KYC: ECB considers ‘misconduct’ for stress tests

And the stakes for KYC (CDD) and Compliance overall grow even higher….

BNP Paribas’ looming fine and possible criminal penalties have dominated banking news for the last week and have French leaders lobbying hard for relief, and the fallout could grow even bigger.

According to a report in the Wall Street Journal, the European Central Bank (ECB) is deepening its analysis of whether massive fines for Compliance misconduct and the potential for criminal charges—not only for BNP Paribas but for several other European banks being investigated by U.S. regulators—need to be figured in to stress tests of the financial health of banks. Such a move by the ECB could raise the stakes even further for improving and adhering to Compliance initiatives including KYC (CDD).

BNP Paribas in February had announced that it had allocated approximately $1 billion to cover fines associated with its allegedly covert business dealings with sanctioned nations like Iran, Sudan, and Cuba from 2002 to 2009. But BNP acknowledged recently that the $1 billion it set aside would likely fall far short of the actual fine, now predicted to be reach $10 billion. U.S. authorities may also add additional operational penalties like a temporary suspension of transferring dollar payments.

Up to this point, the ECB has focused its stress tests on whether banks have enough capital to withstand increases in bad loans and soured investments. But U.S. investigators have been focusing hard and levying large fines for behaviors like ignoring sanctions and aiding U.S. tax evaders. There have also been high-profile stories recently about the fixing of currency rates and other benchmarks.

Regulators in Europe are now wondering whether this type of “conduct” risk is a bigger threat to banks’ health than credit risk. Regulators there acknowledge the difficulty of quantifying this type of risk in general but assert that institutions with known issues and active investigations need to have their conduct risk incorporated into the stress-test analysis to determine whether these banks have sufficient capital on hand.

Industry watchers will no doubt have a keen interest in the final disposition of the BNP investigation and in the other active and pending investigations into banking misconduct. Whether the U.S. regulators and criminal prosecutors will continue with greatly escalated fines and enforcement actions remains to be seen, as does the response in Europe not only in terms of their leaders but their regulators, as well.

We have reported previously in this blog about instances of fines levied against individual Compliance officers and about the high economic stakes of enforcement actions that could cause the targeted institutions to greatly contract or cease operation. We are particularly interested in the AML-CTF Compliance angle and the importance of effective and affordable KYC (CDD) solutions and KYC (CDD) software. The AML-CTF solutions exist to keep financial institutions out of these situations. As much as anything, AML-CTF Compliance is a matter of earnest and effective implementation and adherence, the combination of which will greatly reduce any conduct risk for financial institutions.

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