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A Catalogue of Errors: Regulators Fine Standard Chartered Bank a Further $1.1bn for AML Violations

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The UK’s Financial Conduct Authority (FCA) has fined Standard Chartered Bank £102.16 million for Anti-Money Laundering (AML) breaches in two higher risk areas of its business, the regulator announced last week.  US authorities have also fined the bank around $947 million over allegations that it violated international money laundering sanctions against countries including Iran. The fines are the latest in a string of global penalties against the bank for AML breaches over the past decade – such as the SGD6.4 million ($4.7 million) imposed by the Monetary Authority of Singapore on Standard Chartered Bank Singapore and Standard Chartered Trust (Singapore) in 2018. So how is Standard Chartered using technology to combat its long history of financial crime violations?

FCA fine

The stringent FCA fine represents the second largest financial penalty for AML controls failings ever imposed by the agency, and underlines the seriousness of the bank’s offences. It comes as the result of FCA investigations into two areas of business identified by Standard Chartered as higher risk: its UK Wholesale Bank Correspondent Banking business (with failings identified during the period November 2010 to July 2013) and its branches in the United Arab Emirates (UAE, during the period November 2009 to December 2014).

The FCA found “serious and sustained shortcomings” in Standard Chartered’s AML controls relating to customer due diligence and ongoing monitoring. It also concluded that the bank failed to establish and maintain risk-sensitive policies and procedures; and failed to ensure its UAE branches applied UK-equivalent AML and counter-terrorist financing controls.

Under the UK’s Money Laundering Regulations 2007 (MLRs), banks are required to establish and maintain appropriate and risk sensitive policies and procedures to reduce the risk that their facilities may be used to launder the proceeds of crime, evade financial sanctions or finance terrorism. The MLRs also impose a duty on banks to require their global (non-EEA) branches and subsidiaries to apply policies and procedures in relation to due diligence and ongoing monitoring that are equivalent to those required of the bank’s operations in the UK.

The FCA found significant shortcomings in Standard Chartered’s own internal assessments of the adequacy of its AML controls; its approach towards identifying and mitigating material money laundering risks; and its escalation of money laundering risks.

“Standard Chartered’s oversight of its financial crime controls was narrow, slow and reactive. These breaches are especially serious because they occurred against a backdrop of heightened awareness within the broader, global community, as well as within the bank, and after receiving specific attention from the FCA, US agencies and other global bodies about these risks,” says Mark Steward, Director of Enforcement and Market Oversight at the FCA.

US breaches

But it is not just in the UK that Standard Chartered has been punished. The bank also has a long history of financial crime violations in the US, resulting in previous penalties such as a $667 million settlement imposed by US authorities in 2012 for alleged sanctions violations between 2001-2007 and a Cease & Desist Order from the Federal Reserve in the same year, which the authorities say appears to have had no effect.

In April 2019 US authorities announced further action against the Standard Chartered Group for significant violations of US sanctions laws and regulations during subsequent periods from 2007-14. According to the US Treasury Department, Standard Chartered processed transactions worth $438 million between 2009 and 2014, the majority of which involved Iran-linked accounts from its Dubai branch routing payments through its US operations, among other violations. It is also accused of violating international money-laundering sanctions against Burma, Cuba, Syria, Sudan and Zimbabwe

The bank has agreed to pay $947 million to various agencies: including a $240 million fine to the Department of Justice for violating the original terms of a 2012 Cease & Desist order against the bank, plus an additional fine of $480 million; along with a fine of $292.2 million from the New York District Attorney’s Office and a $164 million fine from the Federal Reserve.

The Federal Reserve has also issued a new ‘Cease and Desist’ order against Standard Chartered, published on April 8, 2019, which requires the bank to  submit a revised ‘US Law Compliance Program’ by the end of June. This must include “written programs, policies, and procedures” to prove that its oversight functions are acceptable. The order also enforces an additional annual compliance review for all branches and subsidiaries of the bank.

Financial blow

In February 2019, Standard Chartered admitted that it had already set aside $900 million to cover anticipated penalties. However, the larger-than-expected fines are likely to further knock its balance sheet by at least $200 million, which could impact first quarter results (expected to be released April 30th), potentially pushing back its target of $700 million in cost cuts as part of its new three-year business strategy.

Seeking solutions

The bank has taken full responsibility for the breaches, on both sides of the Atlantic, and has promised to improve its oversight and controls process – with regulatory technology playing a crucial role in reducing future liabilities.

“Standard Chartered is working to improve its AML controls to ensure all issues are fully addressed on a global basis,” confirmed Steward. “The FCA has taken into account Standard Chartered’s remediation work and its cooperation in assisting the FCA investigation, without which today’s financial penalty would have been even higher.”

Since 2012, the bank claims to have increased its investment in annual financial crime compliance spending ten-fold, along with a seven-fold increase in headcount. However, it recognises that more needs to be done. “While these investments have vastly improved our defences, it’s becoming clear that throwing money at the problem alone isn’t enough to solve it; we need better ideas,” admitted Group CEO Bill Winters back in May 2018.

Winters highlights three pillars crucial to combatting financial crime: 1) improving technological solutions (with a focus on machine-learning and AI), 2) breaking down silos and combining approaches to tackle cyber-crime and financial crime (including the creation in 2018 of an integrated ‘CyFi’ Intelligence Unit) and 3) information-sharing partnerships between the banking system and international governments to create a global picture.

The bank has also invested in numerous third-party technology partnerships to work on improving AML compliance: including an AI initiative in conjunction with Singapore-based RegTech firm Silent Eight announced in July 2018 to improve the name-screening process.

Dubbed ‘Screening Optimisation’, the technology uses machine learning and natural language processing to resolve cases that are created when customers and related party names are matched against various watchlists. The solution collects relevant pieces of data from other sources, applies a decision tree it has built, and provides analysts with a recommendation in plain English, where possible.

By automating the research and enriching the cases the Screening Optimisation engine aims to replicate analyst actions during assessment. The results provided help the analyst reach a decision faster, thus reducing the time it takes to review cases. The tool also helps to improve case quality through a consistent and comprehensive review of all the attributes factored into each decision.

The bank has reportedly faced some opposition from regulators regarding its RegTech program, with senior executives warning that the financial industry is still in the early stages of integrating RegTech into the regulatory environment.

“A lot of effort needs to go into explaining how the solution works and convincing regulators and auditors that we’re not just trying to cut corners, but trying to more effectively manage risk,” noted Praveen Jain, Standard Chartered’s Head of FCC Controls, Strategy and Innovation.

Joint effort

However, it views the investment as a long-term game that has to be approached both globally and holistically.

“We’ve made a deliberate decision to team up with vendors on these solutions,” stated Markus Schulz, Standard Chartered’s Global Head of Financial Crime Compliance Controls, in the latest Financial Crime update released by the bank.

“If you’re serious about fighting financial crime, that’s not something one bank can do alone. We’re in this together as an industry. So, if we develop something smart and really useful, why would we develop that only for us? We are not doing this as a competitive advantage. We want to make it harder for money launderers worldwide.”

Additionally, regardless of how much banks invest in technology to thwart financial crime, their efforts will be ineffectual if they don’t partner with other banks as well as the public sector and law enforcement agencies to allow more targeted monitoring.

“Because each of us only sees a fraction of the transactions of a suspect, we can only be truly successful and take it to the next level if we all – vendors, banks and the public sector – come together around the same table,” concluded Schulz.

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