AML fundamentals
As each jurisdiction has specific AML requirements, let’s examine best practices that will serve you well, no matter what country you’re doing business in.
Written policies
Don’t try to wing it. AML compliance is not something you want to improvise. Think policies through carefully, state them clearly and have it written out for all (executives, staff and regulators) to see.
What are your identification policies?
- What reports are you creating?
- What is your record retention policy?
- What regulations are you complying with and how?
- What are your communications procedures?
Compliance Officer
Who is the person responsible for the program? Designate one individual to “own” the system and ensure that processes are followed and updated, reports are filed, training is correct, and that the system is running smoothly. Consider a senior-level individual who has the power to influence the company on these matters; after all, there’s a lot riding on the success of the program both from a reputational and financial point of view.
Training
Every employee who deals with customers or transactions in any way needs to understand your company’s policies and procedures. They need to understand the legal requirements, techniques used by money launderers, checks they should make and how to report suspicious activities. Training isn’t a one-time thing. Look at refresher programs to keep staff vigilant and informed to ensure the program is up to date.
Review
It’s easy to become complacent; if everything is running smooth, why change? Unfortunately, by the time you notice a problem it might be too late. Have an independent expert, such as a third-party, or at least someone not associated with the day-to-day compliance operations, review your program on a periodic basis.
AML Red Flags
What are some activities or situations to watch for? Remember, money laundering is about trying to legitimize illegal funds, so there are patterns that indicate that money might not come from legal means. You are looking for unusual activities, such as:
- Large cash transactions
- Large number of transactions, which could indicate layering of transactions (splitting up of deposits to fall below reporting thresholds)
- Spikes in activity or amounts
- Transactions connected with cash-heavy businesses, such as gambling
- Transactions connected with jurisdictions that have a history of money laundering
- Transactions connected with individuals or businesses that are potential money launderers
These activities are noticeable in the initial due diligence process or through ongoing monitoring procedures. During onboarding, a baseline for normal activities should become apparent. Whether it’s classifying by account type, source of funds, expected transactions or some other criteria, set up a process to determine when something needs looking at and how. Whether it’s an internal examination, or an external report to regulators, it’s not enough to note a red flag.
For example, just filing a report to file a report, is not really solving the problem. As compliance lawyer Michael Volkov states, “The government has been complaining that financial institutions are now submitting too many SARs (Suspicious Activity Reports), and that the SARs often fail to contain adequate information to warrant the filing of the notice.” Clear processes to handle events are crucial to successful AML compliance.
AML screening
The best way to mitigate risk is to detect and manage problematic accounts before they become a risk. Performing a comprehensive identity verification check reduces risk from fraud, risk of breaking compliance rules, and risk from dealing with dirty money. Once a bad customer passes the initial checks, they are past the gate and can start testing your fraud prevention systems.
Fraudsters are becoming more and more sophisticated. Money launderers and terrorists are identifying weak links in your AML/KYC (Anti-Money Laundering/Know Your Customer) processes to help them hide the true source of funds and their connection to it. By blocking access to those who want to bypass your safeguards in the first place, your prevention systems will be more robust and secure.
This includes an exhaustive AML screening program needs to gather data from diverse government sources, international regulators and law enforcement agencies. These watchlist checks scan for known or suspected entities and individuals who are associated with money laundering, terrorism, financial fraud, arms proliferation, drug trafficking or PEPs (Politically Exposed Persons).
AML monitoring
After the initial onboarding process, compliance is not complete. There’s a necessity for monitoring on an ongoing basis. Monitoring refers to the analysis of continual, ongoing activities to ensure activities remain in compliance.
There are various activities to keep track of, such as exceeding thresholds, suspicious activities, change of status, recording of communications, surveillance of employees, watchlists, market trends, new regulations, trade data and various other market and transaction monitoring needs.
For financial institutions (FIs), even after AML/KYC regulations are met when signing up new customers, continued monitoring is critical long after initial sign up. FIs must monitor activity to ensure fraud is not committed, or that money laundering or terrorist financing funds enter their system.
Risk management
Determining modern-day risk assessments is not an exact science. Instead, it’s about creating dynamic, defendable and adaptable policies and procedures.
Regulators themselves are trending toward a more risk-based approach. This approach is about thinking systematically about your business, customers, partners, regulators, and the security and risk environment. It’s the critical systematic thinking and what regulators are looking for, not an occasional lapse or oversight. A solid compliance program is characterized by actively considering the possibilities and taking preventive actions.
Adapting your Customer Due Diligence measures based on the customer’s profile and their risk helps ensure that compliance is robust while not burdening good customers. Initial checks or specific activities might indicate the need for Enhanced Due Diligence or other ongoing due diligence measures is necessary. With flexible approaches and solutions, your compliance efforts can protect the organization and be relatively quick and seamless.
AML regulations
The requirements for AML continue to become stricter. Disclosures such as the Panama, Paradise and Pandora Papers drive awareness of the pervasiveness of money laundering and lawmakers are closing loopholes and demanding higher standards.
For example, under the EU’s 6th Anti-Money Laundering Directive (6AMLD), employees and officials of organizations — and entities working on behalf of those organizations — can now be held criminally liable. And they aren’t stopping there, with a plan to create a Pan-EU AML agency that will strengthen requirements, close loopholes, and create better coordination and communication between various regulatory agencies.
In the U.S., regulations have evolved significantly from the original Bank Secrecy Act to the latest Corporate Transparency Act. One focus is on uncovering beneficial ownership, as complex layers of global shell companies and other legal structures make it difficult to determine who really owns a business.
Besides jurisdictional requirements, there are industry-specific considerations. Often, one law will have multiple regulators, with each regulator determining compliance requirements for its reporting company sector. Some sectors requiring AML compliance include:
- Banking
- Financial services
- Money service businesses
- Crypto
AML compliance technology
Dedicating staff to performing costly, manual compliance processes isn’t the best use of resources. Allocating 90% of an employee’s time on data collection, entry and organization is inefficient and negatively impacts the bottom line.
Technologies that add to or improve existing processes are gaining the most traction:
- Look for proven technologies; having potential is not enough
- What is the utility? What pain point does the solution solve and how quickly will it bring results?
- How easy is it? While compliance technology does involve complex ideas and technology, good solutions are adaptable and can integrate quickly into existing workflows. Changing processes is prone to resistance from staff, customers and regulators.
Automation won’t eliminate the need for human evaluation and judgment, especially in investigations. Still, by assigning the data and rule processing to computers, automation streamlines the process, reduces regulatory risk and avoids unnecessary charges for people handling repetitive tasks that computers do better.
Open APIs are another technology already having a substantial impact on AML and KYC compliance. In general, APIs offer a quicker, easier and less costly path to deliver new services that meet consumer demands and expectations of today and tomorrow. The ability to quickly integrate new services offers the opportunity to add in innovative AML tools and other regulatory technology solutions.
AML compliance program
Creating a compelling and robust anti-money laundering program requires:
- Devising an effective strategy
- Empowering compliance teams
- Using powerful AML automation technologies
- Keeping on top of regulatory requirements
- Performing continual reviews and audits
Controlling AML compliance costs and risks is possible by using documented policies and intelligent operations for risk assessment and mitigation strategies.
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