The Profitable Business of Money Laundering

Investors woke up on Monday morning to a double whammy that sent bank shares sharply lower: Risk of a second virus lockdown and leaked documents showing banks’ participation in criminal transactions.

An investigation by BuzzFeed and the International Consortium of Investigative Journalists showed banks facilitating more than $2t in transactions that were potentially involved in criminal activity.

• Banks that made the top of the list were Deutsche Bank ($DB) with $1.3t in suspicious transactions and JPMorgan ($JPM) with $514b.
• Over 90 global financial institutions were listed but the most notable banks were HSBC ($HSBC), Standard Chartered (LON: $STAN) and Bank of New York Mellon ($BK).

Are banks in trouble? Not necessarily

In 2019, BuzzFeed got their hands on thousands of confidential documents including Suspicious Activity Reports (SARs) that report potential illegal activity. These SARs are filed by banks to inform US law enforcement agencies of suspicious activities.

Banks are doing what they’re supposed to, but here’s the problem… After reporting suspicious activities, banks aren’t legally required to stop these transactions. In some cases, banks continue facilitating these transactions after being issued warnings from US officials. These leaked reports do not indicate any wrongdoings by the banks. Rather, they highlight the lack of regulatory oversight in the financial industry.

Impact on bank stocks: More of the same

The fall in bank stocks on Monday were likely impacted more by fears of a lockdown and less from the report. This report simply acknowledges what many have already known: fraudulent activities are common in financial institutions. Investors are more concerned about a lockdown that could trigger bankruptcies and impact loans held by banks.

(TAJ: Should you invest in bank stocks?)

Bank stocks will likely see limited impact from this report however, if regulators decided to take action, here’s what could happen:

• More regulations… Tighter banking regulations, which will take years to implement, would increase compliance expenses and lower profitability on banks.
• Fines on banks… Further investigation could lead to fines on banks, a band-aid solution to a bigger problem.