ANTI-MONEY LAUNDERING & THE BANKING INDUSTRY

This short article aims to explain the reticent attitude of banks when it comes to the opening and operation of bank accounts and how this is influenced, amongst others, by money laundering legislation.

Nowadays, it is getting harder to open bank accounts both for (a) non-resident individuals and/or for (b) resident companies with non-resident shareholders. What do we mean by non-resident individuals, or resident companies with non-resident shareholders? To explain this, we can provide the following example: a non-UK resident person (e.g. a person living in France, regardless of the person’s nationality) wishes to open a bank account in the UK without residing in the UK. Or, an English company, with French resident nationals as shareholders, wishing to open a bank account in the UK.

Indeed, it is harder still when there is a company involved, i.e. the latter of the two examples above. This is because for individuals, particularly for high-net worth individuals, an international industry has sprung up offering ‘international’ accounts to service their needs.

In fact, both in the onshore and offshore industries, banks are refusing all sorts of account openings for all sorts of reasons. Moreover, although more rarely, this extremely cautious attitude by banks is beginning to effect even their relationships with individuals who are resident, including companies which have resident shareholders (i.e. for example a UK bank with UK resident individual). There have been occasions where banks have applied certain procedures meant mainly at non-residents equally to residents.

So what is happening? This change in attitude is due to a number of reasons, although primarily one can pin it down to anti-money laundering legislation and ensuing reputational risk caused if found to have found breaching such legislation, whether such breach was intentional or not. The various scandals occurring recently (Panama, Swissleaks etc) have only exacerbated the problem.

The above is also caused by a new reality, in that today most money passes through the electronic banking system (SWIFT, SEPA). It is very difficult to carry out monetary transactions outside of the international banking system. National authorities have realised this, and have passed more and more legislation aimed at ensuring that banks carry heavy liabilities if money, which is subsequently discovered to be illicit or from illegal activities, passed through their channels and/or accounts. In fact, today anti-money laundering (‘AML’) is often being used as a general term for anything which is illegal or illicit. However, in reality anti-money laundering is just one of the illicit activities which banks must look out for, with others such as terrorist financing and financial crimes also being prominent activities which the bank must be careful about. Consequently, banks are now bundled with a lot of compliance obligations making them quasi-enforcement agencies – lay extensions of the police or other similar enforcement bodies. Furthermore, if a bank is accused of having aided money laundering or any sort of illicit activity, apart from having its license suspended, it can be cut off from the international and national system of bank transfers. This means that any account holder who has a bank account with that bank will not be able to make transfers from the “tainted” bank to another bank. This, together with the removal of its license, is a death knell for the bank, meaning that it can essentially close shop. Furthermore, this is not simply a vacuous threat, and there have been recent occurrences where the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the United States Department of the Treasury, accused a Cypriot bank of aiding money laundering leading to its being cut off from the US financial networks (essentially ending all transactions in US Dollar). This also resulted in its banking license being suspended by the Central Bank of Cyprus.

Clearly if authorities take such action against banks, the bank’s very existence is threatened. Consequently banks are increasingly ‘erring’ on the side of precaution, both when opening accounts for potential clients as well as when administering them once open. This is resulting in particularly heavy-handed administration by banks of their clients, particularly of non-resident clients. There is an inversion of the principle in criminal law of innocent until proven guilty. Many banks consider the client to be “guilty” unless the client can show he or she is innocent by means of invoices or receipts.

This movement of banks from financial institutions to quasi-enforcement institutions often causes great distress to innocent clients caught unawares by the ensuing bureaucracy. Despite the existence of software to aid banks in their enforcement function, banks are not well equipped to fulfill this function. It is quite impossible to dedicate all that manpower and remain a profitable organisation. Consequently banks often use a “one size fits all” system to enforce the vision of the authorities. This however results in rules being applied to cases which clearly do not deserve their application, as the net cast by the banks catches everyone, regardless of their real money-laundering “potential” or not.

It is this background which must be taken into consideration when a business is considering international corporate banking and how best to achieve its commercial aims without getting stunted by regulatory issues and the bureaucracy imposed by banks.