Money laundering, repo clearing and a look back at 2017

The fortnight on Risk.net, December 23, 2017 – January 5, 2018

Review of 2017: All sorts of volatility, bar one

Markets were oddly calm this year, while everything else was in motion

Buy-side firms ice repo clearing plans as spreads tighten

Resurgent bilateral market a headwind for services at Eurex and LCH

1MDB looms large in Asian banks’ war on money laundering

Banks in Asia-Pacific spurred by tougher enforcement and stricter AML rules

 

COMMENTARY: Wider still and wider

Money laundering is not only a crime in itself, but an essential precondition for a host of other crimes. There is no point stealing, or embezzling, or taking bribes, or demanding ransoms, if you do not have a plan for getting your hands on the resulting loot without being hunted down.

Fortunately for the dishonest, it has never been easier to move funds (licit and illicit) across the globe. A great deal of human ingenuity, in various countries around the world, is still devoted to hiding money and disguising its origin – either to permit the immoral rich to avoid taxes they would rather not pay, or to allow criminals to enjoy their ill-gotten gains. For criminals, a practical use case for bitcoin remains the payment of untraceable ransoms. And a steady stream of fines and penalties continues to highlight the degree to which major banks were happy not to enquire too closely about the legality of various geese – as long as they retained the lucrative business of handling the resulting golden eggs.

Asia has been behind North America and Europe on anti-money laundering (AML) precautions, for various reasons. AML is an international game, and the region lacks the powerful framework for international co-operation provided by the European Union. Political tensions over other issues make intergovernmental co-operation slower, and – in some cases – the largest money-launderers may have powerful government connections. The Malaysian 1MDB fraud investigation is a case in point, but it nevertheless continues to generate resignations, fines and indictments – and may also be stimulating more rigour when it comes to AML generally. Billions may have been abstracted from 1MDB and laundered through various banks in the region; on a similar scale, casinos and banks seem to have been involved in laundering the proceeds of the Bangladesh Bank heist. The Financial Action Task Force has been active, with visible improvements after its inspections in Malaysia and Singapore, and progress is being made towards common know-your-customer standards, making life easier for Asian banks and their multinational customers.

Regional authorities aren’t yet using every tool available; while 1MDB has led to some nine-figure penalties, it’s noticeable that these tend to be imposed by outsiders (such as the New York Department of Financial Services) rather than by Asia’s own authorities. But the past few years have still seen a very welcome change of pace in Asian AML.

 

STAT OF THE FORTNIGHT

Institutional and retail investors typically place about a 10% chance on a crash comparable to the 1929 slump and Black Monday in 1987 within the next six months or, in other words, they expect such crashes every five years. However, events of such magnitude have happened only twice in a century.

 

QUOTE OF THE FORTNIGHT

“If you are entering into a new contract with an expiry beyond 2020, you need to be very careful about using non-registered benchmarks. If you do use an unregistered benchmark, you need a provision to allow you to exchange that benchmark quickly. Failing to do so could lead to the termination of the trade” – Will Hallatt, Herbert Smith Freehills

Further reading

• Risk management

Bosses escape blame for options blow-up at Swedish bank

• 04 Jan 2018

• Our take

‘Catching the outliers’ does not always make sense for Basel

• 04 Jan 2018

• Regulation

Platforms win small on Mifid day one

• 03 Jan 2018

• Regulation

Maijoor defends late LEI relief amid industry frustration

• 03 Jan 2018

• Regulation

China’s Bond Connect set to remove trading obstacles

• 05 Jan 2018

• Regulation

FSB recommends global governance for transaction identifier

• 04 Jan 2018