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April 2, 2019

Takeaways from Michael Held’s Remarks on Financial Crime and the Payment System

At a risk-management conference this morning, New York Fed Executive Vice President and General Counsel Michael Held discussed financial crime and the payment system. The official sector and the financial industry have a shared goal in preventing the former and protecting the latter.

“It is in everyone’s interest — supervisors and their public constituents; the industry and its customers — to keep crime and the proceeds of crime out of the payment system.”

Further, when it comes to safeguarding the payment system, banks and other financial institutions must exercise judgment around risk management, which may require internal controls beyond what statutes and regulations require.

“Our laws and regulations increasingly bring the industry into partnership with the government on combating national security risks to the United States and financial crime…. Complying with minimum legal thresholds may not be sufficient in all circumstances to appropriately mitigate risk to your services and the financial system.”

Meanwhile, technology has expanded access to the payment system and the risks of its misuse.

“The creative development and application of technology can create opportunities to improve the payment system. Technology also creates new opportunities to compromise that system.”

Not all risks to the payment system are new or high-tech. Many — like trade-based money laundering — rely on deceptions that regulators and supervisors have warned about for many years. Held emphasized how important it is for financial firms to develop good habits — both for reputational reasons and to help safeguard the financial system.

“Over time, some institutions become weak links in our system when they take on riskier clients, perhaps in order to chase profit, without developing the ability to manage those relationships in a responsible way…. Regardless of the profit potential, our sensitivity to warning signs can fade from lack of practice…. Effective compliance gets better with practice. Like ethics, it needs to be a habit.”

He explained that risk professionals in the first line of defense must consider the big picture — noting that “Just because something is legal, doesn’t make it right” — and offered a number of questions for industry practitioners with the aim of improving communication and information sharing:

“Within your firms, how does the front office communicate with the control and audit functions about money laundering risk? Is there a frank discussion about common challenges? Or do those discussions resemble depositions or some other defensive exercise?”

Finally, he urged audience members to consider the relationship between a firm’s culture and its response to financial crime.

“I do think that detecting and deterring financial crime is not just a legal obligation. It is a moral one…. Make the right choices, not just the legal ones.”

Read the full speech.

This article was originally published by the New York Fed on Medium.

The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


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