Internal audit procedures are an essential component of the banking system, providing a crucial tool for banks to manage risks, ensure compliance, and enhance their overall performance. Internal auditing is a process that evaluates an organization's operations and activities to ensure that they are being carried out in compliance with applicable laws, regulations, and industry best practices. It involves a systematic and disciplined process to evaluate and improve the effectiveness of risk management, control, and governance processes. By conducting regular internal audits, banks can identify potential risks and areas for improvement, allowing them to take proactive measures to address these issues before they become significant problems.
Role of Internal Audit in the Banking System
Internal audit is an important function in the banking system, providing independent and objective assessments of a bank's operations, internal controls, and risk management processes. The role of an internal audit is to identify potential risks and weaknesses, evaluate the effectiveness of internal controls and risk management processes, and provide recommendations for improvement.
One of the primary roles of an internal audit is to provide assurance to the board of directors and senior management that the bank's operations and internal controls are effective. This helps to ensure that the bank is able to achieve its objectives and manage risks effectively. Providing independent assessments of the bank's operations helps to build confidence in the bank's ability to manage risks and provide reliable financial services.
Another important role of an internal audit is to identify potential problems and weaknesses before they become serious issues. Internal audit procedures help to detect and prevent fraud, financial crimes, and other risks that could impact the bank's financial stability. Providing early warning signs of potential risks helps management to take corrective action before the problems become more serious.
Internal audit also plays a key role in the bank's overall risk management framework. Identifying potential risks and evaluating the effectiveness of internal controls helps to ensure that risks are identified and addressed in a timely and effective manner. This helps to reduce the bank's exposure to risk and ensures that the bank is able to respond to changing market conditions and economic trends.
Benefits of Internal Audit Procedures in the Banking System
With the constant evolution of the financial industry, banks and financial institutions face a wide range of challenges, including changing regulations, increasing competition, and evolving technology. In this context, internal audit procedures provide a crucial tool for banks to manage risks, ensure compliance, and enhance their overall performance.
1. Compliance With Regulations And Laws
Internal audit procedures help banks to comply with various regulations and laws that govern the banking industry. By conducting regular audits, banks can ensure that they are adhering to all relevant laws and regulations, thereby avoiding legal and financial risks. Internal audit procedures also provide banks with the necessary information to make any necessary changes to their operations to remain compliant with changing regulations.
2. Detection And Prevention of Fraud And Financial Crimes
It can help banks detect and prevent fraud and financial crimes, such as money laundering, terrorist financing, and embezzlement. By conducting regular audits, banks can identify potential fraud risks and weaknesses in their internal controls, which can then be addressed to prevent fraudulent activities from occurring. Internal audit procedures also provide banks with an opportunity to educate their staff on the risks of fraud and financial crimes, helping to build a culture of compliance and integrity.
3. Operational Efficiencies And Cost Savings
It can help banks to identify operational inefficiencies and recommend improvements to increase efficiency and reduce costs. By reviewing the bank's processes, it can identify areas where automation or streamlining can be implemented to increase efficiency and reduce costs. By improving operational efficiencies, banks can improve customer satisfaction and profitability.
4. Enhanced Reputation And Customer Trust
It provides independent assurance to customers and stakeholders that the bank's operations and internal controls are effective. This helps to build trust with customers and enhances the bank's reputation. By conducting regular audits, banks can demonstrate their commitment to maintaining high standards of integrity and transparency, thereby building confidence in the bank's ability to manage risks and provide reliable financial services.
HSBC's AML/CFT Violations in South Africa
Under current banking supervision regulations, financial institutions (banking and non-banking) must issue annual reports containing the results of audits and inspections. Recently, two reports, one from HSBC and one from Banca Monza, have revealed significant AML/CFT deficiencies, for which serious action has been taken (first investigative and then sanctions). HSBC Bank is facing a new money laundering case. The bank had been subjected to several supervisory actions by the US Department of Justice in previous years due to AML/CFT violations.
Despite HSBC's best efforts to prevent criminals from accessing the financial system, it seems that these efforts are not enough. In fact, the bank itself, after several internal interventions in recent years, has discovered a flaw in South Africa with fraudulent agreements that have caused significant violations of the AML system. Investigators suspect that behind this new event, there is a money-laundering network that received $4.2 billion (£3 billion). According to journalistic and informational sources, the communication and reporting relationships regarding AML risks undertaken between HSBC Bank (and its subsidiaries) and the U.S. Justice Authority apparently were not adequately established.
The subject of this investigative report identified three companies with accounts at HSBC's Hong Kong branch. While tracing funds from certain foreign companies, the bank's investigators (Risk Management and Compliance) discovered a sophisticated network of money launderers. The identified network involved 92 HSBC Hong Kong bank profiles that received payments worth $4.2 billion between 2014 and 2017. However, it is not excluded that the origin and use of these economic resources came from legitimate sources and purposes. When the report was released in 2017, 60 of these accounts were still open. In addition, The money flows were placed under investigation, and it was found that most of them were used to act as a conduit to other foreign accounts, such as other banks or companies that are difficult to trace and not directly linked to local criminal organizations, but rather accounts/utilities used to transfer money. According to monitoring sources, it is believed that the amount declared by the bank is greater than 4.2 billion.
A different piece at the center of this dynamic, which is challenging to clarify due to economic-political intrigue, is due to the social and economic difficulties that South Africa has been experiencing in recent years, with frequent cases of social and political instability that have led to continual civil wars, worsened by the already worrying high levels of corruption among the public sector, which makes South Africa a good target for criminal organizations to exploit economic resources for their own advantage for illicit purposes. Therefore, the DOJ has expressed great concern.
FCA's Financial Investigation Into Bank Monzo Ltd
The UK authority, the Financial Conduct Authority (FCA), investigates UK bank Monzo for potential money laundering violations. The same Monzo banking group revealed in its report the difficulties suffered during the COVID-19 period, between layoffs and the necessary maintenance of an economical budget with high standards. This has caused good growth also by means of new economic offers for young people (ex., Home Banking) offering efficient and competitive services. This has driven economic growth in turnover and AML risks. In fact, the customer base grew, but at the same time, the Compliance function could not sufficiently support the supervision of newly acquired customers, KYC compliance processes, and KYC.
Over the past year, the FCA, in previous inspections at Monzo bank locations, notified the bank that it had found regulatory gaps in AML/KYC and requested that the acquisition and risk profiles of its customers be reviewed.
Monzo Bank, in its official statement, declares that it is cheerful and willing to correct the AML risks detected by the FCA. Moreover, all its management body assumes full responsibility for the prevention of financial crimes, which also states that it has made significant investments. At present, the control process initiated by the FCA towards the Monzo Bank is just at the beginning; civil and criminal repercussions cannot be excluded.
The AML banking system in the UK is a well-built system with efficient regulations and operating practices. In particular, the work that the FCA authority has been doing in recent years is valuable and commendable. But, the Brexit issue and the lack of enforcement and due diligence by banks allow international criminal organizations to use banks to transfer money worldwide.
