When presented with a new business opportunity, the findings point to an indifference by bank representatives to adhere to the international regulations, regardless of whether it constitutes a financial crime or sanctions violation.

According to a new study, banks and financial firms around the world, including those based in the UK, are often willing to circumvent international anti-corruption rules and sanctions lists.

The shock findings were a result of a joint investigation by the University of Cambridge and the University of Texas at Austin. Its aim was to conduct an expansive investigation into the effectiveness of regulations in combating illicit financial activity, as well as the effectiveness of the recent rounds of economic sanctions against Russia and Russian individuals.

In total, the researchers emailed 5,000 banks, as well as 7,000 financial intermediaries across 273 countries and financial jurisdictions, pretending to be known high-risk individuals, including impersonating sanctioned government officials.

In addition, they created 12 shell companies across jurisdictions with differing levels of corruption risk, from low to high. They then contacted the banks posing as representatives of these companies to gauge the level of difficulty, or ease, of opening a bank account.

“Not just indifference to the regulations, but a willingness to conspire with high-risk customers to break the rules”

In their responses, one in 30 banks failed to comply with international regulations designed to clamp down on terrorist financing, money laundering, and breaches of international sanctions, including contraventions of financial regulations such as the Magnitsky Act.

Furthermore, this figure rises to one in 10 banks when discounting the number of financial institutions that neglected to respond to the researchers’ attempts to contact them.

The researchers reported that some of the responses indicated not only indifference to the regulations, but a willingness to conspire with high-risk individuals to break the rules by hiding their identity from banks and the authorities.

Some banking representatives even replied that they were able to circumvent regulations, including assisting sanctioned Russian government officials in continuing to use the international banking system.

In one such response, a representative said they could assist a purported Russian client to circumvent Magnitsky sanctions by setting up a ‘shelf company’, so it would appear to a bank that it had been established by someone other than its true beneficial owner.

Failure to discriminate between low- and extremely high-risk customers

The findings point to an indifference to complying with financial regulations when there is a new business opportunity, even if it represents a financial crime.

Furthermore, the report concluded that anti-money laundering rules and Magnitsky sanctions do not work because banks and intermediary corporate service provider firms “completely fail to discriminate between low- and extremely high-risk customers which is exactly the opposite of what is set out by the rules”.

Bill Browder, a prominent lobbyist for the Magnitsky Act in the United States commented, “the results of this investigation are a microcosm of everything that’s gone wrong – that western enablers were actively helping the Putin regime launder their money without any restraint or consequence.”

Browder also believes that this illegal financial activity will continue as long as there is little consequence for a lack of appropriate regulatory compliance. He added, “The reason why these company formation agents are so confident in flouting the rules is because they know that nothing will happen to them.”

How banks can prevent non-compliance through the implementation of technology

This study has demonstrated the widespread failure of global regulation and international sanctions on preventing illicit financial activity. Moreover, it has shone a light on loopholes in the US-led sanctions imposed on Russia, as well as the ease with which sanctioned individuals can exploit them.

Much of the failure of banks failure to comply can be attributed to the actions of individuals who are acting in direct contravention of the policies and procedures set out in the bank’s own compliance framework.

By implementing automated technology, it not only rigorously vets all prospective clients using a risk-based approach, but it can ensure that every single employee adheres to the rules.

To discover how the latest automated technology can help mitigate risk and improve operational efficiency when screening and onboarding customers, request a discovery call today.


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