End of year wrap up – Why “Annus Horribilis” & the Chicago Cubs matter for the financial services sector

Amidst the angst and upheavals in 2016, one event for certain brought huge joy to certain residents of Chicago and its sports fans – the Cubs win the World Series! [1] For those outside Cubs Nation, the win ended a 108 year losing streak in baseball which is perhaps one of the longest on record for any professional sports franchise.  Beyond that, 2016 brought with it issues of significance for the financial services community that will reverberate well into 2017 and beyond.

The economic and social impact of de-risking has now surfaced as a global agenda item that needs to be addressed.  While seemingly mundane and obscure outside of financial circles, the implications of withdrawal of correspondent banking services is now challenging future economic development.  Essentially Western banks are withdrawing their US Dollar and Euro clearing services from higher risk countries, meaning that companies or individuals in the affected countries are finding it much harder to pay for imports in these currencies and offshore workers in these countries, looking to remit their earnings back home, are finding it much more expensive to do so, making it challenging to support their families.  These unintended consequences hit developing countries especially hard, with pan national groups like the IMF [2], World Bank [3], FATF [4], FSB [5] all highlighting the development risks faced by these countries at the brunt end of de-risking.  We should certainly expect more discussions and policy changes for 2017.

The challenging issue of identifying beneficial owners of a financial transaction was clearly brought out in the open with the release of the Panama Papers in April 2016 [6].  Know your customer (KYC) is an important component of ensuring any financial transaction does not run foul of sanctions or risks of money laundering.  The Panama Papers exposed the use of shell companies to anonymize the ultimate beneficial owner, making it difficult to assess risk and raising suspicion among the general public as to why individuals would want to hide their identities.  While there were high profile resignations, public scandals and other negative news initially [7], we should continue to see policy changes in many countries, including the EU where the 4th Anti Money Laundering Directive is being reviewed in light of these scandals, enhancing due diligence processes to identify the sources of transactions [8].

The increasing threats of cyber-attacks directly hit correspondent banking in a big way, with the hack on the SWIFT network resulting in the loss of $81 million from the Central Bank of Bangladesh in early February [9].  While the integrity of the network itself was not questioned, the fact that hackers were able to access the network itself, along with other hacks post the Bangladesh heist [10] caused significant concern for the banking industry.   Indeed, SWIFT continues to warn banks of additional hacks in the absence of robust security controls [11].  Anticipate more cyber-attacks on the banking network in 2017 as  criminals employ increasingly sophisticated methods.

Speaking of increasingly sophisticated methods, money launderers are constantly looking for new ways to launder their money.  It’s all about placing ill-gotten gains into the global financial network so these criminals are able to seemingly conduct legitimate financial transactions once the money is clean. Real estate received special treatment this year, with FinCEN ordering title insurance companies to report on ‘all cash’ purchases of high end real estate.  Indeed, so concerned are regulators with money laundering through real estate that FinCEN broadened the reporting requirement beyond Manhattan and Miami to include six additional major metropolitan areas in July 2016 [12].  In addition to the USA, Australia and the UK are prime targets for money laundering through real estate [13].  Given the US’s current deficiency in mitigating risks in this area (as highlighted by the recent FATF Mutual Evaluation report in Dec 2016 [14]) and the geographic targeting order expansion, expect significant policy changes requiring greater due diligence in the real estate sector in 2017.

2016 was a year of sanctions lifting.  While Iran received the most attention (and the most controversial), economic sanctions were also lifted on Myanmar in September and partially on Cuba in October.  Overall the trend was to dial down the use of this economic tool as a weapon of foreign policy.  However, the change of behavior for banks to modify due diligence processes is debatable.  Global banks are still reluctant in engaging in Iranian originating transactions, given the history of enforcement actions by US regulators [15].  Given the incoming administration in the USA and the anti-Iran rhetoric during the campaign, it is highly likely that global banks will continue to stay away from Iranian based transactions in 2017.  Russia will be a big unknown going into 2017, further increasing risks for banks in the new year.

There are of course areas of new opportunity explored in 2016. New technology buzzwords like ‘Fintech’, ‘Blockchain’, ‘Distributed Ledger Technology’ & ‘Open APIs’ were increasingly discussed in the financial services sector.  While they were acknowledged in prior years, the idea of ‘collaboration’ between banks and Fintech is the hot new trend [16].  Certainly encouraging, as we should expect to see significant transformations in financial services in the upcoming years, making financial transactions faster, cheaper and more transparent.

As we see 2016 draw to a close, one is reminded of the Queen of England’s “Annus Horribilis’ year in 1992 [17] which saw many challenges for the Royal Family that year.  It is certainly debatable if 2016 (or even 2017) qualify as a “horrible year”.  But at least for fans of the Chicago Cubs, it’s been a great year [18].

Happy New Year!

Accuity will be publishing more on the topics raised in this New Year blog – make sure to check back soon.

[1] http://money.cnn.com/2016/08/31/technology/swift-bank-hacks/

[2] https://www.fincen.gov/news/news-releases/fincen-expands-reach-real-estate-geographic-targeting-orders-beyond-manhattan

[3] http://corporatecomplianceinsights.com/money-laundering-schemes-in-real-estate/

[4] http://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-united-states-2016.html

[5] http://www.reuters.com/article/us-iran-usa-sanctions-idUSKCN12A29Q

[6] https://www.finextra.com/newsarticle/29443/banks-rushing-to-collaborate-with-fintech-startups

[7] http://www.thisdayinquotes.com/2010/11/queen-elizabeths-annus-horribilis.html

[8] http://www.chicagotribune.com/sports/baseball/cubs/ct-cubs-win-world-series-sullivan-spt-1103-20161102-story.html

[9] http://www.chicagotribune.com/sports/baseball/cubs/ct-cubs-win-world-series-sullivan-spt-1103-20161102-story.html

[10] https://www.imf.org/external/pubs/ft/sdn/2016/sdn1606.pdf

[11] http://www.worldbank.org/en/topic/financialmarketintegrity/brief/de-risking-in-the-financial-sector

[12] http://www.fatf-gafi.org/documents/news/derisking-goes-beyond-amlcft.html

[13] http://www.fsb.org/wp-content/uploads/FSB-action-plan-to-assess-and-address-the-decline-in-correspondent-banking.pdf

[14] https://panamapapers.icij.org/

[15] https://www.theguardian.com/news/series/panama-papers

[16] http://europa.eu/rapid/press-release_MEMO-16-2381_en.htm

[17] https://www.wired.com/2016/05/insane-81m-bangladesh-bank-heist-heres-know/

[18] http://www.chicagotribune.com/sports/baseball/cubs/ct-cubs-win-world-series-sullivan-spt-1103-20161102-story.html