Banks’ Provision of State Capacity: Reframing the Baseline of Banks’ Anti-Money Laundering Obligations

Wake Forest Journal of Business and Intellectual Property Law, Volume 24, Issue 1, 2023, Pages 295-337.

University of Hong Kong Faculty of Law Research Paper No. 2023/08

31 Pages Posted: 25 Jan 2023 Last revised: 30 Nov 2023

See all articles by Shuping Li

Shuping Li

University of Hong Kong, Faculty of Law

Date Written: January 24, 2023

Abstract

This article examines the baseline and obligation limits of banks in the anti-money laundering (AML) system. Stated differently, that is, to what extent should banks exercise due diligence and investigation to discover and report potential money laundering behaviors? This article focuses on two aspects of the AML system: incentive and capability. A fundamental contradiction of the AML regime is the misalignment of incentives. Except to avoid civil penalties, banks have few direct incentives (in terms of reputation and profit) for AML other than indirect public interests. As the executor of the AML task, the bank maintains the integrity of the financial system by fulfilling the obligations of the regulator. Yet in actual business, the implementation of AML obligations not only reduces transaction efficiency but may also damage the trust between banks and customers.

Another problem with the AML regime is the lack of supervisory capability. Money laundering usually occurs as cross-time, geographical, and cross-institutional behavior. Further, money Money laundering methods arebecoming increasingly complex due to financial innovation and regulatory evasion. This makes it difficult, or nearly impossible, for banks accepting transactions at a single point in time to identify and detect suspicious activity and report it to regulators. AML is a knowledge-intensive task that requires a large amount of information to support the bank’s judgment on suspicious money laundering. Such information needs and judgment requirements can be attributed to regulatory capabilities, and their shaping includes both internal and external social resources. Existing rules focus mainly on the internal capabilities of institutions, setting up AML programs supported by personnel and material resources. However, the provision of social resources is equally important and cannot be replaced by raising the standards of conventional due diligence and manual check. The AML obligations of banks and other financial institutions are the expectations given by society during the collective learning process. Banks cannot and should not be the sole source of information collection and utilization. In the future, regulators should make efforts to provide public resources, such as information sharing and the development of AML detection models based on big data.

Suggested Citation

Li, Shuping, Banks’ Provision of State Capacity: Reframing the Baseline of Banks’ Anti-Money Laundering Obligations (January 24, 2023). Wake Forest Journal of Business and Intellectual Property Law, Volume 24, Issue 1, 2023, Pages 295-337., University of Hong Kong Faculty of Law Research Paper No. 2023/08, Available at SSRN: https://ssrn.com/abstract=4335882

Shuping Li (Contact Author)

University of Hong Kong, Faculty of Law ( email )

Pokfulam Road
Hong Kong
Hong Kong

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