Exclusive: Zooming in on the billions of pounds in criminal cash flowing through the City

Going back more than a decade, in the summer of 2012, HSBC was fined $1.9bn for inadequate compliance and anti-money laundering control processes.

The banking giant was found guilty of providing money laundering services to drug cartels as well as terrorist groups in the Middle East.

Ten years on, money laundering is still a serious problem. Less than a year ago, NatWest reluctantly admitted it had failed to properly monitor £365m when it was deposited into a customer’s account.

The case was widely seen as another major victory for the City’s financial watchdog – the Financial Conduct Authority (FCA) – as it marked the first time a financial institution faced criminal prosecution under relatively young anti-money laundering laws in the UK.

The affair sent shockwaves through the City and Canary Wharf as many financial institutions realised the FCA may be coming for them too.

With the spotlight firmly on the issues that money laundering exacerbates, and the staggering fines that HSBC and NatWest received, the cases could have been a serious call to action for London’s financial services space to get its anti-money laundering compliance in order.

This has not been the case.

To discuss the failures in AML over the last 10 years and what comes next, City A.M. sat down with Richard McCall, CEO at Armalytix, a London-based data intelligence fintech that specialises in helping financial and professional services companies navigate through the complex and rapidly-changing AML maze.

McCall argued that, since the Russian invasion of Ukraine, serious efforts are being made to crack down on dirty money in the City and Canary Wharf.

Anti-money laundering regulation is hardly new, is it?

No, you are absolutely right, it is not, which makes it even more difficult to understand why we have not got the issue under control. Anti-money laundering (AML) regulation has been in existence for over 50 years, starting with the Bank Secrecy Act in the US in 1970.

A key moment in AML regulation history came in 1989, with the establishment of the inter-governmental Financial Action Task Force (FATF), which made money laundering a global concern and created an international standard that signalled a movement from a localised fight against financial crime to a truly global one. Year on year since then, updates to the AML rules have been added in response to global trends, for example new AML regulation in the UK in both 2017 and 2019.

Why are AML checks so important?

We must look at the problems money laundering facilitates. It allows drug cartels and terrorist groups to fund themselves, provides illegal access to arms, and plays a role in modern slavery – the list is long. It’s a critical issue that financial services companies are yet to get to grips with. On top of that, it’s not just from a societal standpoint that AML checks are so important, it’s also from a financial point of view.

“Firms risk financial and reputational risk from not staying on top of their due diligence.”

Richard McCall

Moreover, financial crime also compromises the reputation and functioning of financial institutions and jurisdictions. It can lessen a country’s ability to attract foreign investment, increase the volatility of the exchange market and distort the allocation of resources and distribution of wealth. It’s not just a problem for each company in silo, but a problem that has the potential to bring down large parts of the financial system.  

Has London’s financial services scene had proper warnings?

Yes, the financial services industry has had plenty of warnings, and global regulators have consistently punished those who fall foul of the rules, with every one of Europe’s top 10 banks having been fined for money laundering offences in the last decade. Closer to home, in the UK, fines for for AML breaches have tripled since 2020.

“With Russia’s invasion of Ukraine, the amount of money laundered in the UK has once again come under the spotlight, with the flow of illegal Russian money in the UK markets being particularly criticised.”

Richard McCall, CEO at Armalytix

This has been the trigger for the government to speed up the introduction of the recent Economic Crime Bill – highlighting the need to take action.

So, why are AML checks still not being taken seriously?

Financial services firms often view these checks as a back-office compliance issue, and don’t allocate sufficient time and resource to AML compliance. With other pressing issues in the financial world, including high market volatility and last month’s gilt crisis, financial services firms are focusing their valuable time and limited resources elsewhere. 

Falling in line with the regulator is also an area that requires specialist expertise, which many firms don’t necessarily have in-house. When you add in the potential barriers to customer acquisition that compliance checks can add, firms need a solution that balances the need for compliance, whilst making sure that they aren’t stripped of people and money. 

What are some of the worst sectors for dirty money?

The Russia-Ukraine war has highlighted how rife dirty money is in the London property market, even earning the nickname ‘Londongrad’ with the amount of Russian money that flows through it. The UK property market as a whole is estimated to have received a record high of £6.7bn of questionable investment since 2016 – a clear indication that we haven’t got a grip on the problem.

Gaming and entertainment fines are also on the rise, with giant Entertain currently under investigation. Recent market developments are also quickly pushing crypto into the regulated market, where we’d expect to see a spike in fines for poor AML compliance.

So what would you suggest?

The financial industry’s over-reliance on manual processes needs to be re-evaluated. In our position as AML experts, we see the use of technology as being extremely important to help financial services firms achieve compliance and minimise process impact and effort. These checks can collate and analyse the customer’s increasingly diverse and complex sources of financial data.