Money laundering and financial stability: does adverse publicity matter?
| DOI | https://doi.org/10.1108/JFRC-09-2021-0075 |
| Published date | 12 November 2021 |
| Date | 12 November 2021 |
| Pages | 196-214 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Bahriye Basaran-Brooks |
Money laundering and
financial stability: does adverse
publicity matter?
Bahriye Basaran-Brooks
Faculty of Law, Ankara Yildirim Beyazit University, Ankara, Turkey
Abstract
Purpose –Already sufferingreputational damage from the global financial crisis, banks face a further loss
of trust due to their poor moneylaundering (ML) compliance practices. As confidence-driveninstitutions, the
loss of reputation stemming from inadequate compliance with regulations and policies labels banks as
facilitators of crime and destroys public trust both in the bank itself, peer banks and the wider banking
system. Consideringthe links between financial stability and adverse publicityabout banks, this paper aims
to criticallyexamine the implications of ML-specific bank informationon financial stability.
Design/methodology/approach –This paper adopts a contentanalysis and a theoretical discussion by
critically evaluating the role of bank compliance information on stability with references to recent case
studies.
Findings –This paper establishes that availability of information regarding a bank involved in or
facilitating ML might posea threat to financial stabilityif bank counterparties cut their ties with thebank in
question and when bank stakeholders show a strong and sudden negative reaction to adverse publicity.
Though recentML scandals have not caused immediate instability,general loss of confidence associated with
reputationalrisk have had a destabilising effect on affectedbanks’capital and liquidity.
Originality/value –There has been surprisingly little discussion to date on the impact of publicly
available bankinformation on financial stability and public confidence within the ML complianceframework.
This paper approaches the issue of publicly available banking compliance information solely through the
prism of public confidence and reputational risk and its impacton macro-stability by examining recent ML
scandals.
Keywords Compliance, Money laundering, Financial stability, Reputational risk, Public confidence,
Bank information disclosure
Paper type Conceptual paper
1. Introduction
Money laundering (ML) and terrorist financing(TF) jeopardise the integrity and stability of
the financial system and cause economic and reputational harm [1]. As the banking system
intermediates an extremelylarge number of economic and financial transactions executed in
the wider economy, banks are in a special positionto detect and forestall these crimes with
their due diligence and compliance services. This reinforces their role in the collection of
information, its monitoringand production, which in itself forms a key building block of any
banking business.
It is within banks’interests to deliver good compliance practices to protect their assets,
financial integrity and reputation. As these crimes are conducted in markets in which
information asymmetries exist, banks have the information capital that state authorities do
not. Banks, in the simplest terms, receive deposits and then lend them, which is accomplished
through the collection and re-use of information on clients, but while this safeguards banks’
assets and reputations, it comes with the cost of relinquishing some of that information to
JFRC
30,2
196
Received9 September 2021
Revised11 October 2021
Accepted21 October 2021
Journalof Financial Regulation
andCompliance
Vol.30 No. 2, 2022
pp. 196-214
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2021-0075
The current issue and full text archive of this journal is available on Emerald Insight at:
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state authorities. Even though there are large differences between nation states as to the level
to which banks are required to disclose information, generally the legal framework applicable
draws a line between information, which is to be kept confidential and which is to be disclosed
to the relevant government authorities when compliance with anti-ML (AML) and counte r-TF
(CTF) is concerned.
The bank’s informational autonomy entails a variety of concerns for those who have
vested interests in bank information. Public law interference in bank’s informational
autonomy which is regulatedas a private law institution is mostly discussed in thenexus of
bankers’duty of confidentiality and financial crime reporting. This is only one side of the
coin about bank disclosures that is directed at customer information, which is collected,
processed and held by the bank.It is also directly related to the notable upsurge in reporting
responsibilities of banks relative to their earnings and credit losses because of the same
information that they keep. In this respect, emerging de-risking practices, as a result of the
growing liabilities and costs stemming from sharing or withholding bank information, has
been on the global agenda as it disrupts trade and payments and affects financial stability.
Associated risks related to the handling of the micro-information that banks hold and
process transcend discussions regarding the banker’s duty of confidentiality and have far
wider effects.
There is another dimension to the discussion concerning bank information, which can
affect bank capital, solvency or risk level. This type of information refers to the bank’soverall
safety and soundness and has specific value for bank prudential and stability regulators.
There are many parties who react to this information, ranging from depositors, investors,
bank counterparties to the general public. Global standard-setters highlight the importance of
the ready availability of such information in exerting market discipline so that protection of
financial stability and integrity is ensured by elimination of unsound and ill-managed banks
within the system (Basel Committee on Banking Supervision [BCBS], 2004;Financial Stability
Board [FSB], 2014;OECD, 2002;World Bank, 2019). However, the rising concept of market
discipline, while improving public confidence and contributing the financial stability can also
weaken the public trust due to, for example, revelatio n of poor performance, corporate
malfeasance, illiquidity or insolvency of a bank. In the extreme, negative perception of a
bank’sfinancial standing can cause panic or even information-based bank runs (Chen and
Hasan, 2006;Jacklin and Bhattacharya, 1988;Zhu, 2001). Concerns that associate disclosure of
bank wrongdoings with instability are generally considered to be of more significance in times
of crisis.
Most notably after the global financial crisis (GFC), the protection of financial stability
has become a paramount objectivein financial regulation while banks have had to bear their
fair share of responsibility for the crisis. This is partly because banks were seen as
imprudent in their conduct of business as they focussed on maximising their financial
profits by excessive risk-taking and also a greatdeal of regulatory investigations of banks
reduced trust in banks in general [2]. Enhanced banktransparency, in this respect, has been
introduced as a key toolto bolster financial stability. Accordingly, its role in restoringpublic
trust and increasing the level of accountability, in general, has been a constructive catalyst
for a transition towardsmore transparent banks in the post-crisis world.
While acknowledging the value of bank transparency in supporting public confidence
and therefore financial stability, this paper will focus on one specific type of bank
information, namely, bank ML information as a reputation risk driver and its potential
implications for macro-stability.Existing literature on financial stability in relationto banks
puts special emphasison bank runs or bank capital or liquidity levels when discussingbank
reputational loss and resultant lack of confidence in public. As it focusses on the result,
Money
laundering and
financial
stability
197
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