Evidence submitted by HSBC (ECR0063)

         House of Commons Treasury Select Committee Economic Crime Inquiry

 

  1. HSBC is one of the world’s largest banking and financial services organisations, headquartered in the UK with a unique international network. We have a fundamental responsibility to help protect the integrity of the financial system that customers and society rely on. Our scale and global footprint put us in a unique position where we can make a positive contribution and be at the forefront of the fight against financial crime.

 

  1. HSBC has played in active role in improving the UK’s system for tackling economic crime and will continue to do so. Much progress has been made, but action in a number of key policy areas is urgently needed to increase the effectiveness of the national regime and of financial institutions’ financial crime risk management programmes.

 

 

The anti-money laundering, counter-terrorist financing and sanctions regimes

Effectiveness

 

  1. Policy makers, law enforcement and national security services, regulatory supervisors and financial institutions are aligned on the ambition to prevent the misuse of the UK’s financial system. Law enforcement and national security agencies rely more than ever on the intelligence shared by financial institutions, which can provide the most valuable sources of actionable information to assist in the detection of criminal and terrorist organisations. Supervisors can support this process by implementing regulatory frameworks in a way that leads financial institutions to focus analytical resource on higher-risk activity; managing financial crime risk rather than compliance risk.

 

  1. Effective financial crime risk management by its nature requires a risk-based response, which is the very first of the Financial Action Task Force Recommendations. A consistent and clear regulatory approach that anchors all financial institutions should be complemented by a collaborative, true, and resolute public private partnership in financial crime detection and mitigation in order to foster enhanced effectiveness of the overall regime. At HSBC, we view the principles of public private partnership as being a key part of efforts to combat economic crime activity in the UK and across the international financial system, at both the tactical and strategic levels.

 

 

Improving the UK’s Suspicious Activity Report (“SARs”) regime

 

  1. HSBC supports the UK Government’s SARs regime reform programme. There is broad consensus that the current regime cannot meet the challenges posed by the volume and complexity of cross-border and domestic transactions. Nor is it able to take advantage of opportunities provided by technological advances and unprecedented levels of investment into financial crime risk management by the private sector.

 

  1. The total number of SARs received by the UKFIU between October 2015 and March 2017 inclusive was 634,113; the current regime is not well placed to draw out the most pertinent risks from this data or to identify emerging trends to help drive shared strategic prioritisation of threats between the public and private sectors.

 

  1. Reform should aim to create a framework based on seamless cooperation between public and private sector bodies, to reduce duplication and inefficiency and ensure that funds and expertise are focused on the highest sources of risk. To achieve this, the programme must begin with a governance model focused around a single programme board, with public and private sector representation, which would also cover the wider Economic Crime Reform programme. 

 

 

  1. A new model should be underpinned by a co-designed technology platform to manage the end-to-end reporting process. At HSBC, we are leveraging our data, using advanced analytics, and investing in technology to become smarter and faster at identifying and providing insight into financial crime. The tactical and strategic opportunities from this investment are huge, but they will only be realised as part of a leading edge programme of public private collaboration.

 

  1. HSBC would also welcome more clarity on the roles and responsibilities of the National Economic Crime Centre (“NECC”).

 

Creating a more permissive information sharing environment

 

  1. The information exchange mechanisms within the UK’s Joint Money Laundering Intelligence Taskforce (“JMLIT”), of which HSBC is a founding member, have brought concrete results in helping the public sector to respond to operational priorities such as human trafficking and serious security threats, including terror financing. They have also improved the private sector’s financial crime risk management programmes. But to build on this success, information sharing should be expanded in three key areas: between the private sector and governments, between banks, and within banking groups.

 

  1. HSBC recognises that when sharing information, banks owe an overriding duty of confidentiality to their customers subject to certain exceptions. In the UK, these exceptions allow banks to share data where compelled by law, the customer consents, or there is a public duty to disclose or the bank’s interests require disclosure. In addition to these general principles, information can be shared under provisions in the Crime and Courts Act 2013, the Proceeds of Crime Act 2002, and the Criminal Finances Act 2017.

 

  1. However, these provisions often do not allow banks to share information which falls short of “suspicion”. Future legislative opportunities should be taken to provide more clarity on derogations for permitting information sharing under the provision to detect and protect against financial crime. This would be a positive move towards allowing pre-suspicion sharing. Clear guidance from the Financial Conduct Authority on what is permissible under the current law would also be of benefit.

