How Dirty Money Gets Into Banks

An estimated $2 trillion of illicit capital from criminals, pirates, and even terrorists makes its way into financial institutions annually. What can regulators do about it?


In the fallout of the 2008 financial crisis, the habits of Wall Street—and more broadly, the banking industry worldwide—became front and center in the media: From excessive risk taking, to rate rigging, and actively helping clients evade taxes. But how much has changed to curb the bad behaviors of banks since then? Stephen Platt, an expert on financial-crime prevention, argues that as the scandals keep coming, financial institutions continue to facilitate crime without much recourse.

Platt is an adjunct professor at Georgetown University; he also works with the World Bank and educates employees of the U.S. Department of Justice, the U.S. Treasury, numerous U.S. law enforcement agencies, Europol, and the Metropolitan Police on how criminals abuse financial services. In the past 20 years, he's sifted through thousands of files on money laundering, corrupt public officials, drug trafficking, and even terrorism and piracy to look at how illicit money moves through our financial institutions. His recent book Criminal Capital explains that our financial system is not just globally interconnected, but also inextricably linked to crime.

I recently spoke with Platt about his new book, and why we should care about criminals using our financial system. A lightly edited transcript of our conversation follows.

Bourree Lam: First off, tell me about what you do and how the book came about.

Stephen Platt: I head up a firm that specializes exclusively in conducting regulatory investigations of financial services businesses on behalf of regulators, governments, and financial institutions compelled to appoint us. In that capacity I have examined a wide range of businesses in different parts of the world. I was motivated to write the book because every time I read an article about harmful behavior in the finance industry it was being reported in isolation when in fact I knew that all of the behaviors were causally linked and existed on a spectrum of harmful conduct ranging from excessive risk taking through market rigging, mis-selling, sanctions evasion, money laundering all the way to criminal facilitation. My contention is that criminal facilitation is the worst symptom of the malady affecting the finance industry, and that in order to find a cure to avoid a repetition of the 2008 financial crisis, we have to understand that. It’s rather like going to the doctor and saying "I'm ill." He can only prescribe the right medicine if he understands the worst of your symptoms.

Lam: You mentioned quite a few of the problems in our current banking system: excessive risk taking, market rigging, etc. Is there a worst offender? And what are the consequences of these practices?

Platt: Well it's difficult to to place the behaviors into some sort of order of harm. It depends on whether you adopt a consequentialist or categorical view. If the former you’d say excessive risk taking—just look at the harm caused by the crisis, but on a categorical view you’d be hard pressed not think that criminal facilitation was the most egregious.

Lam: Can you explain what you mean by criminal facilitation?

Platt: Of course. It is distinct from money laundering which relates to conduct that post-dates predicate criminality. Criminal facilitation is the act of assisting a criminal to commit an act of predicate criminality such as the payment or receipt of a bribe or an act of tax evasion.

Lam: The recent HSBC leaks shows that the bank was very eager to help their clients remain anonymous and evade taxes. Are the incentives too high to just take the money?

Platt: The HSBC Swiss leaks story is old news. I think seasoned banking observers have been surprised that it has garnered as much attention as it has. The revelations relate to conduct that is eight years old, and I think in fairness both to the bank and to Switzerland a great deal has probably changed in the intervening period. The idea that HSBC was some sort of rogue institution acting on a limb from the rest of the private wealth management industry is nonsense. There was, and to an extent still is, a huge industry dedicated to assisting people to mitigate their exposure to on-shore taxes. What has been missed in all of the reporting is the central question: Why was this taking place in Switzerland? And the answer is simple—because the laundering of the proceeds of foreign tax evasion was not illegal in Switzerland. This is in stark contrast to the position in many smaller "offshore jurisdictions" that nevertheless continue to be given such a hard time by the international community. Most financial institutions take advantage of regulatory arbitrage opportunities and that continues to this day, which is why we see books of business moving wholesale between jurisdictions as laws are tightened.

In general, within the industry the incentives to act in a willfully blind manner are quite high—that's why there are several reported examples of banks being prepared to do business with corrupt African potentates whose official salary is $10,000 a year, even though they are banking $500 million. How can you not think that something might be amiss in such a relationship? Fundamentally, I don’t believe that the risks of failing to ask all of the right questions yet outweigh the rewards. There simply is not a big enough fear factor in the finance industry to dissuade individual decision makers from doing business that is questionable but highly profitable. The approach to enforcement is completely misconceived, and until we convince decision makers in the industry that they have "skin in the game" nothing is likely to change. Fining legal constructs while decision makers remain with their feet under the boardroom table does not work.

Lam: In your opinion, what can be done to realign incentives and convince decision makers that they have "skin in the game"?

Platt: Great question. I think of this is as a series of concentric circles. In the centre, we have a bank employee and we need to influence his or her behavior. The next circle is senior management, then the board, then the legal construct of the institution, then the regulator, then the government, then political parties, then society and finally "capital." How do each of the circles bring a positive or, more often, negative influence to bear on the behaviors displayed in the inner circles?

So the answer to your question, the government needs to provide the tools to the regulators and set the policy agenda. The difficulty is the influence the banks have on the outermost circles, in particular political parties and crucially the control that they exercise over large pools of development capital. We have to recognize how difficult it is for governments to begin to take effective action because of corporate capture. No government wants to cause perceived economic harm by scaring off capital to friendlier climes. It is difficult to find a politician whose chief interest is not only being re-elected, and who has a longer field of vision than four to five years—which is why not a great deal has changed even since the crisis, and the scandals are continuing.

We can realign in the way you suggest by changing policy and ensuring that the stick is at least as big as the carrot. Government policy (and action) must be that the risk has got to match the reward of acting in a manner that is harmful to society.

Lam: Is there an estimate for how much criminal capital there is in the world, and in our banking system right now?

Platt: Drugs account for about $400 billion, and then estimates suggest that all other crime top it up to $2.1 trillion annually. That's a lot of money that can make a lot of good people make questionable decisions.

One thing I do want to acknowledge is that there really is not in my view an innate toxicity within the finance and banking industry. There are very many good people dedicated to the prevention not the facilitation of crime and much of what we see is in fact the product of volume and lack of effective regulatory oversight. In other words, there is an inevitability to quite a lot of money laundering. Of course, some banks could work harder to make it harder but it's important that we recognize that relative to all other sectors, the finance industry is very much put upon by governments already and it does play an important part in the prevention of crime through suspicious activity reporting. It never gets any credit for that from the media relative to the hammering it gets when things go wrong.

Lam: $2.1 trillion is a lot of money. It sounds like it's hard for criminals to move a large amount of money around, but not impossible.

Platt: My book focuses less on money laundering and more on how the industry can assist the criminal to commit those crimes. That is a really important distinction that the industry needs to wake up to because the industry has been focused for the past 20 years on the former and not the latter.

Lam: What, if anything, can the public do about the latter? Is it just up to the whistleblowers to uncover malpractice, and regulatory agencies to investigate and reform?

Platt: It is very difficult for consumers to vote with their feet—where can they go? It is a challenge to identify a large international bank that has not been involved in some sort of regrettable conduct. In that sense, the public is relatively powerless. You would think that they would demand more action at a governmental level, but for example, in the run up to the May U.K. election, there has been virtual radio silence on the reform of the banking sector despite the fact that not a week seems to go by without some new scandal emerging. It's quite depressing, actually. As regards to regulators, they can only work with what they have. Many of them suffer from an inequality of arms with the banks.