Initial Coin Offerings: A Primer
We all know about initial public offerings. These events are held to issue new stock and sell them to the general population. The stock has value because it is a claim on the underlying assets of the company. However, very few of us are aware of the term initial coin offerings. These events are also […]
Sweeping – Meaning, Need and Types
We are already aware that commercial banks are offering several liquidity management services to their clients. In the previous article, we have already studied how notional pooling can help corporations better manage their liquidity. However, notional pooling is not the only option. In fact, there is another option called “sweeping” which is used by the […]
Why Do Start-ups Fail After Receiving Funding?
It is common knowledge in the investing world that almost 90% of the start-up companies which come into existence shut down within the first couple of years. However, it is also assumed that if a company is able to gain funding from professional investors, its chances of surviving become astronomically high. This is because it […]
What is a Financial Market
A market is a place where two parties are involved in transaction of goods and services in exchange of money. The two parties involved are: Buyer Seller In a market the buyer and seller comes on a common platform, where buyer purchases goods and services from the seller in exchange of money. What is a […]
Golden Rules of Accounting – 3 Main Principles
While the system of debit and credit is the foundation for maintaining balance and accuracy, it can often feel overwhelming for beginners and even for clerical staff who handle day-to-day bookkeeping. The Golden Rules of Accounting are designed to simplify these concepts into actionable principles that anyone can use. These rules break down the most […]
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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