Challenges and Opportunities in Regulating the Banking Industry

Sergio Juwa
Associate Editor
Loyola University Chicago School of Law JD 2019


Regulation in the financial sector is critical to preventing crimes that include fraud, money laundering tax evasion, human trafficking, aiding drug trafficking, and even financing terrorism. Despite the importance of regulation and banking institutions’ compliance with such regulations, many laws regarding money laundering are outdated and prevent efficient prevention of such crimes. Additionally, enforcement against large financial institutions is a difficult matter because of the harm that penalizing them could have on the economy.

Ideas for reform

Senator Elizabeth Warren has stated that the United States needs to review some of its outdated policies regarding money laundering because of the undue difficulty that small banks and community banks face in complying with them. Her recommendations for how such laws can be improved include changing thresholds for reporting suspicious transactions, and requiring greater disclosure from companies.

The Senate Banking Committee has also taken into consideration testimony that banks need greater ability to share information both between institutions, and internally between branches in different nations. Greater ability for banks to receive information regarding potential money laundering would enable them to better monitor transactions for specific problems.

Historically, the banking industry’s attempts at regulatory compliance has only captured an estimated 50% of financial crimes. Banks have traditionally been put in a position where they must assess their own risk for noncompliance, and have found that it has generally been outweighed by the costs of developing the necessary tools, hiring personnel, and the inconvenience to clients conducting legitimate business transactions. The risk of noncompliance increased as fines grew larger, and the negative impact of bad publicity increased after 9/11.

Impact of new technology on regulatory reform

The development of artificial intelligence has made compliance much more efficient. Many third-party detection systems provide alerts to banks regarding suspicious transactions. The Senate Banking Committee has considered replacing current monitoring systems with more sophisticated artificial intelligence which produce less false positives and more accurately identify suspicious transactions. Financial institutions seem to be optimistic about the use of such innovations to streamline compliance with anti-laundering protocols, but find that lack of support by regulators is stifling the process.

Problems with enforcing regulation

Banks have traditionally done the bare minimum to avoid penalties for violating money laundering laws and have sometimes complacently allowed illegal drug money to be deposited in their banks. HSBC, an international bank, knowingly laundered nearly one billion dollars for drug cartels and terrorist organizations. $881 million was laundered through their bank without being detected. The bank knowingly enabled illegal transactions to clear through all regulatory procedures. HSBC processed transactions for Cuba, Iran, Libya, Sudan and Myanmar (Burma), while they were subject to United States sanctions. The bank nor any individuals were held accountable after the bank was criminally charged with violations of the Bank Secrecy Act, International Emergency Economic Powers Act, and Trading with the Enemy Act. The Bank reached a deferred prosecution agreement which resulted in a fine of $1.9 billion which many feel was a slap on the wrist, additionally no executives or employees were arrested for their wrongdoings.

United States of America vs. HSBC USA highlights a few key problems with enforcement of antimony laundering laws when it comes to large financial institutions. Some institutions are so important to the entire economy that even pursuing criminal sanctions against individuals within them could harm the global and national economy. The fear of economic harm caused by prosecuting large banks and executives could also be why there was little if any criminal prosecution following the financial crisis in 2008.


Current financial regulation regarding money laundering is outdated and needs to be reformed to better enable small financial institutions to comply. Additionally, the enforcement of such regulation faces several hurdles. Many financial institutions have too significant of an impact on the economy to effectively prosecute for their lack of compliance. However, Congress is exploring ways to improve anti-money laundering regulation, and artificial intelligence will likely play an important role in how money laundering will be prevented in the future. Currently, it remains unclear how the government can address the issue of institutions willfully permitting illicit funds to enter their systems.