the role of the banks in the FIFA scandal, what has been done to provoke change so far and what can be done to give them greater incentive to act?

Banks: The Unwilling (or Willing?) Accomplices

In May 2015, the US Department of Justice filed an indictment against fourteen FIFA officials and sports business executives, alleging wired fraud, money laundering, racketeering and obstruction of justice over a twenty-five year period. Substantial amounts of money were allegedly channelled into private accounts of the officials involved, to the detriment of the sport and its reputation. Wire fraud and money laundering inevitably involve banks and payment intermediaries, often in complex chains channelled through tax havens. The use of financial institutions to facilitate the making of illicit payments, conceal foreign bank accounts, achieve income tax evasion, smuggle cash, and purchase property and other assets, as well as the obstruction of justice are just some of the chargers faced by the FIFA officials and the institutions involved. HSBC, Standard Chartered and Barclays have already been accused of accepting bribe payments in relation to FIFA. Whether willingly or unwillingly, banks will have played a role in this scandal. This is an association the industry can ill afford at present.

The Impact and Changes Needed

Primarily falling upon the sport itself, the consequences of the FIFA scandal may be considered as being rather narrow. However, other activities facilitated by inadequate AML / KYC controls, including terrorism and drug trafficking, can have far broader societal and financial repercussions. Corruption, for example, is shown to have a negative effect on domestic investments, tax revenues, inequality and the provision of basic services which inevitably impacts society’s most vulnerable. For the financial services industry itself, the consequences are primarily financial and reputational. The fines imposed on HSBC ($1.9bn) and Standard Chartered ($300mn) are just two examples of the willingness of regulators to impose penalties on firms who choose to circumvent AML / KYC controls or fail to enforce them. Furthermore, additional financial loss may stem from the reputational damage incurred, including damage to shareholder value and increased regulatory and operational costs.

Legislators have introduced measures designed to enhance accountability for AML / KYC amongst senior managements, the Senior Managers Regime (SMR), which came into force on 7th March this year, being one such example. The Regime focuses on individual accountability for those who hold key responsibilities, including AML / KYC, within certain institutions. Those responsibilities must be mapped to clearly demonstrate what they are accountable for should a regulatory issue emerge. The tasks firms are expected to perform have also been strengthened. For example, the Fourth Anti-Money Laundering Directive imposes more robust due diligence requirements as well as new reporting and record retention obligations. It also requires Member States to maintain central registers of beneficial owners.

Despite these efforts, gaps clearly remain and further action is required. There is evidence that suggests that as much as half of banks fail to apply EDD (Enhanced Due Diligence) to any level of meaning, a third fail to have effective measures to identify customers as PEP (Politically Exposed Persons) and a third of banks appeared to be willing to accept high levels of money-laundering risk if the immediate reputational damage was acceptable. This was especially applicable to smaller banks. Clearly lessons aren’t being learnt and more needs to be done. A paper published by the UK Department for International Development suggests that anti-corruption measures must take into account context, and be combined with broader institutional reforms, in order to be most effective as one size does not fit all. However, alternative incentives may be necessary to eliminate the weaknesses in AML/KYC procedures and controls.

Currently, banks can incur substantial fines for negligence towards financial crime risk, but perhaps there should be more severe criminal sanctions for the individuals responsible and the firms involved as a greater incentive. Governments and the industry could also strengthen AML/KYC compliance with greater cooperation, with governments working together in order to encourage greater and easier disclosure across borders. For Banks AML/KYC difficulty would thereby be diminished, whilst reducing costs, and weakening the appeal to ignore the problem. Governments could also provide resources where there is a recognised concentration of high risk individuals and business to assist in the enforcement of AML/KYC laws. Alternatively, supranational bodies such as the United Nations, the International Monetary Fund or the World Bank could get involved.

Should banks fail to take the initiative to properly implement change perhaps the only answer left is ever more onerous regulation of the industry by external sources. Furthermore, it is important that government officials and range of actors collaborate together to address key problems in the industry. Scrutiny over accounts, customer information, and those who are benefiting from or those who are handling an account should be increased in order to prevent future cases of money laundering and unethical behaviour. Situations like the FIFA corruption scandal can be avoided, but only where there are strict regulations in place which are followed diligently by all parties. Hence, regulations like the SMR is a step in the right direction.