Global Banks Hung Out to Dry: FinCEN Files reveal global money laundering

October 6, 2020

3 min read

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What's going on here?

Leaked documents show that some of the world’s biggest banks have allowed money to be laundered through their accounts for nearly two decades.

What does this mean?

On Sunday 20 September over 2,500 leaked documents revealed that some of the biggest banks have allowed criminals to launder their money through their accounts. Money laundering is the process in which the monetary proceeds of a crime (such as drug trade, human trafficking or terrorism financing) are placed into bank accounts so that it can no longer be traced back to the crime. The leaked files, known as the FinCEN documents after the US Financial Crimes Enforcement Network, were documents in which the banks had reported the suspicious activity of their clients to the authorities.  

According to the leaked files, around $1.3tn of the transactions went through Deutsche Bank alone, but the files have also implicated other banks such as HSBC and Barclays. For example, one such revelation showed that high profile Russians with connections to Putin have used Barclays bank to dodge the sanctions imposed after the annexation of Crimea in 2014. The aim of these sanctions was to cut named people off from the western financial system, however the leak has shown that the named people have used the UK’s banks to get around these sanctions by hiding behind a company name.

What's the big picture effect?

The files show the great extent to which banks know about criminal money moving around the world, and the extremely large sums involved – the leaked files cover around $2tn of transactions, but comprise only about 0.02% of the reports made to authorities. While banks in the UK are required to carry out certain checks (such as client identity and the source of the funds) in order to ensure that they do not allow clients to launder money, both HSBC and Barclays have stated that they have complied with their legal and regulatory obligations. If this is the case then it is clear that the regulatory requirements have not been effective. It is therefore likely that we see a move for more effective regulation in the area and FinCEN has already announced proposals to overhaul its anti money laundering programmes. The UK has followed suit and has plans to reform its register of company information. This is likely to try to combat the fact that many of the money laundering schemes take advantage of the UK’s current rules on limited partnerships and limited liability partnerships which require the owners to file very little information about their operations. Currently criminals are able to use this type of company structure to move large amounts of money around anonymously. The announced reforms will ensure that directors identities are verified. 

The leak also raises questions as to why the banks have not acted on their suspicions. This is likely due to the fact that under the current rules, once a bank has made a suspicious activity report, they are essentially off the hook as they have complied with their duties. It then becomes difficult to prosecute the bank or its directors regardless of whether or not they have permitted the suspicious activity to continue. As a result, banks are able to make the report and then continue to profit off the criminal activity. While the bank can be liable to pay a large fine, given the amount of money that is being moved around, the fine may simply be seen by the bank as the cost of doing business.  It may be that until financial institutions are fined a lot more, closed down, or those responsible arrested, then there will be no change. 

The damage is not limited to financial institutions, as the fact that Britain had a higher number of companies named in the report than any other country will have damaged the UK’s reputation. A leaked US treasury report describes Britain as a higher risk jurisdiction and compares it to notorious money laundering centres like Cyprus. 

While stocks in the banks slid on the news, they will likely rise back up as the news becomes old, and this does not therefore act as much of a deterrent. We will need to wait and see exactly how the regulators seek to prevent this kind of activity continuing in the future.

Report written by Julie Lawford

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