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Anti Money Laundering and Good Compliance Practice - Where are we now and where are we going?

Date Posted: Friday, November 09, 2007
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 All around the world, regulators and financial services firms are in various stages of evolution in terms of the rules by which their jurisdictions and the businesses within are managed. 

The degree of monitoring, reporting and enforcement and the industry sectors that are covered continues to progress, meeting the needs of the fast changing external environment. 

We have seen many trends emerge and the following highlights some of the more notable. Take for example the very real threat of terrorism.  We are all now much more alert and the free-flow of information from the media keeps us all in a state of readiness. 

Terrorist activities need money and the processes the financial services firms follow to reduce the flow of funds used for these purposes has resulted in an increase in KYC, transactional monitoring and reporting.  Regulators are playing their part advising industry of their vigilance.  In the US shortly after 9/11, the increased enforcement led to a dramatic upsurge in the number of Bank Secrecy Act filings. 

In 2005, 200,000 US institutions filed over 16 million Suspicious Activity Reports.  In 2006, the UK filed 200,000. Is the US filing too many or the UK filing too few?  What is known is that over the same period the US Government Accountability Office cited well over 7,000 Bank Secrecy Act violations which in turn led to over 2,000 various actions being brought against banking institutions. 

In their findings, the lack of money laundering prevention knowledge at management level was cited again and again along with insufficient training for staff. These findings are reinforced by research that was published earlier this year which demonstrated that the cost to financial institutions of fighting money laundering has risen dramatically.  On average spending has increased by 60% over the previous three years. 

The US, Middle East and Africa has seen an increase of 70%.  The biggest cost continues to be on transaction monitoring and staff training.   

Another trend that has emerged is the role played by senior management.  Of the 224 banks from around the world that were surveyed, 71% said directors at the highest level are now actively involved in AML measures.  Based on the US findings detailed above, this is a welcome move. 

This marks a positive shift towards the movement of compliance and anti money laundering departments becoming more central to the business, rather than being a support service to be consulted every time a new customer is acquired. This view is endorsed by other UK based research which found that 8 out of 10 compliance managers believe the emphasis on the need to be compliant and risk free is threatening management attitudes towards compliance within their own organisations.

The effect, it seems, is complacency and discontent at operational level.  The research revealed that a move towards an enterprise wide approach and centrally managed systems would remove the burden of compliance and risk avoidance at operational management level. The UK is widely acknowledged to be a fore-runner in regulatory standards. 

The rules or more recently principles by which firms should arrange their affairs are considered  the most appropriate benchmark.  However, there remains a view that whilst the level of regulation is acceptable it needs to be more effectively targeted and better focused.  Such a criticism may have given rise to a fairly new activity undertaken by the UK Financial Services Authority, “FSA”. 

The regulator recently published a letter on its website that it had written to CEOs of 15 major global investment banks. All recipients had participated in a roundtable discussion with the FSA about how they manage their compliance risk.  The letter did not attempt to explain firms’ regulatory and legal requirements.  It didn’t provide a definition of compliance risk. 

It did however, detail arrangements adopted by firms to manage compliance risk effectively, relative to their size and complexity.  In essence this was a review of observed good practice.  The six areas which were covered were, Defining Compliance Risk and Responsibilities, Compliance Culture, Governance, Compliance Risk Processes, Compliance Monitoring and Evaluating Compliance Performance. 

There is much more detail under each of these headings which could ultimately provide a blue print for firms and their compliance practices.  Such an approach by the FSA marks a new trend in the approach to managing regulation and the businesses governed by it. Trends in reporting and identifying have also changed.  Transaction monitoring systems need to be enhanced and whilst sophisticated IT can assist, most institutions are dependent upon the vigilance of their staff. 

Clearly training has a part to play in the achievement of this objective which helps explain the increase in training budgets. Banks are making greater efforts to identify Politically Exposed Persons, “PEPs”.  The number of firms conducting due diligence has significantly increased.  However this is not the case in all territories. There is still room for improvement in the Asia Pacific region and the variation across Europe is significant.  Perhaps not surprisingly, PEP monitoring is conducted by 86% of banks in the UK with under 30% in Spain and 13% in Italy.   

Globalisation continues to cause problems for the harmonisation of practices across borders to enable the continuation of transaction monitoring.  With the expansion of the European Union, the disparity between anti money laundering processes is heightened and there is no doubt that it will take time to bring processes up to the required standards under the EU Third Money Laundering Directive. 

A more even regulatory playing field across the globe will assist banks and other financial institutions in coordinating their anti money laundering more effectively.  The trend for closer dialogue with regulators needs to continue in order for this challenge to be met. As industry deploys a number of tactics to tackle money laundering and compliance issues, an emerging trend concerning the importance of training can be seen. 

We have already identified the important part this element plays and we have seen training budgets increase substantially.  What is new is the increased emphasis on internal academies of learning.  Many of the larger institutions have developed a holistic approach to training and education.  The percentage of staff trained in AML and compliance has increased significantly and there is a greater emphasis on collective responsibility. 

Recognising the need that staff have for support in this area, these academies demonstrate the commitment that firms are making to their development.  They meet the increasing need for informed employees by growing the skills set organically rather than through acquisition.  They help reduce staff turnover rates and cultivate loyalty.  Moreover, some organisations are utilizing this approach as a differentiator in the market place.  All stakeholders can see the commitment a firm makes to learning, knowledge and its staff and thus it is a tool to champion business.  

So over the past few months many trends have emerged; the positioning of compliance and AML departments as pivotal to the business; buy-in from senior management; regulators being more practical in their efforts to assist firms and a pro-active approach to training and development. 

I hope the bias in this article and its concentration on the positive trends seen in the industry rather than the negative will be seen in the spirit in which it is written.  We know where we are and some of these trends if followed through will help us get to where we want to be.   

To get ahead of the trends in the region register for the CRCA Conference and Training Session by visiting www.crcaconference.com and get up to the minute information on what is happening in the compliance and AML world.

Details of ICA compliance courses can be found at www.int-comp.org   

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