The European banking system a still an unsatisfactory AML/CFT risk system.
In the current global economic landscape, particularly in the last period, some credit institutions have been subjected to supervisory controls by credit supervisors, such as central banks or national and international financial security entities. There are several examples:
Unfortunately, three banking institutions, in particular, Deutsche Bank, Germany-based N26 Bank, and TSB Bank of New Zealand, were found to have some anomalies in mitigating AML/CFT risks. In particular, the different central financial supervisors involved are the FED, BaFin, and RBNZ (Central Bank of New Zealand).
In the TSB Bank case, The central bank also filed an appeal in the High Court against TSB BANK for failing to mitigate and correct flaws in its AML/CFT systems, generally to the Compliance system which it had been warned in 2016.
RBNZ Deputy Governor Geoff Bascand said that despite the initial warnings, the TSB has been "inadequate and ineffective" in remediating or reducing AML risks. Furthermore, "We are disappointed that TSB did not respond sufficiently to our initial formal warning. We are now obliged to follow this High Court procedure," said Bascand.
The bank had not been involved in cases or scandals of crimes such as money laundering or terrorist financing. Still, it did not have adequate KYC systems and protocols in place to ensure compliance with procedures designed to mitigate AML/CFT risks. In particular, the Central Banking Authority found that some of the countries with which it did business did not have adequate KYC systems and protocols in place to assess the risks of bank-client agreements. Retail banks were among the first financial entities required by law to put systems in place to monitor transactions, carry out a risk assessment and due diligence on customers and arrangements and report any suspicious activity, it said.
The RBNZ, New Zealand's central bank, also said that back in 2013, it asked TSB Banks to improve its compliance with AML risks, with the central bank highlighting deficiencies in late 2016. In 2019, the same central banking authority again carried out several inspections of TSB BANK and, last year signaled that it would take enforcement action for failure to correct and enforce the recorded deficiencies.
Some government sources of the banking group say that corrections have been made and that changes are still being made due to the regulatory shortcomings that the RBNZ had raised in the past. However, the RBNZ maintains a strict line against the banking group, demanding fines. Under New Zealand's AML regulations, a penalty for AML/CFT violations can amount to a fine of up to $200,000 for an individual and $2 million for a company.
German financial authority BaFin has ordered digital bank N26 to strengthen its anti-money laundering controls, appointing a supervisor to monitor the proper implementation of KYC and risk mitigation systems. N26 is one of the most highly regarded banking/financial institutions in Germany due to its efficient banking services. It is also known for its efficient correspondence banking and virtual credit services.
The decision of the BaFin authority to appoint a special supervisor is rare. Such a supervisory measure is only requested by an authority if there are grounds for inferring malpractice. It has happened before, with Deutsche Bank in 2018. The regulator's intervention comes two years after it ordered the Berlin-based bank to strengthen its anti-money laundering practices after raising a number of concerns.
BaFin worried that the enormous revenues produced by N26, valued at $3.5bn in a funding round last year, has been one of the most competitive and fastest-growing banks in Europe since its founding in 2013. It has raised almost €800m. Making an operating budget since the beginning of this year, the bank has established more than 7 million customers in 25 countries with high ambitions for financial growth.
In an official statement, BaFin says N26 must: "correct deficiencies in both IT monitoring and customer due diligence (KYC)" and "ensure that it has adequate personnel, technical and organizational resources to fulfill its obligations under the AML Law."
In the Federal Reserve case, Deutsche Bank AG is again involved, as it appears to have failed to comply with compliance programs in the area of customer and holder identification. It should be noted that Deutsche Bank is also currently under scrutiny by US regulators. The Fed alleges that Deutsche Bank has failed to improve its risk management practices, despite having confidential agreements with the central bank to address problems. The Fed is threatening to sanction the banking group financially and heavily.
Despite the Fed's scrutiny, Deutsche Bank says there are positive signs and improved its risk management, at least in some areas.
In these three cases, the respective banking supervisory authorities maintain moderately strict positions towards the three banking groups involved. For a supervisory authority to pronounce sanctions, serious acts are required, such as the commission of some financial crime, mismanagement, wilful misconduct, or negligence by the CEO and a bank subsidiary. It can be said that there are degrees of punishability. At the end of any inspection (which may be requested by the judicial or investigative authorities for a specific case or a simple routine check, of course, it has to be unpredictable and unbeknownst to them), the supervisory bodies acquire documents, study the procedures, reports and compliance status of the different risks within the company, an activity that takes months and even years. If anomalies are found, the management bodies of the banking group are informed.
Subsequently, depending on which violation has been detected and if there are no other violations in the same subject, the body sends recommendations or advice asking for immediate action and realignment with the risk profiles by adjusting the intervention systems, it will set a new inspection date for the banking structure. If the deficiencies have been strengthened at the end of this period, the verification process will end. But suppose the deficits have remained, or even worsened. In that case, an administrative fine will be imposed, and a press bulletin will be published on the official website of the bank and the supervisory body. If this system does not work either, the banking authority appoints its internal supervisor or a third party (auditing firm) with supervisory tasks. If the latter solution does not lead to change and improvement either, the National Central Bank will remove the bank subject to this sanction from its register.
Finally, the same words used by the central authorities (FED, BaFin and RBNZ) are also quoted in the 2020 report by the Council of Europe's international economic watchdog on AML and CFT, Moneyval: "Money laundering alert. The effectiveness of state action is "moderate", calling on European states and non- European states to take a greater interest in AML issues.