Preventing Money Laundering and the Financing of Terrorism Can Help Save Lives - Director General, Financial Conduct Derville Rowland

Remarks delivered at the launch of Anti-Money Laundering and Countering the Financing of Terrorism Guidelines for the Financial Sector

Good Morning Everybody!

I am delighted to welcome you all here this morning for the launch of the Central Bank’s guidelines for the financial sector on Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT). I am pleased to see that we have representatives from across a very wide spectrum of the national and international financial services sector.

And that is as it should be.

For money laundering and terrorist financing is a very big global problem.

Due to its illicit nature, the scale of such activity is hard to assess, but some estimates suggest that between two and five per cent of global GDP is laundered each year. That’s anything between €715 billion and €1.87 trillion (Europol).

And we all have a shared interest in working to ensure that the economic and political influence of criminal organisations does not undermine trust in the integrity of the financial services marketplace on which our economy depends; nor that criminal activity should weaken the social fabric, collective ethical standards and ultimately the democratic institutions of society (FATF).

Making the World a Safer Place

I was reminded of the importance of this work last month when I read the glowing obituaries to Robert Morgenthau, Manhattan’s longest-serving district attorney (Bloomberg 2019). Morgenthau was credited with fighting crime in both the executive suites and city streets of New York for 35 years - choosing to spend a large portion of his budget in pursuit of money-launderers and stock market manipulators.

He famously pursued the Bank of Credit and Commerce International (BCCI), a global bank that had cultivated a veneer of respectability through its links to political insiders and charities, but was in fact a nexus for money that flowed in and out of terrorist groups, dictatorships and drug cartels– including Colombia’s Medellin cocaine cartel (New York Times 2019).

BCCI - later dubbed the Bank of Crooks and Cocaine International - in 1991 pleaded guilty to federal and state charges and was ultimately forced to close down, pay fines and forfeit all its assets in what was then described as the biggest banking fraud in history (Various 1991).

After he died, The Economist noted that during his term of office, Morgenthau had made New York a safer place. Indeed, by the time he left office, the annual murder rate in Manhattan had fallen to 58 compared with 642 when he started – a reminder that dedicated public servants can and do make a difference to the lives of citizens (The Economist 2019). 

The Role of the Central Bank

The Central Bank of Ireland’s mission is also to serve the public interest - in our case by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy.

We regulate financial conduct with the aim of ensuring that the best interests of consumers and investors are protected and that markets operate in a fair, orderly and transparent manner.

Our vision is for a trustworthy financial system where firms and individuals adhere to a culture of fairness and high standards.

We have an important role to play in helping prevent money laundering and terrorist financing - namely by monitoring and supervising credit and financial institutions’ compliance with their obligations and taking enforcement proceedings against firms where necessary.

The obligations on the firms are to put in place the necessary systems and controls to help prevent money laundering and terrorist financing happening in the first place.

The purpose of the guidelines we are launching this morning is to help firms to understand their obligations under the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 which was updated last year when the Fourth EU Anti-Money Laundering Directive was transposed in to Irish law.

Our message to firms today is that they must adopt a risk-based approach to fulfilling their obligations and ensure that their controls, policies and procedures are fit for purpose, up-to-date, tested, and kept under constant review and scrutiny.

Firms should be asking questions like: Who are my customers? Who are the beneficial owners of the accounts they are opening? Do they have links to sectors associated with higher corruption risk? Have there been adverse media reports about them? Are they based in countries where economic or financial restrictions apply? Or ones with weak regimes in place to prevent money laundering and the financing of terrorism?

Politicians Can Pose a Higher Money Laundering Risk

It is worth noting that the 2018 amendments to the Criminal Justice Act provide for enhanced customer due diligence of domestic Politically Exposed Persons (PEPs), their immediate families and known close associates. This comes on top of the existing requirement to perform enhanced due diligence on PEPs who reside outside the state.

The categories of people who can be regarded as politically exposed now also include members of the governing bodies of political parties. That’s because people who hold - or have held - a high political profile can pose a higher money laundering risk to firms as their position may make them vulnerable to corruption such as accepting bribes or   contributions to election campaigns and political parties in return for advantages.

In this context, it is heartening to note that the 2019 Report of the Basel AML Index, an independent annual ranking that assesses the risk of money laundering and terrorist financing around the world, found Ireland to be one of the best performing countries in relation to the transparency of public disclosures, the openness of budgets and public accountability.

Consumer Focused Culture

It is important that firms should assess the identified risks associated with particular customers and seek to mitigate them. However, I should also stress that a wholesale termination of business relationships with entire categories of customers, without an individual assessment of their risk, is not consistent with the risk-based approach.

