Managing Money Laundering Risks in Commercial Banks

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.

What is Money Laundering Risk?

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.

Why is Money Laundering Prevalent in Commercial Banking?

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:

  • Possible to Hide Information: It is possible to hide beneficiary information using commercial banking. Not only is it possible, but it is quite convenient. Commercial banking accounts are opened in the name of corporations. These corporations are fictional people which have been created in the eyes of the law. Now, for the purpose of money laundering, it is possible to use complex corporate structures. This means that one corporation will be owned by another corporation. Hence, finding details about the ultimate beneficiary will be difficult because of the corporate veil. Several layers can be added across different banking jurisdictions in order to obscure the link between the funds and the beneficiary.

  • Fluctuating Volumes: It is normal for companies across the world to have fluctuating sales. Hence, the transaction volumes in their accounts are also fluctuating. It is common for one company to experience a large volume of activity in one month and then remain dormant in the next month. This is particularly true if the company is engaged in selling goods or services which are seasonal in nature.

    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.

  • Large Transaction Amounts: Also, the volume of money transferred in money laundering transactions tends to be quite high. It is for this reason that companies use commercial banks to launder their ill-gotten gains.

    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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Commercial Banking