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Money laundering still on the rise – Industry roundup: 18 July

European Central Bank's new bond instrument to potentially roll out early

As new political turmoil engulfs Italy, the European Central Bank's (ECB) new instrument to combat excessive increases in euro-area borrowing costs may be put to the test sooner than anticipated. Reports indicate that the margin between 10-year Italian bonds and their German equivalents has jumped over 200 basis points, as Prime Minister Mario Draghi's government is said to be on the verge of disintegrating, placing more pressure on the ECB to make activating its instrument simpler.

Gilles Moec, Chief Economist, AXA, stated that the instrument, which is scheduled to be disclosed Thursday as the ECB raises interest rates for the first time in more than a decade, may still be too nebulous or limited in scope to support the Italian bond market. According to officials, the instrument is seen as a safety net to prevent high inflation when at risk, rather than a measure to help governments in crisis. Joachim Nagel, President of the central bank of Germany, Deutsch Bundesbank, requires clear guidelines for when it can be applied.

As stated by Silvia Ardagna, Head of European Economics, Barclays, political turmoil is not expected to activate the instrument—at least not to support Italian bonds. Ardagna further added that the instrument will not be used if the spread widens during a political crisis in Italy, but may be useful in protecting other countries from the consequences of Italian political developments.

Treasury and trade solutions boost Citi’s performance

Citigroup has implemented a strategy to increase investor returns by cutting out underperforming services and purchasing high-growth areas, as reported in the American Banker. Citi’s treasury and trade solutions division, said to be a hot commodity in their institutional clients’ group, which assists global companies with their treasury, payments and commerce needs, increased 33 percent year over year to US $3 billion in second quarter 2022. Reports indicate that this was attributed to higher interest rates but was mainly due to higher client loans, deposits and cross-border transactions. Citigroup CEO Jane Fraser said the increase produced "the strongest quarter this firm has had in a decade."

Citi sold its Australian franchise in June 2022 and is currently in the process of closing eight others overseas, including its Banamex franchise in Mexico.

The cash generated by closed services is expected to be reinvested in development services. Fraser claims that Citi is currently dealing with regulatory and legal issues while the sales process is underway in Mexico. Additionally, Citi expects to collaborate with industrial and financial investment banks to invest in technological advancements for trade and treasury services, wealth management, cards and other services. The bank also expects to expand its personal banking footprint to twenty countries and increase wealth management services from its US branch network.

The bank reported earnings of $4.5 billion for the quarter, a 27 percent decrease from the same quarter in 2021. According to Fraser, the impact was mostly attributable to the accumulation of reserves for potential bad loans, which totaled $424 million this quarter given the growing likelihood of a recession. Revenues were reportedly 11% higher year on year, while earnings per share were $2.19.

Moreover, Citi announced that it is temporarily suspending share repurchases in order to build the amount of capital required by regulators, and also expects to resume stock buybacks once it is deemed advisable to proceed.

Bank account rule change aiding in private banks' growth in the cash management sector

A recent study by Coalition Greenwich 2022 India Corporate Banking, a division of Crisil Ratings, indicated that changes in current account norms aided HDFC Bank, ICICI Bank, Axis Bank and others in growing their market share in the cash management sector over the last two years.

The survey stated that India's private sector banks received a significant boost from the Reserve Bank of India’s (RBI) 2020 circular establishing new rules on current accounts. This is said to ensure that corporates have a minimum size relationship with their bank and to strengthen the competitive advantage of large corporate lenders.

Additionally, market penetration of large private sector banks such as HDFC Bank, Axis Bank and ICICI Bank for domestic cash management has increased from 35% in 2020 to 40% in 2022, according to the report. The same forecasts enabled major banks like Citi, HSBC and Standard Chartered Bank to boost market penetration from 58% in 2020 to 65% in 2022 in the area of international cash management. However, the poll noted that the lenders have not just benefited from favorable rules; they have also benefited from private banks' cutting-edge digital products during the past few years. In the survey's rankings for major corporate banking for lenders, the public sector State Bank of India came out on top, followed by India’s private banks, ICICI Bank and HDFC Bank. Among local lenders, HDFC Bank reportedly led the way in middle market banking penetration, followed by ICICI Bank and Axis Bank.

Money laundering still on the rise: fintech executives convicted in the US following the transfer of $160 mm to Nigeria

According to Bloomberg reports, owners from a Texas-based payments company with connections to the UK pleaded guilty in the United States to money laundering violations after their company facilitated transfers of US $160 million to Nigeria over a three-year period.

