How corporate governance prevents money laundering

How corporate governance prevents money laundering and what you need to know about it as the stakes get higher

In modern business, there is a serious price for looking the other way when wrongdoing occurs. 

Money laundering isn’t just some distant problem that you can omit from the priorities list or get to “when you have time”. It’s a daily occurrence, estimated to affect between 2% and 5% of all the available cash in the world every year; that could be anything as high as $2 trillion. 

These days, it doesn’t matter if your business deliberately launders money, turns a blind eye to it, or even accidentally allows it without any executive or board knowledge – the legal guilt remains the same. This means you could end up hauled before regulators or answering questions in court simply because you didn’t make the effort to find out whether dirty money had touched your business’s bank accounts. 

Major institutions have been exposed in money laundering scandals on multiple occasions. The amounts laundered, the ramifications for leaders, and the fallout in the public sphere are increasing all the time. Given this, it’s essential for directors to understand their responsibilities when it comes to money laundering. And it can be summed up in one simple principle:

ASK

It’s the process of making money obtained through illegal means look legitimate, or “clean”. 

This often involves different stages of handling funds, moving them from one point to the next, until the chance of tracing their origin is little or nothing. 

Anti-money-laundering (AML) processes aim to track and recover these manipulated funds, as well as those responsible for laundering them, whether they know they’ve done so or not. 

It’s a battle of sophistication. As criminals develop better ways of laundering, authorities pursue more rigorous ways of stopping it. In doing so, they have worked with regulators to make business decision-makers (executives and boards) take a more active role to the point where, sometimes, they are automatically guilty if they do nothing.

If you lead a company and think that money laundering isn’t your problem, think again. 

This may have been true in the past, but the modern stakeholder will know that, even if you’re new in your role, even if finance isn’t your area of expertise, even if you have never seen a case of money laundering up close before, you may still be liable if authorities discover dirty money.

Here are three examples:

Danske Bank was the epicentre of one of Europe’s largest money scandals, which reached its peak during the second half of the 2010s. Over €200 billion in suspicious transactions were found to have flowed through the bank’s Estonian branch. 

It later emerged during investigations that the board became aware of serious red flags much earlier. Minutes from key executive board meetings support this. However, the directors did not act on them with enough urgency, prolonging the period through which dirty money was allowed to flow from criminal sources into Europe.

2012 was a bad year for HSBC. It was hit with multiple fines over AML concerns, the biggest of which came from US regulators at $1.9 billion, mainly as a penalty for facilitating the movement of drug money by Mexican cartels. 

The company later admitted that its AML controls had fallen short. Further investigation revealed that in the years prior to the fine, the bank’s leaders had attempted to centralise key operations globally. While it might have been a perfectly logical governance call and streamlined day-to-day business, it exposed gaps in the bank’s money laundering defences.

Wirecard was a case of open and deliberate fraud. Key executives within the German digital payments provider intentionally inflated the company’s revenue figures for years. Eventually, and despite previous audits and regulator probes, the company finally admitted that €1.9 billion of its balance sheet was simply “missing”. Things unravelled fast from there. 

Most of the attention in the Wirecard scandal points to the former CEO and COO, as well as the German regulator that did not pick up on the seriousness of the problem. However, the governance failings here include more independent directors not demanding answers based on so many red flags. Even when those flags began to come from whistleblowers and journalists, leaders did very little.

It comes down to one word: ASK

Corporate governance professionals need to get openly curious about anything that doesn’t seem right about the business’s operations. That goes for all kinds of strategic decisions, but it matters beyond measure when it comes to money laundering. 

Think about it: the first signs of money laundering are often auditors picking up red flags, figures that don’t make sense, or even the odd whistleblower or news article. They’re not automatic signs of guilt, but they’re not part of everyday business either. 

When these things happen, directors have a choice: either ignore the red flags and assume everything’s fine, or ask more questions so that they can fully understand why something doesn’t look right.

No. Your job is not to act as a forensic accountant. Your job is to engage and ask questions when something doesn’t make sense. If your questions stir more suspicions within the company, the forensic accountants might step in and take it from there.

Your job is to simply use your power of questioning. Ask when a transaction seems overly complex. Ask when patterns don’t align, when balance sheets don’t balance.

Ask even when it’s uncomfortable. In fact, ask especially when it’s uncomfortable. People who know more than you may try to create an awkward boardroom atmosphere as a kind of deterrent against examination.

It can be hard to ask in certain circumstances. And in fact, companies involved in real wrongdoing might make it harder to ask on purpose, clouding information from their own executives and directors, or creating a culture of “I’m sure it’s fine.”

If you find yourself working against this, there are some safeguards you can count on. 

• Your board will likely have a relevant oversight committee. These should be independent and be able to get to the bottom of any wrongdoing. You can work with them until your questions are answered. 
• You will also likely have regulators, legal representatives and external auditors that you can work with if this feels more comfortable.
• Ultimately, your own governance career needs to be protected, so if you’re asking multiple stakeholders and getting nowhere, you leave your role and make your concerns crystal clear while doing so. This can be tough in the short term, but it sends a powerful message.

Money laundering is a serious crime, failing to prevent it is a serious crime, but these days, it doesn’t stop there. 

Even if your company has never been connected with dirty money, your defences against it still need to be at industry standard. If regulators find your defences are insufficient, that’s a failing in itself. 

Ultimately, there are so many red flags which could be raised when it comes to money laundering. As a corporate leader, you have the unique power to ask until you have an adequate answer. This is a crucial line of defence against criminal practice.

How corporate governance prevents money laundering – The Corporate Governance Institute