Wednesday, August 8

Private Banking and Money Laundering: A case study of opportunities and vulnerabilities

This is an old US congressional report, dated back to 1999. So I think I am reasonably safe in commenting upon this report and private banking per se'. There are three issues people need to remember because those structural issues have yet to be resolved across the world. The first is that private banking is generally a low volume business. In other words, the number of transactions per client is very low, can be about 10 transactions per year. And its a relationship based business. So when you are talking about this level of business, you cannot have automatic Anti-Money Laundering tools (too expensive per client or even for the complete private client / private banking / wealth management business.

Second is the number of people per country per business. This is a high contact business and generally, you wouldn't find large numbers of people in the private client business. So the amount of oversight is comparatively lower compared to say retail or investment banking. So slip-ups do happen. Furthermore, you have to recall that since it is a people business, it is highly localised and spotty. So a private banker in Guyana will have almost complete discretion and very little oversight over his business in Guyana. Who else will know about it?

The third issue is that the rich and the highly rich and the filthy rich are horrendously sensitive to data protection and privacy. So besides being absolutely anal about keeping data private, countries impose draconian data protection, transmission and privacy requirements. So if the private bank is headquartered in say Bermuda or Switzerland, then you had it, data will be sparse, patchy, hidden, and unconnected. So a compliance or a risk manager will find it extremely difficult to audit or track any wrong doing.

But the regulators are getting very very stroppy about any failures on the part of private banks on AML practises such as here, or here, so I am afraid there is simply no excuse. While there is no terrorist activities to my knowledge which has gone through a private bank, there have been far too many cases of drug money, crime and corruption monies which have flushed through these dark hidden channels of the financial markets. And this case study is a wake up call. Read and Reflect.

Only the introduction is appended below, for the full report, go to the report linked here.


for indent & between paragraphs------------->
Because of their central role in drug trafficking and organized crime, money laundering activities have been the subject of eight prior investigations of the Permanent Subcommittee on Investigations. Despite increasing international attention and stronger anti-money laundering controls, some current estimates are that $500 billion to $1 trillion in criminal proceeds are laundered through banks worldwide each year, with about half of that amount moved through United States banks.
This report summarizes the Minority Subcommittee staff investigation to date into U.S. private banks and their vulnerability to money laundering. The investigation has found that the products, services and culture of the private banking industry present opportunities for money launderers, and that without sound controls and active enforcement, private banking services have been and will continue to be used by those intent on laundering money.
Subcommittee Investigation
To date in this investigation, the Subcommittee staff has conducted almost one hundred interviews and reviewed tens of thousands of pages of documents. The interviews have included meetings with almost 50 private bank personnel, including private bankers, their supervisors, compliance personnel, auditors, senior bank management and board members. The staff has interviewed and obtained information from more than two dozen government agencies and organizations, including the United States Departments of State, Treasury and Justice, the Federal Reserve, Securities and Exchange Commission, International Monetary Fund, World Bank, and law enforcement personnel in Mexico, France and other countries. The Subcommittee staff has also spoken with private bank clients, and with banking and anti-money laundering experts in academic, regulatory and law enforcement circles.
The documents reviewed by the Subcommittee staff include a wide range of materials, from reports on the private banking industry, to reports on money laundering trends, to SEC filings, legal pleadings, private bank audits, bank examination materials, and numerous documents related to specific private bank accounts and transactions. The Subcommittee has issued subpoenas to over half a dozen financial institutions and entities.
The information gathered by the Subcommittee's investigation falls into three categories: (1) the anti-money laundering obligations of all banks, including private banks; (2) the elements of private banking that make it vulnerable to money laundering; and (3) four case histories at the Citibank private bank illustrating a range of issues related to money laundering.

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