The Nordic Crisis of 1992
The Nordic crisis of 1992 refers to the series of bank runs and currency crisis that shook Finland, Sweden as well as Norway in the early 1990’s. This was the first major national banking crisis since the 1930’s (if wars are not taken into account). Thus, an important belief that the fractional reserve banking system […]
Applications of Equity Valuation
“Valuation” or the process of assigning a fixed numerical value to the present and potential of a business is considered by many experts to be the most important part of corporate finance and financial markets. The most coveted and highly paid jobs in the financial markets are in this domain. The reason for this is […]
A Primer on Private Placements
When we think about investment banks, as well as the activities that they undertake, we tend to think about initial public offerings, debt syndication, and other such activities that are very visible to the public eye. However, the reality is that a lot of investments that are routed via investment banks are actually private placements. […]
Regulatory Role Performed By the Central Bank
The two tiered system puts the central bank in control of the commercial banks. Therefore, the government authorities have delegated some of the regulatory responsibilities to the central bank. It is the job of the central bank to ensure that commercial banks are conducting their business in a manner which is considered ethical as well […]
Market-Based Vs Bank-Based Financial Systems
Commercial banks do make some money by providing services such as transaction processing and payroll processing to their clients. However, to a large extent commercial banks make money by making loans to corporations. Interest income is the predominant source of income for banks around the world. Now, this puts commercial banks in direct competition with […]
Up until now, we have seen various ways in which commercial banks are able to serve their corporate clients. Almost all the products and services created by commercial banks are created with the intention to serve their customers. However, corporate customers are not the only stakeholders that the banks have.
Commercial banks are also answerable to government authorities as well as to society at large. Hence, they have to perform some additional services which are not willingly paid for by the corporate client. However, these activities are important for society at large.
The formation of anti-money laundering teams as well as funding its day-to-day running is one such task. It is the duty of every commercial bank to ensure that adequate funds and resources are made available to these teams even though it represents an additional cost to the customer.
In this article, we will discuss the money laundering risks which commercial banks face and what are the steps taken by the banks in order to manage such risks.
Commercial banks are in the business of enabling quicker and more accurate business transactions for their clients. This often means that banks try to create systems wherein the turnaround time for payments and collections is reduced to a minimum. Of course, this is useful for the businesses which use the services. However, there are possible side effects to this increasing automation and reducing the turnaround time.
Criminals and terrorists all over the world have been using the commercial banking system in order to move their money around the globe. It is a well-known fact that crime syndicates and terror networks cannot function unless they have a proper source of funding. Hence, commercial banks end up inadvertently supporting these illegal activities.
Over the years, banking regulators have taken cognizance of the fact that commercial banks have inadvertently been involved in commercial banking. Ever since they have taken steps to ensure that commercial banks are able to detect suspicious activities and flag them out to the regulators. Dedicated teams have been created in order to detect the money laundering taking place in the organization.
Organized criminals and terrorists use several methods in order to traffic their money to different parts of the world. However, commercial banking is one of the most commonly used ones. Unfortunately, the current structure of commercial banking makes it conducive to money laundering by anti-social elements. Some of the main reasons are as follows:
Fluctuating payments are also the pattern followed by people who launder money. When the money launderers open accounts in the name of companies, the cash flow pattern does not raise any red flags. This is the reason that it is easier to disguise questionable transactions as regular business transactions without raising any red flags to the regulators.
High-value transactions in individual accounts immediately raise red flags and draw the attention of the relevant authorities. However, when it comes to companies, it is common for them to make large value transactions. These transactions can be made across various companies and also across borders. Since this is normal in the course of business, it does not attract regulatory attention. It is for this reason that money laundering experts find it easier to disguise their money using the corporate banking network as compared to other sources. This helps them launder money in a convenient manner. Instead of making thousands of small value transactions, they can simply make a few large value transactions and be done with the task.
Hence, it can be said that the commercial banking system is prone to money laundering attempts by anti-social elements. This makes it difficult for corporate banks to operate since they have to be very careful about the companies they take on as their customers.
Commercial banks are also required by law to ensure that they have a system in place which will help detect or flag questionable transactions. We will discuss the same in the next article.
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