A remarkable leak detailing 17 years' worth of confidential transaction reporting has cast doubt on banks' anti-money laundering (AML) efforts by suggesting that leading banks continued to transfer money even when they knew it could be connected to fraud.
The leak involved more than 2,000 suspicious activity reports (SARs) filed by banks with the US treasury department's Financial Crimes Enforcement Network (FinCen).
The documents covered a period from 2000 to 2017 and were leaked to Buzzfeed News which then shared them with the International Consortium of Journalists (ICIJ).
Some of the world's leading banks are mentioned in the leaks, including HSBC, Barclays Bank, Standard Chartered, Deutsche Bank and JP Morgan.
HSBC is even accused of helping fraudsters launder the proceeds of an $80m Ponzi scheme even after the bank knew about the investment scam.
The reports also show that established financial centres like the UK have a far bigger role in facilitating illicit money flows than offshore centres such as Cyprus. FinCen refers to the UK as a "higher risk jurisdiction" with 3,000 UK-registered companies appearing in the report, more than any other country.
Fergus Shiel, a member of the ICIJ, said that the leaks "show what banks know about the vast flows of dirty money across the globe" and that the "system that is meant to regulate the flows of tainted money is broken".
The focus on anti-money laundering and transaction reporting increased massively following the terrorist attack on New York in 2001 as authorities looked for a way to track terrorist financing.
Technology has also looked to help in the fight against financial fraud or market manipulation. Anti-money laundering systems and so-called regtech software tools have become a rich area of development. It is estimated that banks spend an average of $48m a year just on AML compliance.
However, the leak of FinCen reports suggest that the technology will be of limited use if banks fail to act on the findings and continue to work with clients they know to be suspicious.
Regtech companies have been quick to comment on the leaks. "As speculation mounts, what we are seeing certainly suggests that the content within the expected series of articles is serious enough to put public interest above national security," said Rachel Wooley, global director of financial crime at regtech firm Fenergo.
"The question now is where is the failure this time? The Panama Papers highlighted the issues of transparency and complex ownership structures while 1MDB and the Luanda Leaks exposed political corruption. Perhaps what we’re about to witness suggests systemic failures across the entire financial system," added Wooley.
The banks mentioned in the leaks have since made statements to make clear that they have sought to improve their processes. HSBC told Reuters that the information contained in the report is "historical" and the bank has since "embarked on a multi-year journey to overhaul its ability to combat financial crime across more than 60 jurisdictions".
Standard Chartered said in a statement: “We take our responsibility to fight financial crime extremely seriously and have invested substantially in our compliance programmes.”
But despite these statements, shares in the banking sector had fallen on Monday morning as the markets reacted to the leak. Barclays, HSBC and Standard Chartered all saw their shares drop on the London Stock Exchange on Monday morning while shares in HSBC dropped by more than 4% in Hong Kong to their lowest level since 1995.
It remains to be seen how the leaks and any subsequent reaction from regulators will affect the regtech market and banks' spending on AML systems and fraud detection technology.
On the one hand, we could see banks' regulatory requirements become more stringent as supervisors launch a crackdown, leading to more spending on compliance tools. On the other hand, the notion that banks continue to work with questionable clients even after they have been flagged as suspicious or even placed on a national sanctions list will lead people to ask why they are spending so much on the technology in the first place.