New Research Study Suggests Poor AML Oversight of Shell Companies by Financial Industry

This week, the ICIJ reported on a new study by a group of renowned academics that revealed that, despite past scandals, the industry continues to turn a blind eye and accept customers that may be at high risk for financial crime. The study, described by the authors as a “mystery shopping expedition,” involved setting up shell companies with differing risk profiles in several jurisdictions and subsequently reaching out to thousands of financial institutions and corporate service providers (CSPs) for the provision of bank accounts and services.

While the goal was to test AML oversight between low and high-risk clients, the outcome of their experiment suggested that “the ‘risk-based’ regime, [which is central to the effective implementation of the FATF Recommendations,] is broken,” sounding the alarm for those on the frontlines tasked with safeguarding the global financial system.

According to the report, the authors discovered that the varying risk profiles of the shell companies “made ‘almost no difference’ to banks’ willingness to open an account.” For CSPs, whose documents were central to the Pandora Papers revelations, the study revealed they were even less sensitive to risk. According to the ICIJ, among the varying risk profiles, “terrorism-financing risk caused a significantly higher non-response rate as well as an increase in refusals.” Notably, and concerningly given their role as gatekeepers to the global financial system, approximately a third of the responses from banks and CSPs, “which specified the need for identity documents did not specify that these documents had to relate to the actual owner. Either explicitly or implicitly, they allowed that verification of the representative would be sufficient.”

 

Following their shell shopping expedition, the authors crucially highlight that “shell companies with bank accounts are perhaps the single most common mechanism for engaging in money laundering, transnational corruption, tax evasion, and other related crimes.” The authors go on to suggest in their conclusion that, “for policy-makers, getting both parts of beneficial ownership verification right is no mere quibble, but rather goes to the heart of the effectiveness of the regime.” According to The Economist, one of the authors stated their study demonstrated that “the grunt-work of AML is being pushed onto a private sector which can’t or won’t do it,” and that “banks are unable or unwilling to make the fine-grained risk judgments the system demands, because they use standardized, generic procedures.”

It’s no surprise then that David Lewis of the Financial Action Task Force (FATF), as Sigma reported in April, called for a change in compliance culture by stating that there is an urgent need for financial crime professionals to “stop just ticking boxes,” which The Economist’s reporting further underscored.  As the findings of the study have so clearly demonstrated, a change in the regime and our approach to financial crime compliance is badly needed to stem the flow of illicit finance and more importantly safeguard the global financial system.

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