14 September 2018
At a time when information flies at the speed of a mouse click, and supply chains, businesses, and people easily cross borders, the possibilities for transformation are endless.
There is a lot of good news as a result: goods can get to market much faster and at more affordable prices; more people around the world have access to these markets; and there are signs that the middle class is growing in parts of the world that have been under-served for decades. The opening of the economy also translates into the opening of the press, free speech, and greater freedoms for people around the world.
But inevitably, there are also serious risks and challenges: false rumors and inaccurate reporting can also cause individuals significant difficulty in opening or maintaining banking services, attracting investment and the ability to travel freely.
In this regard, banks have found themselves on the front line – given the important role they play in enabling transformation, while contending with the risks they face from enabling corruption or money laundering.
In 2015, The Wall Street Journal was one of the first to report on how banks, de-risking due to new money laundering laws, were hurting legitimate customers. This included claims by NGOs that de-risking was endangering the lives of people in poor countries, who in many instances are reliant on money being sent to them by relatives abroad.
The Guardian reported on the case of one individual in the UK who had their bank accounts closed for no apparent reason. Not only were his savings of £440,000 confiscated, but he was also charged £24 in administration fees. Why? Because he had withdrawn £60,000.
There’s the story of a British couple who had their bank accounts frozen because they went on holiday to Iran and used their credit card while there, according to The Daily Telegraph.
And in an even more alarming development, The Guardian reported in a separate story that Iranian nationals living legally in the UK were having their bank accounts closed in light of Donald Trump’s ascendancy to the White House.
So what’s going on?
Investigations into banking practices
Over the past ten years, banks have been forced to take on greater responsibility for understanding their clients and their money. HSBC, for example, had to pay significant fines for enabling drug money to be laundered through their banks. Standard Chartered, Barclays, Danske, and others have also been forced to contend with investigations into their banking practices.
The lessons for banks is that they have a responsibility to know their clients and the source of their wealth. For good reason, as enforcement against the banks has increased, the risk appetite to take on any clients who may be tied to untoward behavior decreases.
Automation of the due diligence process
Media in all its forms plays a pivotal role in building support or contempt for a particular subject or target. The migration of journalistic content from print to online has created an easily accessible and uncensored encyclopedia of information. Whatever your favoured term is - fake news, disinformation or malicious falsehood - the presentation of erroneous information as fact can cause incalculable harm.
As banks look to de-risk, they are increasingly relying on automated processes to carry out the due diligence process. This includes reliance on outsourced information and intelligence databases.
Most banks rely on at least one of three main compliance databases. These databases have automated what was previously a laborious process for compliance analysts of checking multiple online blacklists. To an extent these databases play a valuable role in trying to combat money laundering. However over time, these databases have combined regulatory and criminal blacklists with subjective media and online news. To this they have added proprietary categorisation, labels and tags which are applied to individuals without their knowledge or consent. Even the compliance databases themselves acknowledge that the data may not be correct; they are merely mirroring what is found in public sources. They invite individuals to apply for a copy of their file through the General Data Protection Regulation (GDPR) process and to make their case to correct the information.
Unfortunately, it is a case of guilty until proven innocent.
Presented with large quantities of information, a belief that it is high quality, true information with opaque sources and, a muddled timeline, this leads to banks making misinformed judgements. Given the complexity of the information and that it’s not easily unravelled, banks are simply choosing to close bank accounts or decline banking services with no transparency over their criteria for doing so.
At the same time, the last decade has also witnessed the emergence of a new trend: the ability to spread “fake news” to smear a competitor or to avenge a personal grievance.
Known best as a tool of powerful oligarchs in 1990s Russia, “kompromat” or compromising materials were regularly placed in the media to trash rivals. The emergence of the internet has now allowed anyone to mount a similar smear campaign.
The allegations, with no regard for the truth, can have widespread destructive impact – especially on risk averse banks who often don’t have the time or the risk appetite to look beyond page one of Google. It’s an extremely effective strategy for those who wish to cripple their rivals: cut off access to the financial system and you cut off access to supply chains, new markets, and modernisation.
Transparency is vital for the financial system. That is why it’s important to have controls in place to prevent and spot flows of illegitimate money. But likewise, it’s also important that the system is fair, so that it can’t be abused by those who seek to capitalise on the bank’s appetite to de-risk in order to do harm to others.
As the examples cited earlier show, at present it is relatively easy for an innocent party to become ostracised from the financial system, which in some instances may be on the whim of a malevolent actor.
At Schillings, we refer to this as Flawed Flags. During our 34+ year history, we’ve witnessed the use of flawed flags being planted in the media to do harm. In today’s information age, we’re increasingly seeing flawed flags being placed in the financial and banking system to do similar harm.
The process for addressing this threat is not about glossing over or contextualising material. Nor is it about Search Engine Optimisation (SEO) that may seek to manipulate Google’s algorithm to hide material.
Instead, in a process pioneered by Schillings, it’s about putting in place a methodology that seeks only to distinguish between information that is accurate and inaccurate. The value of such a methodology is that it aligns the three different interests in the process:
- It is in an individual’s interests that their material in the public domain is accurate;
- It is in the interest of intelligence and information databases that the material they are compiling is accurate, otherwise it debases the value of what they provide;
- It is in the Banks’ interests that the material is accurate so they can make informed decisions.
In the end, banks must make their own decisions and if they are not satisfied with any prospective client’s application, they must not on-board someone.
But it is Schillings’ view that such decisions should never be based on the result of fake news, false rumours, inaccurate reporting or a malicious smear campaign.Receive our monthly newsletter