Question

Discuss the issues related to disclosure in the AML compliance process

Answer 1

Banks and financial institutions are facing some serious AML compliance challenges that can be typically attributed to faulty mitigation approaches. Firms that fail to prevent laundering tend to pay a heavy price in the form of declining revenues, customer dissatisfaction, huge penalties, loss of reputation, and fall in stock prices. To comply with AML regulations, banks around the world use various technology-based products and solutions.

Banks face several challenges in managing risks involved in assessing the current Anti Money Laundering status and identifying vulnerabilities. Disparate transactions and increasing complexities of fraud and cybercrimes compound the situation. To address these challenges, banks need to ensure data protection, detect fraud in time, and prioritize compliance with the FATF regulations.

Financial industry regulations continue to stress the installation of the right people, processes and technology to achieve compliance: namely, comprehensive and timely discovery, prevention, and reporting of money laundering and terrorist financing events, pertinent to each financial institution’s risk profile. Less-than adequate commitment to meeting these mandates substantially increases enterprise and operational risks for financial institutions, often culminating in heavy fines, intrusive external oversight, even prison sentences for "aiding and abetting" and "willful blindness" convictions. Open-ended risk emanating from public disclosure under the "Freedom of Information Act" brings additional threats. In response, many financial institutions have taken the necessary steps to install know-your-customer and transaction monitoring solutions, but often fall short of the data requirements and rules-based logic needed to meet minimum requirements.

The role and stature for AML Compliance professionals has certainly increased in recent years. While a number of years ago, the AML Compliance functions may have been more focused on policy, there is now a trend to having these teams assist in the implementation and enforcement of that policy on a global scale, which can also include monitoring the adherence to that policy across the organization. These responsibilities are not limited to AML Compliance teams. There is an increased expectation for business line involvement and accountability, which means further bolstering the effectiveness of the first line of defense. In addition, there continue to be a number of emergent expectations that can impact a financial services firm across many areas, including operations, compliance and technology. Topics such as having a single, holistic view of clients and their risk, and breaking down silos to converge AML, Fraud and other financial crimes related topics introduce numerous challenges related to data quality and cross-organization coordination. A number of firms we have worked with often fully study recent AML cases, industry events and guidance from enforcement agencies to determine and implement typologies to enhance their monitoring programs. In short, institutional compliance responsibilities and their importance have and will continue to increase for the foreseeable future, particularly given their critical role in identifying and intervening on money laundering activities.

Here are the other challenges organizations face:

(A) Enhanced governance: Banks and financial institutions can find it difficult to manage cross-border and multi-jurisdictional AML-compliance requirements and evergrowing customer due diligence requirements.

Identifying beneficial ownership and initiating remedial measures to address AML gaps uncovered by regulatory reviews also come with their own set of challenges.

(B) Lack of specialized personnel for implementation of AML guidelines: Getting skilled resources with in-depth knowledge of AML can be a challenge. Other issues include high on-boarding timelines and costs, and attrition. Organizations also need to invest considerable time and effort in keeping personnel abreast with changing regulatory requirements.

(C) Complicated processes and technology: AML compliance requires banks to put in place a multiplicity of processes and technology solutions that will consolidate KYC data and systems in a single repository. They also need to create infrastructure for cross-channel detection of suspicious activities, improve data quality, and standardize data to enable centralized analysis of fraud and financial crimes. The risk level assigned during on-boarding varies according to the transactions undertaken by the customer. This means that banks have to assess the risks dynamically for each customer, and change risk levels accordingly, to prevent false positives. This necessitates continual transaction monitoring for each customer, which is a mammoth task.

The obligations of banks have steadily increased in recent years and there’s no reason to believe their obligations will lighten anytime soon. Regulators have come to view financial institutions as essential allies in the fight against money laundering. While financial institutions have been penalized in the last few years for their lack of effectiveness in implementing appropriate anti-money laundering measures, they are realizing the negative impact of money laundering on their reputation and business objectives. Financial institutions are thus re-evaluating their processes and technology and regulators expect that banks should approach their obligations with energy and resources. As a result, banks have devoted significant resources to build out and improve anti-money laundering compliance systems. That process will continue indefinitely as regulators’ expectations expand.

In recent years, financial institutions have faced new but quite specific requirements. Subsequent to new regulations, institutions have done their homework by implementing new processes and new systems. External auditors have checked for accurate implementation. Today, financial institutions are obliged to regularly assess what area of their business are a target for money laundering. This inherent risk has to be compared with the existing internal safeguards. If the existing safeguards do not appropriately mitigate the inherent risk, the institution has to derive new or adjusted internal safeguards or refrain from that specific high risk business activity. That is the reason why there is no longer a standard AML Framework that fits all.