Indeed, when it comes to compliance with anti-money laundering requirements, it is important that financial institutions support vulnerable customers who may have challenges in producing the relevant identity documentation. We do not wish to see financial institutions adopting a one-size-fits-all, tick-box approach to compliance that may result in financial exclusion.

And that is where culture counts. Firms with a positive consumer-focused culture should commit to investing and resourcing an effective framework from both a customer and compliance perspective. Blanket bans are inconsistent with firms’ statutory obligations to apply a risk-based approach and are at odds with our international commitments to financial inclusion (FATF 2013).

In short, financial institutions must know their customers, understand their customer profiles, monitor the way accounts are used and make reports of suspicions to An Garda Síochána, and the Revenue Commissioners where appropriate.  It is important to note that An Garda Síochána investigate money-laundering cases, not the Central Bank.

The Tectonic Plates are shifting at EU and International Levels

The launch of these guidelines is particularly timely because the tectonic plates are shifting at both European and international levels as policy-makers, law-makers and regulators ramp up efforts to prevent money laundering and terrorist financing.

Already, two additional EU Directives have been adopted by the European Parliament, and are due to be transposed into Irish law in 2020 (5 and 6AMLD). So time spent getting to grips with these new guidelines is time well spent as it will provide a strong foundation for compliance with current obligations. The guidelines will operate as a live document and will be updated as new obligations come into force.

It is also notable that a recent spate of money laundering issues at European banks has moved this topic higher up the EU agenda. Last year, the European Council recommended that the European Commission perform a “post-mortem’’ analysis of money-laundering issues at EU banks. The Commission analysed ten recent cases of money laundering and alleged money laundering in a report published in July this year. Among the key conclusions of the report (European Commission) were that:

• There were substantial incidents of failures to comply with core requirements of the Anti-Money Laundering Directive, such as risk assessment, customer due diligence, and reporting of suspicious transactions and activities to Financial Intelligence Units;
• Cases showing prolonged compliance deficiencies often also displayed broader related governance flaws, particularly in the control function and also in the attitude of senior management, in some instances;
• Many of the cross-border banking groups organised functions to prevent money laundering and terrorism financing locally, with an emphasis on complying with local rules, without supplementing it with a rigorous and consistent implementation of a group policy and control processes; and
• While some of the shortcomings identified seem to have been mainly driven by negligence, there were instances where employees or the management of credit institutions appeared to have supported money laundering/terrorist financing; or deliberately lowered defences, in quest of profitable business. The deficiencies were so severe in some cases that they ultimately led to the failure or closure of the Bank or specific business.

It should go without saying that these kind of failures are totally unacceptable.

Strengthened/Enhanced Powers for the European Banking Authority

The Central Bank welcomes strides to increased co-ordination at EU level, including the recent decision to enhance the powers of the European Banking Authority (EBA), to allow it to take steps to bolster the effectiveness and to improve the consistency of the application of anti-money laundering/terrorist financing legislation across all regulated financial institutions in the EU. In addition, there is ongoing co-operation between the Single Supervisory Mechanism and the EBA in this area.

This year marks the 30^th anniversary of the Financial Action Task Force (FATF) which was set up at a time of mounting concerns about the manner in which drug barons, such as Colombia’s Pablo Escobar, were using the financial system to launder profits made from their illicit drug trade.

We have come a long way since 1989 as the outgoing FATF President Marshall Billingslea noted earlier this year. Thirty years ago, the task force had just 16 members, while today it has 39 (FATF). Back then, most countries had not even criminalised money laundering and terrorist financing.  But most have now done so, while there has also been progress in investigating and prosecuting such crimes.  And this is helping to reduce real harms caused to society by drugs, people trafficking, fraud, terrorist attacks and cybercrime (Billingslea, Marshall 2019).

The task force sets global standards for preventing money laundering, the financing of terrorism and, more recently, the financing of proliferation of weapons of mass destruction. It also monitors how those standards are implemented in practice, notably through peer reviews.

Ireland has been reviewed four times, most recently in 2017 (FATF 2017) when the review concluded that “Ireland has a generally sound legislative and institutional framework’’ and that the supervision of compliance with this framework was substantially effective. While these reviews are helpful in terms of benchmarking ourselves against our peers, it is also important that we remain vigilant and keep our framework and our supervision of that framework under constant review.

The Central Bank actively participates in policy development as a member of the Irish delegation to the task force, together with colleagues from An Garda Síochána, the Department of Finance and the Department of Justice and Equality. And we will continue to play an active role in these and other international fora including at the European Supervisory Authorities.

