Infractions of Anti - Money - Laundering Rules in Banks: The Disciplinary Role of Stakeholders

Research papers

When do Foreign Regulatory Interventions Trigger Market Disciplinary Effects? Evidence from Anti-Money Laundering Violations (Andrea Schertler and Sandra Tillema)

Corporate misconduct can be costly to companies, partly because of the disciplinary actions taken by market participants. As previous studies in this field have often concentrated on violations of domestic regulations, our understanding of market disciplinary effects in the context of multinational companies is limited. To fill this void, we analyze the role of institutional investors in situations in which international banks violate foreign and domestic anti-money laundering (AML) rules. Although it may be more difficult for market participants to collect and process information about misconduct in foreign countries, we find strong support for the conjecture that institutional investors exit their holdings when they learn that a particular bank is involved in a foreign regulatory intervention. We further find that the amount of institutional holdings negatively influences the responses of stock prices to regulatory interventions irrespective of whether the concern is over foreign or domestic interventions. Finally, we find that after news about foreign interventions has been released, the likelihood of a forced CEO turnover increases with the percentage of institutional holdings. The size and direction of the disciplinary effects that we find for foreign interventions resemble those for domestic interventions. Based on our study, we strongly suggest that future research into misconduct must consider information on foreign malpractices, as ignoring this information produces biased results.

From Profit Seeking and Safeguarding Society: The Impact of Governance Incidents on Bank Stock Price Crash Risk (Amal Alabbad and Andrea Schertler)

Governance incidents in the banking industry damage a bank's reputations and trustworthiness. While the revelation of such incidents generally triggers sudden declines in stock prices, the impact of these events on a bank's future stock price crash risk remains unclear. Using 17,590 bank-year observations across 82 countries from 2007 to 2024, we find that releasing governance incidents significantly increases banks' future stock price crash risk. Some governance incidents are deeply grounded in banks’ profit maximizing objectives, like tax evasion and optimization, while others, such as money laundering (ML) may arise because the bank fails to meet its regulatory defined societal function. Therefore, we distinguish between these two types and find that ML incidents affect banks’ crash risk as much as other forms of governance failures. However, this channel is moderated by the ML risk of a country. Relative ML incidents more strongly increase future crash risk if banks are located in countries with low ML risk indicating a well protected financial system. Overall, this study underscores the importance of enhancing regulatory frameworks and market safeguards to mitigate the risks associated with governance failures and strengthen the financial system's integrity.

Market discipline after banks' governance incidents: A matter of regulation quality? (Andrea Schertler and Johanna Stauder)

Market discipline describes a mechanism through which stakeholders punish banks for wrongdoing. Analyzing banks' stock response worldwide to governance incidents, we investigate whether banking authorities' supervisory power moderates such punishment. We find that abnormal returns are significantly more negative when bank regulators have high supervisory power than when they have low power underpinning the moderating role of regulation efficiency. Especially proxies capturing information availability explain abnormal returns in countries with high supervisory power. To the contrary, abnormal trading volumes around these incidents are always positive regardless of regulatory power.

Spillover effects of AML infractions (Niels Hermes and Andrea Schertler)

The third study investigates (positive and negative) spillover effects of violations of AML rules to other banks and whether high-quality risk governance limits negative and fosters positive consequences of these spillovers. Spillover effects may occur through several channels. First, investors may believe that other banks will be involved in AML cases, as well. This informational spillover implies negative consequences for banks with similar characteristics as the bank which was detected to violate AML rules. Second, investors may bring their funds or deposits to those banks which are less likely to be involved in similar infractions. With this channel, the spillover effect implies positive consequences for banks not treated with the detection of violations of AML rules.