For private bankers, preserving client wealth is a fundamental principle upon which they build their businesses and reputations. Preserving wealth against financial loss is one matter. Preventing financial loss or damage to clients from a financial crime event is another. For the latter, anti-money laundering (AML) training and other defences become a marketing tool, not a blockage created by the compliance function against new business.

For individuals or families seeking to launder the proceeds of crime through a private bank or commit other illicit activity, the consequences are straightforward. Their relationships with the private bank should be terminated and their suspicious activity reported to the relevant financial intelligence unit. Criminal prosecution could be the end result. Given recent regulatory action, this type of illicit business is shunned by reputable private banks.

Identifying then managing out shady clients should be a top concern for private bankers. Protecting existing clients from the repercussions of a major financial crime event should be just as important. Well-intentioned clients can incur serious harm from financial crime in a variety of ways, some direct and others indirect.

Private bankers are often the top financial advisors to an individual and their family. The

advice imparted by the private banker can be critical in the decision-making process by a high net worth individual. If a private banker has been highly trained on the subject of financial crime, they can advise their clients on how to avoid the pain of financial fraud, money laundering and other types of financial crime. They can alert their clients to possible red flags concerning an investment or business opportunity, potentially averting disaster.

If the private banker possesses limited and informal knowledge on financial crime, they may play an unwitting role in directing

their clients into a Ponzi scheme, money laundering transaction, tax-evasion arrangement or other type of dangerous business activity. More troubling, however, are those instances where the private banker has a strong grasp on financial crime yet uses that knowledge to game the system. For instance, in

February 2019, a French court ordered UBS to pay USD4.2 billion for helping clients in France evade taxes1.

UBS is not alone in helping wealthy clients in this way. While no financial institution has been directly implicated in recent instances of tax-evasion scandals related to European footballers Cristiano Ronaldo or Lionel Messi, both used shell companies to avoid paying taxes2. How did these athletes know to set up these shell companies? How did funds get transferred into these accounts? To play effective defence for their clients, private bankers must include advising their clients about investment vehicles or relationships that may be too good to be true.

Most private banking clients are proud to be associated with a venerated financial institution

ManchesterCFSuite 501125-720 King Street WestToronto, Ontario Canada M5V 3S5+1.416.388.6051manchestercf.cominfo@manchestercf.com

Glass, china, and reputation are easily cracked, and never well mended.

– Benjamin Franklin, American inventor (1706-1790)

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If a private banker has been highly trained on financial crime, they can advise their clients on how to avoid the pain of financial fraud, money laundering and other types of financial crime.

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that, in some cases, has been offering private banking services for centuries. Other financial institutions may not have that long a history, however they spend enormous sums on cultivating relationships with high net worth individuals with the aim of providing them and their families with private banking services over several generations.

Given these long and highly sensitive relationships, many clients will be embarrassed should their private bank become involved in a financial scandal. For those who have built reputable family businesses over decades, association with a financial institution involved in money laundering, fraud or terrorist financing cannot be tolerated. A reputation in business or politics is built over many years and can be dashed in an instant if there is even a hint of a scandal. Although the family would need to undertake the painful process of establishing new banking relationships, there are many eager banks within the private banking industry that would be only too happy to oblige.

Reputation is not the only reason to abandon a private bank tainted by scandal. Confidentiality is the hallmark of many private banks. If banking regulators, insurers and financial investigators are called to the scene of a financial crime, their scrutiny may intrude into all aspects of the bank. Longstanding customers who have guarded their financial secrecy will not be pleased to witness streams of investigators, consultants and others placing the bank under a high level of scrutiny. Some may elect to take their business elsewhere.

Reputational damage can negatively impact the ability of the private bank to acquire new customer relationships. Prospective clients may take issue with placing their assets under the guise of a financial institution that has recently undergone tremendous operational and financial strain. The story of the Non-Resident Portfolio in Danske Bank’s Estonian branch offers a morality tale as the bank’s reputation was dragged through the mud due to lax AML compliance monitoring3:

Following the publication of its quarterly results on [April 30th 2019], Danske lost

nearly €900 million in market value in a single day. The bank, which has seen a steady decline in share prices since the summer of 2017, saw its market value fall by half in September 2018 after its legal advisors issued a report outlining the activities of its Estonian branch. The drop cost its investors up to €10 billion.

Some may rather opt for alternative banks for their needs. Better to bank with a conservative financial institution than to place one’s assets with a group of cowboys who are chasing short-term profits at the expense of sound banking management.

Many private banks boast of long-serving employees with extensive industry experience. The knowledge and expertise brought by these employees brings comfort and security

to their high net worth clients. Yet a major financial scandal can thin the ranks of senior management. It is not uncommon for individuals to be named within consent orders issued by regulators in cases of major money laundering failures. Some employees have faced personal fines by banking regulators. It may be only a matter of time before a private banker is led

away in handcuffs for their involvement in an egregious case of financial crime.

Other major cases of money laundering have forced turnover within senior management and seasoned operational staff. In most cases, the loss of individuals has impacted the organisation and disrupted the operation of the business. These external shocks can disrupt management and operational structures that are designed to operate smoothly for customers. Too many compliance failures or one powerful disruption can force clients out the door.

Correspondent banking is another potential problem for private banks collecting regulatory sanctions. A series of minor compliance events, or one major financial crime event, can cause a private bank’s correspondent banks to drop the relationships in a matter of hours.

As concerns around AML monitoring at the Danske Bank Estonian branch began to surface

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major cases of money laundering have forced turnover within senior management and seasoned operational staff. In most cases, the loss of individuals has impacted the organisation and disrupted the operation of the business.

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in 2013, correspondent banking relationships with the bank quickly began to dissolve4. For private banks that rely on foreign currency and international payments capabilities, the loss of a major correspondent banking relationship can cause enormous uncertainty and an exodus of clients.

The unenlightened private banker will consider the compliance function as a necessary evil in order to keep domestic and foreign regulators from interfering with the successful operation of the business. From their perspective, if rudimentary efforts at compliance are undertaken, management should be happy enough. Indifferent management can set a tone from the top whereby lax compliance efforts are encouraged.

If management is focused solely on revenue generation, some relationship managers will undoubtedly pursue high-risk clients who generate fat commissions and fees. If management mocks the compliance function, or ignores it outright, salespeople will assume they are free to pursue any client who can generate large revenues for the bank in the shortest time possible. For money launderers, such a bank is a rare and valuable find.

Tone from the top dictates the success or failure of a private bank’s compliance regime. If management sends the right message,

relationship managers will demonstrate to their clients that the bank’s compliance regime works in their favour. Clients will be reassured that financial crime training within the bank will create safeguards against the individual and their family from becoming enmeshed into a major financial crime scandal. For those seeking to reassure clients that their trust (and money) are in the safe hands of a private bank, the financial crime defences

erected by the bank should provide a great deal of comfort.

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1 https://www.wsj.com/articles/ubs-is-fined-4-2-billion-in-french-tax-evasion-case-11550668920

2 https://www.ft.com/content/3793076c-90f6-11e8-bb8f-a6a2f7bca546

3 https://www.riskscreen.com/kyc360/news/danske-banks-other-legal-problems/

4 https://danskebank.com/-/media/danske-bank-com/file-cloud/2018/9/report-on-the-non-resident-portfolio-at-danske-banks-estonian-branch-.-la=en.pdf

© ManchesterCF 2019

If management mocks the compliance function, or ignores it outright, salespeople will assume they are free to pursue any client who can generate large revenues for the bank in the shortest time possible. For money launderers, such a bank is a rare and valuable find.

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