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Fitch Rtgs: Bank Fines Rising for Violating Sanctions, AML and ATF Rules

Published 2018-11-19, 05:05 a/m
Updated 2018-11-19, 05:10 a/m
© Reuters.  Fitch Rtgs: Bank Fines Rising for Violating Sanctions, AML and ATF Rules

© Reuters. Fitch Rtgs: Bank Fines Rising for Violating Sanctions, AML and ATF Rules

Link to Fitch Ratings' Report(s): Regulators Flex Muscles over AML, Sanctions Violations https://www.fitchratings.com/site/re/10052007 Fitch Ratings-London-November 19:

Banks face increasing fines for violating sanctions, and anti-money laundering (AML) and anti-terrorist financing (ATF) rules as regulators worldwide toughen their stance, Fitch Ratings says in a new report. US authorities have levied the largest fines, mostly against European banks for violations of US sanctions. Rising geopolitical tensions are likely to lead to more sanctions from the US and elsewhere, which could result in more violations and more fines. European authorities have focused on AML violations and their fines have tended to be smaller, but we expect them to follow the US by taking a more muscular approach, including on sanctions violations.

Stronger AML/ATF legislation is planned for 2020 in the wake of terrorist attacks in Europe, which will add to pressure on banks to tighten their AML/ATF processes and controls. The creation of an EU body to investigate AML/ATF violations could result in a rise in detection and penalties. In the Asia-Pacific region, evolving supervisory activity and enforcement, led by Australia, Hong Kong, India and Singapore, is leading to increasing fines. Australian banks may face additional AML-related fines as a result of a Royal Commission investigation into alleged misconduct.

Conduct risk may also increase for Chinese banks due to broader AML issues and inadequate risk management of offshore branches. Smaller banks reliant on international business or clients are at greater risk of becoming non-viable due to violating sanctions or AML/ATF rules.

They are less able to invest in the necessary staff, processes and systems, and may not have sufficient financial buffers to absorb large fines. Smaller banks are also more likely to lose their licences (Pilatus Bank, BSI Group), suffer from liquidity runs (ABLV Bank) or fail following asset freezes (Balboa Bank & Trust, Panama), with state support less likely given the lack of systemic consequences.

Larger banks have infringed on a greater number of sanctions and AML/ATF requirements, but their larger capital buffers and typically more diversified earnings can mitigate the impact of fines, and their stronger resources help them to remedy shortcomings, reducing the likelihood of further violations. Indicators of high violation risk can include elevated levels of non-resident deposits in non-local denomination, relationships with "politically exposed persons", and clients from high-risk jurisdictions or businesses. An emphasis on "business" over compliance, a lack of an escalation culture and insufficient attention from senior managers are among the shortcomings that can often lead to violations of sanctions or AML/ATF rules. The Financial Action Task Force on money laundering maintains a list of high-risk jurisdictions with strategic deficiencies in their implementation and enforcement of AML/ATF, largely made up of emerging markets countries and offshore tax havens. But G20 members such as Canada, Mexico and Saudi Arabia have also been found to have weaknesses in their AML legislation or its enforcement, and a string of AML violations in the EU has highlighted the fragmented nature of EU member states' implementation and enforcement. Regulatory fines erode banks' profit and may weaken their financial profile. Most fines can be absorbed by earnings and do not lead to rating downgrades. However, negative rating implications may arise in unsettled cases that leave open the possibility of a very large fine, or where broad-based weaknesses in a bank's risk management or governance come to light. The report "Regulators Flex Muscles over AML, Sanctions Violations" is available at www.fitchratings.com or by clicking the link above. Contact: Monsur Hussain Senior Director Financial Institutions - Banks +44 20 3530 1793 Fitch Ratings Limited 30 North Colonnade London E14 5GN David Prowse Senior Director Fitch Wire +44 20 3530 1250 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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