To Fight Laundering, Know Your Employees Along with Your Customer

A recent investigative news report in India exposed bank employees across the country all too eager to help customers do deals in violation of anti-money laundering guidelines.

The sting operation by Cobrapost.com captured employees advising the customers how they could convert their black money and route it into the system by opening multiple accounts, using other customers' accounts, engaging mules, posing as farmers and using shell companies to account for overseas travel and other expenses.

These revelations, along with penalties worldwide against multinational banks for laxity in AML controls and violating sanctions, suggest that guidelines were violated for large profits.

Greed was the driving force that led the top management to flout all rules of morality and ethical values governing business operations. Implementation will always be sloppy unless a compliance culture is created and it is made a part of an organization's DNA. That requires a firm commitment from the management of an organization.

Money laundering and crime are twins. One cannot survive without the other. Crime generates dirty money and money laundering washes that dirt to make it look clean. It is a mechanism that transfers money through various complex routes and parks it at a place, where it becomes difficult, though not impossible, to trace its origin. So each complements the other; if dirty money is not there money laundering will not be there and if money laundering service is not available then it will discourage criminals and will lead to a reduction in crime.

Money laundering is the third largest industry worldwide after oil and currency, according to the International Money Laundering Information Bureau. It manages billions of dollars in dirty money. Like cancerous cells gradually nibbling away at the body, money laundering slowly but surely gnaws at the economic structure, rendering it hollow and fragile, finally leading it to a stage where collapse is unavoidable

Prevention is the only solution. This means blocking an event that may pervert the established internal controls. Clearly, if the growth of money laundering is to be arrested, strong doses of chemo-radiation in the form of stringent internal checks and controls and high ethical business standards with all the unflinching commitment of the top management will need to be administered.

Know-your-customer, an essential precaution, must be coupled with know-your-employees. There are a host of instances that highlight the involvement of employees in fraudulent transactions and in most cases in league with customers, as the Cobrapost sting operation indicated. Though there was no evidence to show they did it for direct financial gains, it did prove that to attract customers and mobilize businesses to meet their targets they won't hesitate to resort to any tactics. It seems the pressure to achieve the target was the motive behind their action. It couldn't be established, though, whether they had the blessings of the senior management. This therefore brings in sharp focus the need for thorough checks on employees' credentials and proper screening of candidates to prevent the hiring of undesirables.

Violations take place primarily because of target achievement pressure and veiled motivation from top management. "If you have to grow the business, take your own calls … the compliance man will only tell you how not to do business," a hotshot at a large global bank reportedly told up-and-coming managers in at a Mexico City meeting in 2006 – six years before his institution was embarrassed into paying a record money-laundering fine in the U.S. It is ironic that the official spoke just after a session on business ethics. Such a remark suggests that AML compliance is anathema to revenue generating employees such as marketing and product management and is mostly considered a necessary evil that blocks and impedes business growth.

An organization implementing and maintaining a robust internal control system and with a moral and ethical value system would, in most cases, prevent any perversion of rules and regulations. If banking organizations do not go down that road, it is inevitable that they will be more prone to violations and resultant reputational risk. A good internal control system with a strong and robust ethical culture will minimize any damage. But even with the soundest internal checks and control system in place, subversion will take place because of staff collusion and abuse by a person with authority overriding the control management.    

AML guidelines prescribed by the regulator must be implemented and followed religiously. I am not exaggerating. A touch of religiosity (religious rituals are done with devotion and with discipline) in implementation may perhaps inspire commitment.

Lack of spirituality and materialism seem to be the root cause for all these problems. Greed has taken over contentment and replaced ethical values. Everyone wants to get rich, driving people and organizations to indulge in activities inconsistent with organizational value systems. Organizations should try to develop a culture with an ethical and spiritual tone that echoes constantly. The more it is developed, less will be the incidence of fraud and violations.

S.S.A. Zaidi, a retired banker and consultant based in Mumbai, has written a forthcoming book on combating money laundering and terrorism financing.