WASHINGTON A proposal issued by international supervisors last week put banks on notice that voluntary anti-money-laundering practices recently adopted by some large financial institutions have not inoculated the industry against tougher regulatory restrictions.
The Basel Committee on Banking Supervisions 22-page Customer Due Diligence for Banks paper makes clear that the international regulatory community sees itself as the main bulwark separating the banking system and the world of dirty money.
National supervisors are responsible for ensuring that banks have minimum standards and internal controls that allow them to adequately know their customers, the proposal says. Voluntary codes of conduct issued by industry organizations or associations are to be encouraged but they are not in themselves sufficient to ensure market integrity or sound risk management.
To be sure, the proposed guidelines are generally consistent with previously issued statements by other regulatory bodies, such as the Federal Reserve Board and the Treasury Department. Among other things, the proposal calls for positive identification of account holders when a customer relationship is opened, ongoing monitoring of account activity for suspicious transactions, and special scrutiny of foreign political figures and their relatives.
But the fact that the guidelines were issued by the Basel Committee, which has usually left money laundering matters to international law enforcement groups such as the Financial Action Task Force, suggests that bank regulators plan to take a more active role. In fact, a press release accompanying the paper said it is expected to become the benchmark for supervisors to establish national practices and for banks to design their own programs.
The fact that the Basel Committee has taken this step just adds to the growing recognition around the world of the importance of this issue, said former Deputy Treasury Secretary Stuart E. Eizenstat, who oversaw the Clinton administrations anti-money-laundering initiatives. Anything like this, that adds further strength to the whole movement and greater sensitivity to the industry, is welcome, said Mr. Eizenstat, who later this month will join the Woodrow Wilson International Center for Scholars as a public-policy scholar.
The proposal was released barely three months after the announcement of a pair of industry-driven efforts to stem money laundering.
In late October, a consortium of large international banks agreed to apply a set of voluntary guidelines, known as the Wolfsberg Principles, to their private banking operations. The same day, trade groups joined with bank regulators and law enforcement agencies to release the first in an ongoing series of reviews of the Suspicious Activity Reports that financial services firms must file when money laundering is suspected.
There has been a push in the industry to develop standards that will take some of the heat off, said Satish M. Kini, a partner in Washington with the law firm Wilmer, Cutler & Pickering. But there is a clear signal here that self-policing, while encouraged, is not the end of the road. That does come through loud and clear.
Some argue that any hope that regulators would back off on money laundering was misplaced from the outset.
You are not going to see the regulators abdicate the field to private initiatives, said Oliver Ireland, former associate general counsel at the Federal Reserve Board and now an attorney with Morrison & Foerster in Washington.
It is unrealistic to expect the regulators to ignore the issue, so you have to ask what are they going to do, he said. They can either endorse private-sector guidance or they can put out their own. As a regulator, there are some difficulties endorsing private-sector guidance.
Part of the problem, Mr. Ireland said, is that regulators need to promulgate rules that apply to a broad spectrum of institutions, whereas the Wolfsberg Principles, for example, are applicable only to large private banking operations.
In the end, he said, regulators may still come up with guidelines that look very much like the industry effort. But hopes that they will sit back and let banks police themselves have virtually disappeared.
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