There are many reasons for this, political or otherwise, but a significant driver is the economic benefit from buying and selling goods and services using US dollars in global trade transactions. It is liquid, easily exchanged and backed by the US Federal Reserve, trusted by many markets that these transactions will be settled reliably and safely. With the large number of USD transactions, many international banks have branches in the US, particularly New York, where they are able to settle these USD trade transactions on behalf of their clients.
As long as the USD plays such a central role in international trade, many banks around the world have to comply with US policies, irrespective of their political interest. Financial crime, especially money laundering and terrorism financing continue to be primary concerns for US regulators, evident by strict regulations and enforcement actions since 11 September 2001 after the terrorist attacks on New York and Washington DC.
The USA Patriot Act has been a primary regulatory driver, passed since the terrorist attacks and has been used as an instrument of US foreign policy. Sanction programs resulting from these AML regulations is now the preferred method of achieving US foreign policy, with the most well-known example of the imposition and subsequent lifting of sanctions against Iran to force compliance with nuclear non-proliferation. Fighting wars are expensive with estimates of USD 2.1 Million per soldier and USD 1.3 Trillion for the Iraq and Afghanistan wars since 11 September 2001 according to a US Congressional Report from 2011.
Certainly much more effective to place sanctions on countries that are not in line with US foreign policy and to have banks be the front line of enforcing these policies. As a result, many international banks that are not intimately familiar with US banking regulations get caught in enforcement actions for violating AML regulations whether intended or otherwise. Consequences have been severe, with penalties up to $8.9 Billion for a major European bank in May 2015.
The recent penalty against an Asian bank for violating AML laws continues to drive home the long reach of the USA. In this case, the New York Department of Financial Services specifically highlighted deficiencies in their compliance and AML programs related to the use of USD in trade transactions. If an international bank decides to operate a US branch or engage in USD denominated transactions, a direct consequence is the need to comply with US law, wherever it may operate.
Best practice is to develop AML policies and procedures based on US regulation and use those policies as a baseline for all their other international operations, including their headquarters. This means leveraging tools that have been built that include these best practices. Many international banks that establish branch offices in the US typically adopt AML policies based on their home country, without adapting to local US regulations. Clearly for many international banks that have been penalized, this is not a winning strategy. The financial and reputational damage incurred far outweigh the supposed cost and effort savings of implementing AML policies based on their home country.
Accuity recommends that international banks review their current approach to AML screening in all their overseas branches including their headquarter location. Clearly the significant use of USD for trade transactions globally means that US based regulators are able to penalize any international bank for violations of AML policy. Given the effectiveness of sanction programs and the relatively cost effective option of dictating foreign policy through regulations, international banks need to recognize that penalties for non-compliance will continue. The cost and efforts savings from a non-US based AML policy is simply not worth the risk. Certainly the US dollar dominance may change over time but for now, international banks have no choice but to comply.
Find out more about our Compliance Solutions here
Follow us on @AccuityTweets and LinkedIn