The Importance of Internal Audit Procedures in The Banking System

Under current banking supervision regulations, financial institutions (banking and non-banking) are required to issue annual reports containing the results of audits and inspections. 


Recently, two reports, one from HSBC and one from Banca Monza, have revealed significant AML/CFT deficiencies, for which serious action has been taken (first investigative and then sanctions).


 HSBC Bank is facing a new money laundering case. The bank had been subjected to several supervisory actions by the U.S. Department of Justice in previous years due to AML/CFT violations. 


Despite HSBC's best efforts to prevent criminals from accessing the financial system, it seems that these efforts are not enough. In fact, the bank itself, after several internal interventions in recent years, has discovered a flaw in South Africa with fraudulent agreements that have caused significant violations of the AML system. Investigators suspect that behind this new event, there is a money-laundering network that received $4.2 billion (£3 billion). According to journalistic and informational sources, the communication and reporting relationships regarding AML risks undertaken between HSBC Bank (and its subsidiaries) and the U.S. Justice Authority apparently were not adequately established. 


The subject of this investigative report identified three companies with accounts at HSBC's Hong Kong branch. While tracing funds from certain foreign companies, the bank's investigators (Risk Management and Compliance) discovered a sophisticated network of money launderers. The identified network involved 92 HSBC Hong Kong bank profiles that received payments worth $4.2 billion between 2014 and 2017. However, it is not excluded that the origin and use of these economic resources came from legitimate sources and purposes. When the report was released in 2017, 60 of these accounts were still open. In addition, The money flows were placed under investigation, and it was found that most of them were used to act as a conduit to other foreign accounts, such as other banks or companies that are difficult to trace and not directly linked to local criminal organizations, but rather accounts/utilities used to transfer money. According to monitoring sources, it is believed that the amount declared by the bank is greater than the 4.2 billion. 


A different piece at the center of this dynamic, which is challenging to clarify due to economic-political intrigue, is due to the social and economic difficulties that South Africa has been experiencing in recent years, with frequent cases of social and political instability that have led to continual civil wars, worsened by the already worrying high levels of corruption among the public sector, which makes South Africa a good target for criminal organizations to exploit economic resources for their own advantage for illicit purposes. Therefore, the DOJ has expressed great concern. 


FCA's Financial Investigation Into Bank Monzo Ltd. 

The UK authority, the FCA - Financial Conduct Authority, investigates UK bank Monzo for potential money laundering violations. The same Monzo banking group revealed in its report the difficulties suffered during the covid-19 period, between layoffs and the necessary maintenance of an economical budget with high standards. This has caused good growth also by means of new economic offers towards young people (ex. Home Banking) offering efficient and competitive services. This has driven economic growth in turnover but also in AML risks. In fact, the customer base grew, but at the same time, the Compliance function could not sufficiently support the supervision of newly acquired customers, KYC compliance processes, "know your customer." 


Over the past year, the FCA, in previous inspections at Monzo bank locations, notified the bank that it had initiated found regulatory gaps in AML/KYC and requested that the acquisition and risk profiles of its customers be reviewed. 


Monzo Bank, in its official statement, declares that it is cheerful and willing to correct the AML risks detected by the FCA. Moreover, all its management body assumes with full responsibility the prevention of financial crimes, which also states that it has made significant investments. 


At present, the control process initiated by the FCA towards the Monzo bank is just at the beginning; civil and criminal repercussions cannot be excluded. 


The AML banking system in the UK is a well-built system with efficient regulations and operating practices. In particular, the work that the FCA authority has been doing in recent years is valuable and commendable. But, the Brexit issue, the lack of enforcement and due diligence by banks, allows international criminal organizations to use banks to transfer money worldwide. 


Written by Dimitri Barberini

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