By John L. Guerra
Editor, GRC & Fraud Software Journal
The International Consortium of Investigative Journalists recently released a searchable database of 200,000 offshore entities, which may include details on accounts owned by Americans – information as yet unpublished.
When that occurs, the U.S. government, as well as financial regulators from around the world will be quick to act, investigating the banks and financial institutions in the database.
The Panama Papers revelations, the earthquake that rocked financial institutions around the globe, already has banks of all sizes preparing for greater regulatory scrutiny, says Alan Morley, head of AML and Compliance Practice at GFT, a global consultancy that councils nine of the world’s 10 largest banks and hedge funds.
Honest banks will review accounts
Banks know that illegal tax shelters, money laundering and providing accounts to banned entities and criminal groups is against the law, but that’s not the point. Honest banks also will fall under the regulatory magnifying glass.
Regulators want to see if compliant banks have managed – unwittingly or not – accounts or transactions with any of the firms and persons connected to the Panama Papers schemes.
Banks will beef up compliance staff
For instance, compliant U.S. banks that in the past facilitated questionable transactions that weren’t quite risky enough to stop or report to regulators could find themselves scrambling if those accounts and players turn up on the list. That means hiring more employees and auditors.
“There will be a temporary employee headcount increase in even smaller banks to handle the volume of work as a result of the new information and possible sanctions directives,” Morley says.
AML, KYC under microscope
Financial industry regulators will review documentation of the bank’s on-boarding process and audit the financial institution’s due diligence and Know Your Customer (KYC) procedures. That’s how they will determine whether a bank documented all the steps in the anti-money laundering procedures when approving new accounts.
“Banks will have to follow their own internal AML investigations processes to determine if a person or entity’s activity is worthy of a Suspicious Activity Report, be blocked or left as is,” Morley says.
Auditing of reporting processes
Financial institutions also will have to audit their reporting processes and find other solutions to ensure compliance with AML and other banking regulations.
‘The Panama Papers revealed some of the biggest and most frustrating gaps in AML coverage – and the increased risk of audit gaps, leading to possible action against global banks,” Morley says.
Are third-party entities on the list?
That includes whether the bank performed due diligence on third-party entities – the relationships account holders had with other individuals, financial institutions and organizations. For instance, does the account holder receive deposits from banned organizations or suspect individuals?
Though banks conduct enhanced due diligence on the Correspondent Bank (CB), they are unable to do effective third-party entity due diligence on the CB’s customers, other than name matching for Sanctions, Morley says.
Are account holders tax-compliant?
“It is likely that some institutions may have to conduct supplementary transaction look-backs, using both the names listed and an updated Customer Risk Scoring Process,” Morley says.
That includes determining whether prospective account holders met tax reporting requirements for U.S. citizens, filed annual reports required by the Foreign Account Tax Compliance Act, as well as the Report of Foreign Bank and Financial Accounts required by the Financial Crimes Enforcement Network.
The good news
The release of the database on Monday will also help banks get a better picture of risk.
“When finally fully published, the new Panama Papers list will also give financial institutions an opportunity to improve their monitoring and classification programs,” Morley says.
“Knowing the names of the offshore shell companies, names of the people associated with them and their banking relationships will make this process much easier. Intelligence gathering will also increase.”
Knowledge leads to better compliance
“Remember, we have no idea as to any criminality but we do know that the very nature of this probably catapults them to high – very high risk categories in any bank’s KYC due diligence program,” Morley says.
Morley suggests banks to prepare for:
- An increase in KYC activities – potentially more head count
- Adjustments to their Sanctions Filtering and Transaction Monitoring platforms (applications, data and tuning)
- Significant updates to their own watch-lists
- Spin off project(s) to make sure this gets done and in accordance with policy and procedure in a timely fashion- which will require more head count.
Advice: Cooperate with investigations
More positive news: The U.S. Security Exchange Commission’s Enforcement Division’s Cooperation Program awards greater cooperation by individuals and companies in SEC investigations. In some cases, banks can receive safe harbor as well as reduced fines and punishment for cooperating.
“Cooperation is encouraged and welcomed,” Morley says. “I heard Kara Brockmeyer, chief of the Foreign Corrupt Practices Act Unit at the SEC, speak at the Securities Industry and Financial Markets AML and Financial Crimes conference in New York in early April. She encouraged active cooperation on all levels. The sooner something is self-reported to the SEC and acted upon, the better for all.”