Consistent with US legal filings, Anslem Oshionebo, 45, and Opeyemi Odeyale, 43, were sentenced to 27 months in prison for failing to maintain effective anti-money laundering controls and unlicensed money transmitting. Additionally, the statement from the Department of Justice (DOJ) on 7 July stated that the Dallas-based company they owned and operated, Ping Express US LLC, faces five years of probation and a fine of up to $500,000 after pleading guilty to a similar charge, while another executive received a 42-month sentence.

Reports indicate that customers' remittances were sent to Nigeria, Kenya, and other African countries by Ping Express. Despite processing a sizable number of questionable transactions over a three-year period, the company neglected to alert regulators to any one of them, according to the DOJ, even though it eventually filed a number of reports.

Payzen Ltd., a payments business with offices in London that Odeyale also founded and operated, has had Oshionebo as a shareholder. According to US and UK documents, the UK Financial Conduct Authority (FCA) approved Payzen to operate in January 2020, two months before federal prosecutors for the Northern District of Texas accused the two men and a number of other people of money-laundering offenses. The British company has not been charged with any wrongdoing and was not cited in the US lawsuit, according to reports.

In December 2020, Odeyale ceased to be Payzen's controlling shareholder, and the new owner, Adekanmi Adedire, who currently controls the company, claims that Ping Express and Payzen are completely different organizations and unrelated to each other. According to the FCA’s website, Payzen still has an active license as a payments company, with its website listed as ping-express.com. Ruth Wharram, a spokeswoman for the FCA, stated that the watchdog considers all relevant information when supervising firms.

Reports show that the British financial technology landscape has come under scrutiny, with concerns that its lax regulations are facilitating the movement of illicit funds throughout the world. The Transparency International UK organization has demanded stricter oversight after discovering that more than one-third of UK-licensed electronic-money institutions exhibit warning signs, reports added.

In the midst of market collapse, the Central African Republic launches the 'Sango Coin' cryptocurrency

The Central African Republic announced that they will begin selling a cryptocurrency worth US $21 million this week, despite industry slump and uncertainties about the project's viability in a structurally weak nation.

According to the country's Sango investment website, the "Sango Coin", described as a "national digital currency", will be available for purchase on 21 July with a minimum investment of $500 to be paid in cryptocurrencies, including Bitcoin and Ethereum. The International Monetary Fund (IMF) and many cryptocurrency specialists raised concerns when the Central African Republic, a country with limited energy and internet access, became the first African nation to recognize Bitcoin as legal tender in April 2022.

With Bitcoin down almost 55% so far this year, the market for cryptocurrencies is still very unstable. Despite the scepticism and the so-called "crypto winter", the Central African Republic government's eagerness for its plan does not appear to have diminished.

The Sango website states that foreign investors will be able to buy citizenship for $60,000 in cryptocurrency, with the equivalent Sango Coins held as collateral for five years, and e-residency for $6,000, held for three years, under the Central African Republic's initiative. Additionally, it was reported that there will be 12 more coin sales, with the price increasing each time. However, many details remain unknown, such as the technology used, which companies support the product, and whether the token's price would be free-floating or fixed. According to the terms and conditions of the Sango investment platform, unused Sango Coins cannot be refunded or converted into other cryptocurrencies.

Cancelled merger between VyStar CU and Heritage Bank due to regulatory scrutiny and deteriorating economy

US Florida-based VyStar Credit Union and US Georgia-based Heritage Bank have cancelled their merger agreement. The rising influx of web and mobile applications as well as a deterioration in the US economic outlook were said to be main causes for the termination.

As recently as April 2022, the merger appeared to be active and priority, according to Leonard Moreland, CEO, Heritage Bank. However, both institutions decided last week that they would not meet all of the regulatory requirements for the transaction before the deadline. Moreland of Heritage Bank stated that the bank would proceed independently, noting an improved post-pandemic environment and a solid financial position. Heritage expects to concentrate on innovative ideas to build partnerships and efficiencies that will benefit shareholders. On the other hand, VyStar intends to pursue independent expansion in Georgia.

According to reports, trade groups such as the Community Bankers Association of Georgia are pleased the transaction ceased because they believe credit unions have an unfair advantage when acquiring community banks due to their tax-exempt status. With US $12.5 billion in assets, 850,000 members, and 88 branches, the merger would have made VyStar the 13th largest credit union in the United States, reports added.

Reports show that bank mergers and acquisitions will face several challenges in 2022. The US administration increased regulatory scrutiny on bank mergers in 2021, focusing on how the merger will benefit the community as a whole rather than just the firm, making transaction approval more challenging to achieve. Furthermore, banks' balance sheets are becoming more constrained as a result of rising interest rates and inflation.

As a result, financial organizations that are looking to expand and scale, notably small-medium sized banks and credit unions, may prioritize their implementation of an all-encompassing digital strategy.

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