The Effects on Financial Institutions?

Financial institutions are at the forefront of the battle against the money launderers. It is not only their institutions that the money launderers target to use in their various nefarious schemes but under current legislation they are responsible for policing the financial dealings and reporting any suspicious transactions and also transactions over a reporting limit of £10,000 (In the UK).

Financial institutions are affected by money laundering;

1. in a legal sense because of the obligations placed on them by legislation;
2. financially because of the need for compliance. The Money Laundering Regulations 1993 (Hereafter called Regulations) require financial institutions to put in place systems to deter money laundering, and to assist the relevant authorities to deter money laundering activities.

Employers’ Legal Obligations.

These arise from the Money Laundering Regulations 1993. The Regulations impose a number of statutory obligations on all financial institutions.

• To set up procedures for verifying the identity of clients
• to set up record-keeping procedures for evidence of identity and transactions
• to set up internal reporting procedures for suspicions, including the appointment of a Money Laundering Reporting Officer
• to train relevant employees in their legal obligations
• to train those employees in the procedures for recognising and reporting suspicions of money laundering.

If employers fail to do this, they are committing an offence, which is punishable by a maximum of 2 years’ imprisonment, a fine, or both.

However, the law also imposes an obligation on people personally and they must take this responsibility seriously. If not, and they knowingly help a money launderer, or if a transaction, a client or a colleague causes them to suspect money laundering - and they fail to report their suspicions…. they can go to gaol. For example "tipping off" someone they are under investigation is an offence and upon conviction punishable by up to five years imprisonment.

Because of the need to set up and maintain various procedures in order to comply with their legal obligations' businesses face compliance costs. The Regulations affect the financial and professional services sector. Within this sector they apply to:

• all banks, building societies and other credit institutions;
• all individuals and firms authorised to conduct investment business under the Financial Services Act 1986;
• all insurance companies covered by the EC Life Directives, including the life business of Lloyd’s of London;
• all other undertakings carrying out any of the range of financial activities in the annex to the Second Banking Supervision Directive. This includes notably bureaux de change and money transmission services.

The Regulations require that financial institutions put in place systems to deter money laundering, and to assist the relevant authorities to detect money laundering activities. In order to do this, it has meant that financial institutions have had to incur additional costs and these costs are most likely to increase in the areas of administration, training and provision of storage space for records.

Costs occur here because of the need for businesses to obtain evidence of identity from their customers when doing business of ECU 15,000 or more. ( Regulation 7(5) ) They must also keep records of identification evidence and financial dealings for five years. ( Regulation 12(2) ) Other costs which may occur would be if an institution had to introduce new systems of control - for example, new computer software, which they would not otherwise have introduced. This will not be the case however, for all businesses. For members of self regulatory organisations, who are already required to identify customers, and for other firms which may require identification for professional reasons, the main change is likely to be in the nature of the evidence required and the time for which it must be kept. Firms that already have well-developed procedures in these areas, such as Banks and Building Societies, will find that the costs of compliance will be relatively lower.

All relevant staff of institutions affected are required to have initial and recurrent training in:

1. the reporting and customer identification requirements of the Regulations;
2. the legislative position; and
3. the companies anti-money laundering policies and procedures.

There will be one-off costs in producing new procedures and training manuals.

The record-keeping requirement (Regulation 12(1) ) will have implications for the amount of storage space needed and the subsequent costs this will incur.

The costs will vary considerably for the different types of business institution affected and it is difficult to produce estimates for ‘typical’ institutions as the Regulations will apply to a wide variety of businesses in terms of staff numbers, volume of transactions, and existing degree of money laundering compliance. A table has been produced by HM Treasury (28 July 1993) derived from figures supplied by a number of individual institutions and trade associations.

In May 1992, HM Treasury issued a consultation paper in order for businesses to give their views on the cost of the proposed Regulations. One thousand copies were issued to a cross section of the affected professional bodies and businesses. Consultees were asked "to identify and quantify any additional direct or indirect costs (recurring and non-recurring)" that would be likely to arise as a result. Very few of the respondents commented on the costs. This suggested that costs arising from compliance were not a major cause for concern.

HM Treasury has produced what it calls ‘very broad brush estimates’ based on illustrative assumptions.

• Substantial revision of computer programmes may well be needed by most medium and large institutions outside the banking and building societies area. This might affect some 500 firms, at a weighted average cost of around £40,000 each. Ongoing maintenance might be ten percent of this total.
• Identification procedures will require new manuals to be produced by all but the smallest firms, at a total cost of perhaps £3 million, and the procedures may increase ongoing staff workload by perhaps 500,000 man-hours.
• Staff training might amount to some 500,000 man-hours annually, with additional total set-up costs of perhaps £5 million.
• Recurring record-keeping costs might be of the same order.

Allowing a margin for other costs, the total might be of the order of £30 million of initial costs and £20 million of recurring costs. This compares with total wage and salary costs alone for the banking, finance and insurance sector in 1992 of £17.2 billion. In concluding, it would seem therefor that compliance costs are relatively unimportant and a relatively small percentage of overall costs to the industry.