By Pierre DELVAL.
For the past decade, banks in many countries have demonstrated a better understanding of key aspects of corporate governance: effective board oversight, rigorous risk management, strict internal controls, and compliance. , especially. The progress is undeniable for a large part of them with regard to the assessment of the collective skills and qualifications of the Board of Directors, the establishment of an independent Risk Management Committee within the Board of Directors, the creation and strengthening of the role of director of risk management and the integration of the outcome of the consultations between the committees of the board in charge of audit and risk monitoring.
National authorities have taken steps to improve prudential and regulatory supervision of corporate governance and risk in banks. In particular, they have strengthened or tightened existing regulations or guidance, strengthened their expectations for the risk management function, engaged in a greater dialogue with the board of directors and management, and verified accuracy. as well as the usefulness of the information provided to the board of directors.
In order to measure the progress made by the national authorities and the banking sector in the area of risk governance since the global financial crisis, the Financial Stability Board (FSB) published a Thematic Review on the subject in February 2013, Thematic review on risk governance, as part of its collegial evaluations. This review demonstrated that financial institutions and national authorities around the world are taking steps to improve risk governance.
Nevertheless, even though the results are now starting to move in the right direction, multiple threats persist, particularly in the area of transnational organized crime and terrorism. Money laundering in this area is constantly growing, demonstrating if need be that criminals innovate every day to turn the 1600 to 2000 billion annual profits into legal capital. The reality is that dirty money from illicit trade is the sole motivation of criminal organizations, mafia states and terrorist groups. Without money, they can not maintain their power and cause chaos. And without leaching, they can hardly consume it. A snapshot of the current global illegal economy clearly shows the extent of illicit trade and justifies why tracing money and monitoring companies in the banking sector are essential to deter illicit activities, but also to break and dismantle corruption, without whom none of this could exist. Make no mistake: the global illegal economy is booming.
Criminal activities, you know them. For more than two years, I have been denouncing them in my columns of Financial Afrik: trafficking in drugs, weapons, human beings, counterfeit goods and piracy, illegal tobacco and alcohol; illegally harvested timber, wildlife and fish; defiled olive oil; diversion of diamonds, gold and other natural resources and precious minerals; antiquities stolen. A whole range of forbidden goods, often non-compliant and dangerous, passed on our streets, in companies located in the free zones and on the net. The challenge of enforcing the law is therefore considerable for the states, but also for banking institutions, often on the front line.
Counterfeits: estimated value of nearly $ 3 trillion in 2022
According to all the analyzes of the most serious international institutions, this illicit trade will have doubled in only five years. For example, the global economic value of counterfeits alone will reach nearly US $ 3 trillion by 2022. To support such a development, free zones (FTZ) are beginning to interest predators of all kinds. Perfectly comfortable in areas where surveillance and customs controls are inadequate and where the regulation and implementation of the fight against money laundering remain weak, mafia commercial and industrial structures see the FTZ as a particularly laundering tool interesting. The OECD already estimates that 5% of FTZ products are counterfeits.
Thus, as reported by the US State Department in the Country Reports on Terrorism of 2018, Panama’s free-trade areas and the cross-border area of Argentina, Brazil and Paraguay remain regional hubs. money laundering, including tobacco and illegal liquor. The reality is that too many FTZs do not have the capabilities – and in some cases the political will – to effectively control incoming and outgoing freight, repackaging and relabelling. And as the Financial Action Task Force (FATF) has noted in recent years: “The lack of transparency in the process of setting up businesses in the free zones allows them to create difficult complex financial transaction strata, even impossible to trace by the police.
With regard to online marketplaces, the proliferation of trade on the net and its massive flows also favor the circulation of illicit products, and with it its new electronic and cryptocurrency scams. A recent Cybersecurity Ventures report estimates that the financial costs of cybercrime will double from US $ 3 trillion in 2015 to US $ 6 trillion in 2021, particularly because of the exponential growth of the world’s population and new access to Internet every year.
The situation is such that banking institutions have no choice but to contribute to this “war effort”. In fact, it is a context of a sneaky war, particularly dangerous for the economy of the States and the security of the populations, and eminently predatory for the stability of the financial institutions. Both banks and national authorities must therefore continue their efforts to define effective risk governance mechanisms and to establish the terms of reference for the evaluation of these devices by third parties. Banks must also increase the powers and independence of risk managers. National authorities need to strengthen their capacity to assess the effectiveness of risk governance and corporate culture in this area, and to engage more frequently with the board of directors and its committees. audit and risk management.
The growing importance given to the risks and governance of these risks includes the definition of the responsibilities of the various components of the organization in the treatment and management of these risks. Often referred to as the “three lines of defense”, they each have an important role to play. The operational line, the first stage of defense, is responsible for taking into account and controlling the risks to which its activities give rise. As a second step in defense, independent of the first, the risk management function is responsible for detecting, measuring, monitoring and reporting on company-wide risks. The compliance function is also part of this second stage of defense. The third line is the Internal Audit function, which conducts audits and reviews that are risk-based, but also more general in scope, to provide assurance to the Board that governance framework, including the risk governance framework, is effective and that policies and processes are in place for this purpose and applied in a coherent manner.
As a reminder, one of the attributions of the Board of Directors and management is to define risky behavior in the context of the activities of the bank. Wrongful behavior can result from the misuse of financial products to individuals and businesses; violation of national and international laws (tax legislation, anti-money laundering and anti-terrorism rules, economic sanctions, etc.); the manipulation of financial markets (eg manipulation of Libor and exchange rates). The board must therefore set an example from the top and ensure that management fulfills its role of encouraging and maintaining a healthy corporate culture and a strong risk culture. For this reason, management must also develop a code of ethics or code of conduct to foster a culture of integrity and accountability to protect the interests of clients and shareholders.
In this context, there is one point on which banks must be more than vigilant. I want to talk about ghost companies. As its name suggests, these entities do not have a real existence. The name of the holder (nominee) and (false) contact information appear on documents assembled for the purposes of money laundering. They constitute so many additional links in devices that tend towards a maximum complexity, dissuasive for a curious banker and for a possible investigator; their designers are always on the hunt for fixtures to conceal, at best, the origin and final destination of recycled funds. These companies offer undeniable advantages for the end-users in search of anonymity who prefer them today to the companies of “facade”, of “home”, even to the companies “ready-to-use”, far too showy today. hui. Increasingly, transnational organized crime is using these ghost companies, creating an extremely complex legitimacy for the investigators.
Knowing one’s enemy is therefore essential to the bank’s governance policy demanded by the public authorities. Thus, the public authorities ask a lot of banking institutions, to start by discovering the truth of the false; Which is not part, a priori, of their attributions. This is why, more than ever, financial institutions need the support of criminologists in learning “security knowledge”, so that at the end of the day they can do early identification and, on the other hand, provide a dedicated acuity, essential for the filtering of these particular threats. One thing: We can no longer afford to wait to be certain that the expression of political will is no longer limited to the presentation of successive catalogs of good intentions. Unfortunately, banks are now proactive in providing appropriate, innovative governance and transparency to deal with contemporary criminal threats, in their interest and in the interest of the global economy. Thus, “Wherever the danger grows, so does that which saves” [1].
[1] Friedrich Hördelin