The penalties issued against both domestic and international financial service providers for lapses in their money laundering defenses rose by more than 50% in 2022 per recently released data. Although financial penalties generally come years after the initial infractions in question occur, these revelations hint that despite significant increases in the gross sum of funds demanded from these enforcement actions, these staunch penalties have done little to deter illicit financial activity from occurring at financial institutions small and large. All told, financial institutions were fined nearly $5 billion for anti-money laundering shortcomings, sanctions breaches, and insufficient know-your-customer (KYC) systems – bringing the grand total of post-2008 financial crisis penalties to a whopping ~$55 billion total.1
Just over a year ago, it appeared that the financial sector was finally beginning to reap the rewards of the global crusade against monetary misconduct. Both the total number and gross sum of financial penalties levied against international FI’s had seen a downtick from that of the past several years preceding it. The rather large spike seen in 2022 however has effectively put those sentiments to rest however. “There’s a lot of evidence, particularly in the U.K. and the U.S., in terms of recidivism . . . repeat offending by the big firms after they’ve been fined for things,”2 Huw McCartney, University of Birmingham professor and author on post-crisis finance told the Financial Times. McCartney noted that after being fined, financial institutions usually choose (whether willfully or not) to shape up and improve the allocation of resources to their compliance departments. However, these reformations can be “quite poorly enforced and monitored both within the firm and by the regulators themselves.”1
Yet while the number of money laundering fines undoubtedly rose significantly from 2021 to 2022, a number of factors must be taken into account when analyzing these findings. Aside from the likely rise in shear rates of white-collar crime and the increased avenues of exploitation available to bad actors today with respect to online finance and digital payments, positive takeaways contributing to these statistics can include the potential reduction in leniency of international regulators in levying penalties for misconduct, as well as improved investigatory capacities and detection rates of financial crime in general as compared to that of just a few short years ago. Another positive is that once again, these striking findings will place financial institutions and federal regulators on high alert for illicit financial activity in 2023.
Further contributing to this trend is the unfortunate reality that is big bank arrogance. Many larger financial institutions have continued to take large-scale penalties in stride as nothing more than a simple cost of doing business, all while continuing the cycle of maintaining insufficient AML/CFT protocols and forgoing appropriate record-keeping and KYC activities that ultimately hamper the sector as a whole. As a result, many analysts remain skeptical of the effectiveness of financial penalties in helping to clean up the global financial system. A joint report from PYMNTS and Featurespace titled “The State of Fraud and Financial Crime in the U.S.” backs the fact that “big banks” have played a major role in this ongoing surge of fines, as over the past year 62% of large banks reported increases in financial crime.3 In a recent excerpt from the Irish Times, Dennis Kelleher, chief executive of Washington-based financial reform advocacy group Better Markets, noted that “no matter how big [fines] are they are small compared to the revenue and profits of the banks”,1 adding that the only way to bring about real change in this regard is to hold individual executives/employees accountable for their own failures and those of their respective firms as a whole. Kelleher believes that we won’t see bankers take compliance seriously until their own personal bank accounts are affected.
The PYMNTS report found that at the very least however, the large banks surveyed claim that financial compliance is a top concern for them. The research from the aforementioned report showed that 95% of anti-money laundering executives view enhanced due diligence and AML compliance as top priorities in 2023 and beyond; this includes using cloud-based and artificial intelligence-backed solutions to their advantage in better identifying and mitigating financial crime. Only time will tell if these sentiments emerge as actualities in 2023 however.