Private Banks Feel Heat In Financial Crime Crack Down

The battle to combat money launderers and fraudsters has turned away from the law to turning the legal screws on private wealth managers and banks. Governments seem to have given up chasing crooks and seem to concentrate instead on controlling how the organisations that manage their wealth do business because they are easier targets.

The world’s richest people are depositing their cash into private banks and investment funds, but the cost of taking on high net worth clients is soaring. Kleinwort Benson’s private wealth arm reckons the cost of taking on a client with a $1 million or more in liquid funds costs between £5,000 and £25,000 to carry out background checks that meet regulatory requirements like identifying clients, clarifying the sources of their money and money laundering regulations. This is expected to rise when US, UK and European tax compliance laws like the Foreign Account Tax Compliance Act (FATCA) come into force next year.


The firm explained the number of wealthy clients is growing and is expected to continue to do so, and regulatory costs account for 10% of the first 12 months of earnings from a new client. New laws under consideration in some countries call for the prosecution of bankers and wealth managers as well as their employers if the organisation unwittingly aids a financial criminal. Already, prosecutions in the US and UK have targetted banks and wealth managers. In the US, HSBC was fined for unknowingly aiding a Mexican drugs cartel launder their ill-gotten gains and Swiss private bank Wegelin closed after admitting aiding tax evaders for a decade or more. While in Britain, Coutts was fined by regulators for failing to properly apply money laundering laws. The World Wealth Report from RBC Wealth Management confirms the cash mountain for high net worth individuals is growing – last year 10% was added to make the total $46 trillion.

Due diligence

At the same time, wealth manger profits more than halved to 5.3% from 12.3% in 2011, as high regulatory costs began to bite. Accountants PwC predict regulatory costs will keep rising and that many private banks will show some clients the door because managing their risk is not profitable. However, a spokesman for Kleinwort Benson did not believe any amount of due diligence checks will uncover real crooks. “They have the necessary documents, cover stories and front to do business,” he said. “In the end, the wealth adviser either feels something is not right or the case will slip through the net regardless of the regulator’s rules and guidance.”

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