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The Global Laundromat and British banks

Not since the financial crisis has Britain’s banking sector and its customers been under so much scrutiny. It’s not hard to understand why.

Earlier this year, several UK banks were exposed for handling substantial amounts of suspicious money of Russian origin between 2010 and 2014. Investigations into this are currently ongoing, but initial estimates suggest that these payments were part of a wider money laundering scheme worth up to $80billion. Two months before that, Deutsche Bank made news for all the wrong reasons after being fined more than $630million in fines for moving billions of suspect cash through highly dubious ‘mirror trades’ between its Moscow and London offices. On top of this, there are still enquiries being made into allegations that came out of the Panama Papers last year. And, all of this comes not too long after UK regulators hit Barclays with a then record fine (now superseded by Deutsche Bank’s) for failing to comply with basic anti-money laundering rules during a multi-billion-dollar deal.

I could go on, but you get the picture. Money laundering is no longer just a niche issue for compliance, it’s a financial hazard and reputational risk that affects some of the world’s biggest businesses. Chief executives throughout the sector will anxiously anticipate the next, almost inevitable, leak that could paste their names all over the national press. Despite recent fines still being short of a credible deterrent, losing hundreds of millions at a stroke is not something anyone would want to be associated with. That’s just the start.

Behind cash penalties is the cost of litigation. Putting a number on that is difficult, but it heightens the risk for the sector and, in some cases, banks are already putting shareholders on notice that the cost of legal action against them could hit profit margins.

Then there’s the reputational damage. Over time, patterns begin to emerge, with some banks – whether fairly or not – being seen as negligent at best and complicit at worst. Ascribing a financial cost to that is even more challenging, but it should be a strategic concern.

So, what has gone wrong and why? A common thread runs through these scandals: a neglect of some pretty basic customer service. Those involved failed to really get to know who they were doing business with and what that business was. Some may dismiss this as misty-eyed nostalgia – having a personal relationship with your customers is something that’s gone the way of the telegram and the chequebook; it’s a relic of a bygone era. However, it’s now probably more essential than ever.

Taking evasive action


Would you like to wake up to news that you’ve got a terrorist financer on your books? How trustworthy do you think you would be perceived if you’ve wilfully or unwittingly been involved in stealing an eighth of a developing country’s annual GDP? Knowing your customer is not obstructive red tape imposed by stuffy bureaucrats, it’s a business imperative.

Given this is now becoming a boardroom issue, what do boards need to be ready for next? Remember the three Ls: legislation, law enforcement and leaks.

In the UK and across Europe, there are moves to tighten the requirements on what banks should be doing as part of their money laundering checks. The EU’s Fourth Money Laundering Directive will have to be transposed into UK law by the end of June and further amendments are expected after that. Unless, after Brexit, the UK wants to turn itself into the clearing house for the corrupt, these rules will remain a feature of the regulatory landscape.

Alongside tighter rules, their law enforcer – the Financial Conduct Authority – has been issuing fines of growing magnitude for breaches. In 2016, it also introduced the Senior Managers Regime, which is aimed at increasing individual accountability within the sector. Although these changes are still to bed-in and, in some respects, are much weaker than originally drafted, they might just start resulting in individuals being held responsible for bad behaviour, not just the banks as a whole.

Media coverage

Then there’s the media. Despite some doomsayers, investigative journalism is still alive and well, fed by material from whistle-blowers at the heart of some of the most secretive businesses in the financial sector, and crafted into hard-hitting material by experienced, knowledgeable and well-connected reporters.

In recent years, we’ve had the Luxemburg Leaks, the Swiss Leaks, the Bahamas Leaks, the Panama Papers and the Global Laundromat exposé. These scandals could be just the beginning of a more concerted campaign to highlight bad practice in the banking and financial sector. We work closely with these journalists to develop policy responses to the underlying issues and make the case for them to government. With every new release those involved become more knowledgeable, more organised and more focussed on their targets.

Overall, in terms of risk, these trends mean there is an increased likelihood of being caught out and a greater impact when you are.

There is some cause for optimism. Much of the wrongdoing outlined above happened two to three years ago, or before. Many of those involved will have moved on and there’s an opportunity for some of the banks who’ve been implicated to redeem themselves.

Here’s how:

Compliance should not be a tick-box exercise. If you go through the motions and do the bare minimum then you’re bound to come unstuck at some point. You have to spend money on this function anyway, so make it an investment in your reputation rather than seeing it as a block to business or a drag on your margins.

Changing culture is difficult, but essential. So often firms put short-term financial gains ahead of long-term stability. We saw this in the financial crash of 2008 and again in the environment in which Libor rigging took place, giving the sector such a bad name. One of the key drivers of bad practice is the incentives staff are given, which often put immediate returns in conflict with more strategic goals. Think about the incentives you’re currently providing staff and how they can be redesigned to help meet your business needs and embed a culture that is intolerant of corruption, not complicit in it.

Lead by example, don’t wait for your hand to be forced. There are a number of ways banks can be at the forefront of the fight against illicit finance. Share information with law enforcement and peers through the UK’s Joint Money Laundering Intelligence Taskforce. Re-evaluate your strategic priorities and how they interact with emerging money laundering risks. Even engage civil society in dialogue about past failures and new approaches.

At Transparency International, we find many in business, government and civil society are keen to identify common ground and find workable solutions. You can be part of the answer, too.


Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.

Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.


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