Supervising the Supervisors: systemic failures in banking oversight – Transparency International

by Max Heywood

A million dollars in 100 US$ bills weighs about 8 kilos. Serious cash can be hard to spend without arousing suspicions, and it also tends to get moldy over time. So if you happen to be part of a corrupt network aiming to steal anything above a few million, you’re going to need access to a bank.

And sure enough, in every major corruption case in recent years, from Malaysia to Brazil, banks have — whether through incompetence or complicity — helped the perpetrators manage their illicit funds.

Wait a minute. Shouldn’t someone be doing something to stop banks from doing that?

Strong commitments, weak implementation

On paper, sure. Over 180 countries have agreed to supervise their banking sectors. By signing up to the standards set by the Financial Action Task Force (FATF) — an inter-governmental body — they have committed to get their authorities to put in place a range of measures: robust risk assessments; monitoring and in-person inspections; guidance and feedback to the financial sector; and sanctions.

In order to do that, countries also agreed to ensure that financial supervisors have sufficient operational independence and autonomy to do their work as well as adequate financial, human and technical resources.

The trouble is, that out of the 80+ countries FATF has most recently assessed as regards their implementation of these commitments, not a single one has been rated as “highly effective”. Just a handful have the second best score, “substantially effective”, and the vast majority are rated as either low or moderate.

Europe: Lacking resources and ineffective sanctions

For instance, in Austria, the FATF mutual evaluation report highlights that the “frequency, intensity and combination of supervisory measures applied by the financial supervisory body are often defined by resource considerations rather than by institution risk profiles, as it should be.

Similarly, an August 2017 FATF evaluation of Denmark found that the Danish financial sector does not face serious remedial action, and Danish supervisors did not demonstrate strong or timely supervisory activity. For instance, there were a low number of reviews (both on- and off-site) of financial institutions by national authorities, and in many cases “it appears that there has never been an inspection”.

According to the same FATF review, the number of sanctions imposed in Denmark has been very low and even these were not proportionate to the crime nor dissuasive. The FATF review of Switzerland has also questioned the effectiveness of sanctions imposed by Swiss authorities, finding them not to be dissuasive, despite an increase in actions taken over a four-year period.

United States: Strict sanctions and the ‘cost of doing business’

On the opposite side of the spectrum, the United States (US) has a range of sanctions and remedial measures including, investigations, prosecutions and penalties. Domestic and international coordination to achieve these ends are also relatively strong, according to FATF’s review.

At the same time, the US often relies on deferred prosecution agreements (DPAs) instead of taking cases to court. Critics claim that DPAs, essentially plea agreements, may not have a dissuasive effect and actually deter corporate crime. According to an American law professor, there is an “extremely high” chance that no individual is going to be prosecuted when DPAs are used and can be seen by financiers as merely a cost of doing business.

Supervisors need more resources

Next week the FATF will be hosting the first ever Supervisors’ Forum in China, in order to explore ways to make supervisory oversight more effective.

Case after case shows that banks are a critical link in the flow of illicit money around the world — helping launder dirty money so it can be converted into an extravagant 5th Avenue apartment or a private jet and luxury yacht . All too often, supervisory action only follows the uncovering of a large-scale corruption case by a whistleblower or journalist. It is time for supervisors to get the powers and resources they need to do their jobs, and to be held publicly accountable if they fail to do so.