Money Laundering - Impact on Banks: General
Money laundering and terrorist financing can pose a grave threat to the sound management of banks and, by extension, the stability of the financial system. They can tarnish a bank’s reputation, hamper its funding, affect its customer relationships and even threaten its very survival
The negative effects of money laundering on economic
development are difficult to measure, but it is obvious that such
activity seriously
damages the financial sector economy by diverting resources, encourages crime
and corruption and distorts the trade indicators in the international sector.
Major Impacts observed include:
·
Equity price declines
Money laundering shocks can trigger
equity price declines and increase the cost of insuring against corporate
default.
·
Contagion effect
Money laundering shocks can affect other
key regional banks, indicating a contagion dynamic between the affected banks
and their counterparts.
·
Weakened role in economic growth
Closure of Business to affected bank; Money
laundering can erode financial institutions and weaken the financial sector's
role in economic growth.
· Legal Consequences
Imposition of
Fines, Imprisonment, Loss of License
·
Increased risk of macroeconomic
instability
Money laundering can facilitate
corruption, crime, and other illegal activities at the expense of countries'
development, and can increase the risk of macroeconomic instability.
According to The United Nations Office on Drugs and Crime (UNODC), the money Laundry problem represents 2 to 5% of the world’s GDP, which is equal to $800 billion – $2 trillion, laundered annually.
The impact of money laundering on the banking industry is
significant and far-reaching. In addition to the financial losses banks incur
due to laundered funds that might reach the institutions, they also face reputational damage and legal consequences.
In terms of financial losses, a Basel Institute on Governance report estimates
that banks lose approximately 1% of their total annual revenues due to money
laundering. This equates to billions of dollars in losses each year, only in
the US market.
Now a days, most of the nations are implementing AML regulations with varying levels of compliance needs. Accordingly, fines get imposed on Banks in an industry where margins are thin and competition is tough.
On August 14, 2004, Global Trust Bank (GTB) was merged with Oriental Bank of Commerce (OBC), a public sector bank, to rescue the bank from financial troubles. RBI excluded Oriental Bank of Commerce from financial lawsuits against Goldman Sachs on 24 July 2004.
There was no swap arrangement for GTB shareholders when the private sector bank is amalgamated with OBC.
For example, in 2012, HSBC agreed to pay $1.9 billion to
settle allegations of money laundering. Similarly, in 2014, JPMorgan Chase agreed to pay $2 billion to
settle similar charges.
AML fines in 2023
While fines are typically issued several years
after AML failings occur, the top AML fines incurred in 2023 occurred across
the following sectors:
1.
Cryptocurrency - $ 5.8
billion
2.
Banking - $ 835
million
3.
Gambling -$ 475
millions
4. Trading & Brokerage - $ 194 millions
The Reserve Bank of India (RBI) can impose fines of up to ₹50 million for non-compliance with Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) (AML/CFT) laws in India. The actual fine depends on the circumstances of the case. In addition to fines, other penalties for non-compliance include: Imprisonment for up to 10 years, Closure of the business, and Loss of licenses.
Reserve Bank of India imposes monetary penalty on four banks
The Reserve Bank of India (RBI) has, by an order dated June
25, 2019, imposed monetary penalty on four banks for non-compliance with
certain provisions of directions issued by RBI on Know Your Customer (KYC)
norms / Anti Money Laundering (AML) Standards and Opening of Current Accounts,
as detailed below:
|
Sl.
No. |
Name
of the bank |
Amount
of penalty |
|
1. |
Allahabad Bank |
5 |
|
2. |
Corporation Bank |
2.5 |
|
3. |
Punjab National Bank |
5 |
|
4. |
UCO Bank |
5 |
The penalties have been imposed in exercise of powers vested
in RBI under the provisions of Section 47A(1)(c) read with Section 46(4)(i) of
the Banking Regulation Act, 1949, taking into account the failure of the banks
to adhere to the aforesaid directions issued by RBI. This action is based on
the deficiencies in regulatory compliance and is not intended to pronounce upon
the validity of any transaction or agreement entered into by the banks with
their customers.
The Reserve Bank of India has collected Rs 78.6
crore from these penalties over three years, including 261 penalties in 2023alone
In FY 2023-24, the RBI imposed 86 penalties totaling ₹28.16 crores (approximately USD 3.37 million), which is more than double the amount imposed in FY 2022-23. The average penalty per financial institution in FY 2023-24 was ₹32.7 lakhs, up from ₹19.21 lakhs in FY 2022-23.
India’s Financial Intelligence Unit
(FIU-IND) Friday [March 2, 2024] imposed a penalty of Rs 5.49 crore on Paytm
Payments Bank Ltd for violating rules under the Prevention of Money Laundering
Act (PMLA).
The action comes just a month after
the Reserve Bank of India (RBI) barred it from accepting deposits, credit
transactions or top-ups. FIU-IND is the financial intelligence arm of the Department of Revenue under
the Ministry of Finance.
Although the PML Act and PML Rules
do not provide for the revocation of licences of reporting entities, this may
be possible based on the circulars relating to KYC and AML, issued by the
regulators of the reporting entities. The RBI KYC Master Directions were issued
by the RBI under section 35A of the Banking Regulation Act 1949 (the BR Act)
(which empowers the RBI to issue such general or specific directions ‘as it may
deem fit’), as well as under the PML Rules. Section 35A of the BR Act, read
with section 22, provides that if a banking company does not comply with a
direction validly issued by the RBI, then the RBI has the power to revoke the
banking licence of the banking company. Accordingly, in the event that a
banking company fails to comply with the provisions of the RBI KYC Master
Directions, the RBI may be empowered to revoke the licence of the banking
company.
Similarly, sections 45K and 45L read
with section 45 IA(6) of the Reserve Bank of India Act 1934 provide that if an
NBFC fails to comply with the provisions of a direction issued by the RBI,
including, for instance, the RBI KYC Master Directions, the RBI is empowered to
cancel the registration of the NBFC.
Section 11B of the SEBI Act 1992,
inter alia, empowers the SEBI to regulate the securities market by any measures
as it thinks fit and to cancel the licence of an intermediary for
non-compliance with the directions issued by the SEBI, including, for instance,
the SEBI AML Guidelines.
3. Impacts of Money Laundering
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