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Crime-money, reputation and reporting

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Abstract

The emphasis of government legislation on money laundering has been based on the assumption that reporting institutions are able to spot deviant customer behaviour and that implicitly such behaviour is criminal. This paper looks at the drivers for reporting of suspicious or unusual activity, in particular, focusing on the principle of reputation. It considers the evidence over bank disclosure within annual published reports with respect to their money laundering compliance activity; particularly examining whether there was any change in disclosure and hence reputation management reporting by those banks fined by the regulator for lapses of compliance. An attempt is also made to apply the principles of legitimacy theory to evaluate the association between money laundering and reputation looking for evidence of a ‘virtuous cycle of compliance’. However, the findings point to limited public awareness of money laundering and to the adoption of a deficit rather than enhancement model of reputation management.

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Notes

  1. Although the data base is available for every year during the 1980s, due to the very limited coverage of money laundering during the decade, only selected years are provided here. There is no apparent explanation for the disparity between the UK and the global data that occurs in 1984 nor for the drop in coverage in the UK in 2004. Both of these were checked and appear to be accurate.

  2. Or, alternatively, that ‘perception management’ consisted of not attracting attention.

  3. Using his approach of sentence and word counts.

  4. The only way that this might have been verified would have been through interview with the fined banks, unfortunately, on approach, whilst the Money Laundering Reporting Officer within one of the banks was willing to explore the impact on the bank of having been the subject of a fine it was disclosed that “one of the terms of the FSA Enforcement notice was that we would not discuss the matter with any third party other than the FSA”. (e-mail exchange with author).

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Authors and Affiliations

  1. Newcastle Business School, Northumbria University, Newcastle upon Tyne, UK

    Jackie Harvey & Siu Fung Lau

Authors
  1. Jackie Harvey
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  2. Siu Fung Lau
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Correspondence to Jackie Harvey.

Appendix: approach to classification

Appendix: approach to classification

Annual reports were obtained for each of the years 2001–2005 for the seven banks selected for the study. The banks included in the analysis were: Barclays; Halifax Bank of Scotland (HBOS); Hong Kong Shanghai Banking Corporation (HSBC); Lloyds TSB; Northern Rock; Standard Chartered; Royal Bank of Scotland (RBOS). Compilation of the Scoring Chart for the analysis follows an iterative process. For each of the reports all sections where identified that directly disclosed information in relation to money laundering or indirectly linked with the issue or money laundering (such as combating financial crime). For each bank it was possible to sort disclosure into a number of main categories as identified by that bank. From this it was possible to identify a number of broad money laundering themes into which each of the identified sections could be classified. As discussed below, these themes addressed general anti-money laundering, training, account related activity, compliance or regulatory activity and any identification of reputation. A final category addressed the related but broader issues of financial crime. As a test for robustness of the system of coding, the initial analysis was conducted by one of the authors and then independently repeated by the other author. Having agreed the classification, all disclosed information was analysed with respect to depth and quality of disclosure. To achieve this a very simple scoring chart was applied to each of the main identified areas of disclosure as follows:

  1. 1.

    Each issue of money laundering disclosed—one point

  2. 2.

    Explanation of such issue of disclosure—one point

  3. 3.

    Explanation of usage of such issue—one point

  4. 4.

    No disclosure—zero points

Ranking of the banks was simply the result of the summative score for each institution, with the total maximum points allocated to each area of disclosure of three points across each of the six themes, providing a possible maximum of 18. The broad categories used for the analysis were:

Measures to counter money laundering included: mention of anti-money laundering; money laundering prevention and combating money laundering.

Training included all references to training within the field.

Know your Customer (KYC), account monitoring and SARs included all discussion of KYC and other account monitoring for the purposes of money laundering including reference to suspicious activity reports (SARs)

Compliance and Regulatory activity included all mention of compliance or regulations and money laundering legislation together with any reference to the Money laundering reporting officer (MLRO) and to the joint money laundering steering group (JMLSG)

Reputation and Risk refers to identification of reputation risk and money laundering risk

Financial crime refers to risk of financial crime and measures aimed at preventing financial crime.

On the basis of this approach it was possible to sort the information contained within the various reports and assign a total score to each of the banks. An example of how this was conducted is included here: Standard Chartered Bank’s annual report for 2002 states that: “The Group continues to strengthen its money laundering prevention policies, procedures and training”. Under our approach to the coding this receives a point for the mention of money laundering prevention and a point for the mention of training. By comparison, Lloyds TSB report for 2005 states the following: “Group Compliance also provides leadership on compliance with money laundering and terrorist financing legislation and regulation across the Group. It sets group policy and standards on the topic and undertakes high level oversight of anti money laundering risks. A specialist team within Group Compliance provides a centre of excellence on the relevant legislation and regulation as well as interfacing with external public and private bodies in order to evolve the Group’s approach and seek to ensure greater effectiveness and focus on key risk areas. Its remit also includes compliance with financial sanctions”.

Using our coding the following would apply. The identified area of compliance is discussed in some detail. It identifies the broad spectrum of money laundering compliance and regulation, it states the approach of the bank (albeit briefly) on how it will carry out compliance activity and adds further explanatory detail regarding the identified specialist team. This is provided with a score of 3. In addition the mention of one of the other classification areas of risk scores an additional point, providing a total score of 4.

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Harvey, J., Lau, S.F. Crime-money, reputation and reporting. Crime Law Soc Change 52, 57–72 (2009). https://doi.org/10.1007/s10611-008-9173-x

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