Closer to home, we are an active member of the Irish Anti-Money Laundering Steering Committee while we also provide technical assistance to the Department of Finance, particularly in relation to the transposition in to Irish law of the relevant EU Directives.

How We Supervise

The Central Bank is a risk-based supervisor. This means that, when it comes to compliance with the rules designed to prevent money laundering and terrorist financing, we subject firms with a higher level of risk to more frequent and comprehensive supervision. Last year, for example, we carried out 72 on-site inspections, held 59 review meetings and issued 259 “Risk Evaluation Questionnaires” to firms.

We also take enforcement action to hold firms and individuals to account in order to deter misconduct and promote compliance. To date, we have concluded 12 enforcement actions against credit and financial institutions in relation to breaches of the CJA Act 2010 - imposing fines of €12.5 million.

It is worth noting that failure to comply with anti-money laundering requirements can result in very serious consequences. For example, last year, the European Central Bank (ECB) revoked the licence of Malta’s Pilatus Bank after its chairman was charged with money laundering. The ECB revoked the licence on foot of a recommendation by the Malta Financial Services Authority that it be withdrawn.

I would encourage firms to pay very close attention to such outcomes, and to ensure that lessons are being learned from them.

Supervisory Priorities

When it comes to preventing money laundering and the financing of terrorism one of our key supervisory priorities is transaction monitoring. We expect firms to be able to demonstrate the effectiveness of their transaction monitoring in identifying and, where appropriate, reporting suspicious transactions.

Traditionally, firms have relied on predictable patterns of behaviour, such as monitoring the placing of large cash deposits. But money launderers are employing an increasing level of sophistication to avoid detection. The need for effective transaction monitoring has never been greater, given the ever increasing volume and speed of transactions.

To protect the integrity of the financial system, firms must be able to scrutinise transactions in a timely manner, in order to detect suspicious activity that may warrant further investigation and the filing of a suspicious transaction report.

With enhancements in technology, the use of artificial intelligence and bots (small pieces of code designed to perform tasks traditionally performed by humans), to interact with customers is becoming more widespread. Increasingly we see firms utilising automatic transaction monitoring systems. While there are many advantages to using these systems, there is a danger that firms place “blind faith” in them. There is also a risk that if innovation in this area is not understood or applied properly, it may weaken a firm’s anti-money laundering and terrorist financing safeguards.

Firms must ask themselves are the rules and parameters put in place to drive these systems fit for purpose; are they being reviewed regularly and in response to known instances of money laundering and terrorist financing; and are all customers subject to transaction monitoring. This is particularly relevant for firms with large numbers of systems covering multiple business lines and geographic locations. It is imperative that firms understand that the responsibility remains with them to ensure that these solutions are allowing them to comply with their obligations, and that firms are responsible for adequate oversight which should include regular assurance testing.

Conclusion

I spoke earlier about the legacy of Robert Morgenthau who died during the summer at the ripe old age of 99. In an interview with the New York Times on his retirement in 2009, he ruminated on the night in 1944 when his ship was torpedoed by Nazi warplanes and he went down with 47 of his shipmates (New York Times, 2019).

“I was swimming around without a life jacket,’’ he recalled. “I made a promise to the Almighty, at a time when I didn’t have much bargaining power…That I would try to do something useful with my life.’’

He achieved that ambition by making New York a safer place, in part at least by focusing on preventing money laundering.

At the Central Bank, we believe that effective regulation in this area strengthens the integrity of the financial sector, and contributes to the safety and security of citizens, by preventing drug dealers, and those engaged in human trafficking, terrorist attacks and organised crime, from using the financial system to support these activities.

Lives can be saved, if such criminal activity is curtailed. And while compliance can be burdensome at times, it means that firms are playing their part in stopping the regulated financial system being used for criminal means.

I would like to think that all of us gathered in this room today will be able to look back some day and say that we too played a useful part in helping make our world a safer place.

Before I conclude, let me remind you that we have many interesting speakers for you this morning.

Tommy Hannafin, the Head of the AML division in the Central Bank, shall speak to you now in more detail on the content of the Guidelines.

You will then hear Maureen O’ Sullivan, the Registrar of Companies at the Companies Registration Office.

And last, but certainly not least, Detective Chief Superintendent, Pat Lordan, Head of the Garda National Economic Crime Bureau.

Thank you so much for your attention.

Acknowledgements: I would like to thank Kathleen Barrington, Shane Connolly and Sarah O’Dwyer for their help with this speech