 

  1. Barriers to deeper information sharing are not exclusive to the UK, and the different approaches taken by other jurisdictions also impact on the ability of the UK to manage financial crime holistically. With a sound evidence base from the JMLIT model and support from financial institutions, the UK should promote public private partnerships among international partners, helping efforts to tackle money laundering and terrorist financing globally.

 

Effective Ultimate Beneficiary Owner (“UBO”) Registers

 

  1. Company formation in the UK is abused by criminals to hide the ownership of assets and enable financial crime. A UBO register on which the private sector can place reliance is thus an essential tool in preventing the misuse of the UK’s financial system. Such registers are most effective when they are accurate, verified, accessible, and comprehensive.

 

  1. The UK’s Persons with Significant Control (“PSC”) Register is one of the strongest across Europe, but there remain concerns about its accuracy and verification. While it is ahead of many jurisdictions in placing a legal requirement on companies to self-certify their UBO structures and to record changes in a short period, enforcement must be strict and regular in order to achieve the desired deterrent effect.

 

  1. On verification, current PSC Register resourcing is not up to the task of independently verifying the information it contains. The registry authority should be able to draw appropriately on government information, including that received from the private sector and from other national registers, and on open source media. There may be scope for the private sector to contribute resource to achieving the shared goal of a register on which reliance can be placed.

 

  1. The UK’s recently-established Register of Trusts will face the same challenges of accuracy and timeliness.

 

Sanctions Implementation

  1. Financial institutions play a crucial role in the effective implementation of sanctions regimes, and thus their ability to achieve policy goals. Such regimes can be increasingly complex, and the international community has expressed concern about harmful de-risking from high-risk jurisdictions and sectors.

 

  1. HSBC welcomes discussions on improving the UK’s licensing regime, which would reduce unintended consequences, including by removing barriers to the NGO sector’s ability to move humanitarian aid payments within the formal financial system. As before, expanded sharing of both tactical information on the targets of regimes and typology insights on evasion methods would help to streamline implementation and prevent customers from being impacted unnecessarily.

 

Consumers and economic crime

Fraud

  1. Fraud is estimated to be the UK’s fastest-growing crime type, with card and Authorised Push Payment (“APP”) fraud, as well as the use of mule accounts, of particular significance. At HSBC, our robust fraud detection systems help us to protect our customers. We also help customers protect themselves by raising awareness of how criminals target their data.

 

  1. Fraud detection and mitigation is an area in which expanded information sharing, especially between banks, would help to identify illicit activity more quickly and trace stolen funds. Fraud is already a key component of Hong Kong’s private public partnership on information sharing; the UK should consider how this approach can benefit JMLIT. Overall, there needs to be a much clearer join up between the initiatives to combat fraud and wider economic crime reforms.

 

Technology and Innovation

  1. Digital identities can offer effective and efficient solutions to some of the challenges facing financial institutions in deterring and detecting criminal activity and protecting their customers. As an example, the GOV.UK Verify programme provides a level of assurance that meets basic ID&V requirements. But uptake is limited, and the platform is falling short of the trajectory required to meet its 25m target by 2020. Government Gateway is another such scheme.

 

  1. The longer term policy goal should focus on increasing levels of assurance to include biometric and “behaviometric” technology, and broadening the range of attributes held against the identity, eventually to include Know Your Customer information and beneficial ownership. Maximum value will be derived if banks can place reliance on an electronic ID and its attributes for regulatory purposes. 

 

  1. HSBC is developing Intelligence-Led Financial Crime Risk Management (“ILFCRM”), moving away from a rules-based approach to compliance to harness the potential of our data. By using advanced analytics to deliver a more dynamic and holistic view of risk, ILFCRM will allow HSBC to most efficiently and effectively support the public sector in confronting the harms associated with financial crime. The public and private sectors should work together to meet the full potential of technological innovation in financial crime risk management.

 

 

Priority Action Areas

 

At HSBC, we would highlight the following priority areas for action to improve the effectiveness of the UK’s national regime and financial institutions’ ability to detect, deter and protect against financial crime:

  1. The creation of a single private/public sector programme board to oversee the governance of the Economic Crime Reform Programme and SARs reform.

 

  1. Operational cooperation: clarity on the roles and responsibilities of the NECC.

 

  1. End to end reporting: urgent action to progress work on a co-designed technology platform.
  2. Shared priorities: ensuring that the private sector’s understanding of emerging threats is included in national priorities.

 

  1. Information sharing: continued efforts to remove barriers to expanded information sharing between the private sector and governments, between banks and within banking groups.

May 2018

PUBLIC