Westpac to Pay Record Fine for 23 Million Money-Laundering, Terror-Financing Breaches

Starling Team

Westpac, Australia’s second-largest bank, agreed to pay the largest fine in Australian corporate history, a $920 million penalty for breaches that included a failure to detect transfers that may have been used to facilitate child exploitation in Asia. The institution self-reported some of the breaches to the Australian Transaction Reports and Analysis Centre (Austrac) last year and made shareholders aware of the investigation.

Most of the breaches involved the bank’s failure to report international transfers to the regulator in a timely fashion. The bank also failed to retain records and carry out due diligence checks with potentially high-risk banks. “The failure to pass on information undermines the integrity of Australia’s financial system and hinders Austrac’s ability to track down the origins of financial transactions, when required to support police investigations,” said Austrac CEO, Nicole Rose.

The nation’s banking sector was also the subject of a royal commission – Australia’s highest form of public inquiry last year that exposed widespread wrongdoing in the industry. The cases come amid many investigations around the world into top banks for their alleged failures to prevent money laundering.

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Citi CEO Mike Corbat Sent Staff a Memo to Get Employees to Take Risk and Controls More Seriously

Starling Team
In the last weeks, press reports have indicated that US Federal regulators may impose a fine or take other remedial action aimed at Citigroup, as a consequence of the firm’s failure to upgrade its non-financial risk controls adequately.  The timing is less than propitious, as news headlines are currently filled with stories relating to broad risk management failures across the banking sector, detailed in the so-called “FinCEN Files.”  

So it is perhaps notable that Citi CEO Mike Corbat recently sent a memo to staff asking that they take risk and controls seriously.  “In recent years, we have been working on significant remediation projects to strengthen our controls, infrastructure and governance,” Corbat wrote, noting that “While we have made progress, we have work to do to meet the standards that we must hold ourselves to.”

To serve its stakeholders properly, Corbat’s memo argued that Citi must establish an industry-leading risk and control environment.  In this direction, he argued that the firm would need to change its views regarding risk controls, which are often viewed as a regrettable but necessary expense aimed at placating regulators.  “We can’t think of them as just something that is important to our regulators,” Corbat exhorted. “It’s not about getting remediation projects done or checking boxes.”

Policy-makers, legislators and regulators, worldwide, have begun what is sure to be a lengthy and deep scrutiny of banks and other financial intermediaries engaged in distributing trillions of dollars in economic support monies that central banks have made available to Covid-beleaguered businesses and households.  That scrutiny will be gearing up against a backdrop of risk management failures at Citi and numerous other financial institutions.  Firms would do well to act immediately to adopt a new risk management mindset, with attendant changes to process and tools deployed to manage misconduct risk.

“Our approach to risk and controls needs to be proactive, consistent across the firm, deeply embedded in how we do business and prioritized by every person who works at Citi,” Corbat concluded in his memo to staff. “We will be measured, as a firm and individually, by how well we accomplish this change, and I encourage you to see it as an opportunity.” 

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Global Banks Defy U.S. Crackdowns By Serving Oligarchs, Criminals And Terrorists

Stephen Scott

Secret U.S. government documents reveal that big banks have defied money laundering crackdowns by moving staggering sums of illicit cash for questionable characters and criminal networks. Records show that five global banks — JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon — kept profiting from dangerous players even after U.S. authorities fined these financial institutions for these same issues.

These leaked documents, known as the FinCEN Files, include more than 2,000 suspicious activity reports filed by banks and other financial firms with the U.S. Department of Treasury’s Financial Crimes Enforcement Network. The files offer insight into a secret world of international banking, anonymous clients, and financial crime.

“By utterly failing to prevent large-scale corrupt transactions, financial institutions have abandoned their roles as front-line defenses against money laundering,” Paul Pelletier, a former senior U.S. Justice Department official and financial crimes prosecutor, told ICIJ.

The question is: why do banks move suspect money? They do it because it’s profitable and suspicious activity often flies under the radar. The secret documents show that frequently, banks file suspicious activity reports only after a transaction or customer gets negative press or is under investigation. At that point, the money is usually long gone.

James S. Henry, a New York-based economist, attorney and author commented that “more prosecutorial will and international collaboration” to truly change the relationship between banks and illicit cash flows. “We have to put some senior executives who are in charge of this stuff at risk,” Henry said. “And that means fines and/or jail.”

“We have to put some senior executives who are in charge of this stuff at risk,” Henry said. “And that means fines and/or jail.”

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GCRA: Little More Than Acting the Part

Starling Team

Australians are asking why it should take Royal Commissions, withering media reports, shareholder activism and litigation before boards and senior leaders recognise that issues of Governance, Culture, Remuneration, and Accountability (GCRA) represent material business risks.

Non-financial risk management in the financial services sector is managed according to a Three Lines of Defence (‘3LoD’) model. Following risk management failures, most post-mortems conclude that the 3LoD model was insufficiently well ‘embedded’ within a firm. Typical call-outs include: inadequate clarity in roles and responsibilities, coordination challenges, broken processes, and inaccurate risk reporting, collectively enfeebling the ‘voice of risk’ in the organisation. The question is: why does this pattern of failure persist?

The truth is that the model itself doesn’t manage risk, people do. At many firms, operational risk management has become little more than a Kabuki theatre, designed to provide comfort that things are taken seriously and to produce demonstrable (if spurious) “evidence” of thoughtful activity to placate concerned stakeholders without actually shifting things at all. Such false comforts are costly and produce immense frustration when risk management failures appear.

We don’t need better frameworks that help with more box-checking. We need real-time insights into cultural drivers of behaviour so that firms can course-correct when things look likely to hop the guardrails. We need real-time, evidence-based and data-driven insights that provide leading indicators of risk before it is made manifest, rather than backward-looking surveillance systems designed to catch bad actors after-the-fact.

Rather than waiting for risk to materialise, leading firms (and their regulators) will invest in predictive approaches to drive proactive risk mitigation and operational resiliency.

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Regulators Prepare to Reprimand Citigroup for Failing to Improve Risk Systems

Starling Team
US federal regulators are reportedly preparing to reprimand Citigroup for failing to improve its risk-management systems.  According to those familiar with the matter, the expected rebuke from the Office of the Comptroller of the Currency and the Federal Reserve accelerated planning for Chief Executive Michael Corbat’s retirement.

For years, regulators have privately pressed Citigroup to upgrade its risk management framework.  The Fed and the OCC have many tools to address concerns out of the public’s eye. A consent order indicates that those methods did not achieve desired results. Such a public rebuke, if imposed, would require Citigroup to develop and execute a plan.

Announcing his early retirement, Mr. Corbat indicated that the effort involved in such a large scale change initiative is best left in the hands of his successor.  Citi recently announced that Jane Fraser, its current president and head of global consumer division, is to become its new boss when current chief Michael Corbat retires in February.
“We recognize that we are not yet where we need to be and that has to change,” a Citigroup spokeswoman said. In memos to Citigroup staff, both Mr. Corbat and Ms. Fraser acknowledged that the bank needs to transform risk and compliance. “One thing has become very clear to me…we need to think about infrastructure and controls very differently,” Mr. Corbat wrote to staff in August. “We can’t think of them as just something that is important to our regulators.”

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