Financial institutions remain a constant target for money launderers and those who finance terrorist activities, which means they have to develop and update AML compliance programs according to global and local standards. Let’s explore the opportunities to improve AML compliance programs and keep them effective amidst rapidly changing regulations.
The financial industry requires compliance with local, state, and international anti-money laundering (AML) standards. This promotes effective implementation of legal, regulatory, and operational measures aimed at combating money laundering, terrorist financing, and other threats to the integrity of the international financial system.
Since business relations are becoming increasingly remote, structural changes have been proposed to EU AML regulations. In 2021, EU AML/CFT rules were amended, proposing a new EU authority to fight money laundering. Back in 2020, the Fifth Anti-Money Laundering Directive (5AMLD) was applied to solve a number of emerging and ongoing issues in the framework of the European Union’s AML/CFT regulations. All these changes were intended to make sure that financial institutions use suitable AML prevention systems to protect themselves from money laundering and terrorist financing.
To keep up with these changes and stay compliant, companies should consider investing time and resources in building and renovating their AML compliance programs. Otherwise, they risk exposing themselves to legal, operational, and reputational risks. Let’s learn more about creating an effective AML compliance program below.
In short, an AML сompliance program is a set of policies, practices, measures, procedures, and controls related to the prevention and reporting of money laundering and terrorist financing.
Money laundering refers to the process of concealing the existence, source, movement, destination, or illegal usage of illicitly-obtained property or funds to make them appear legitimate. The United Nations states that approximately $2 trillion is laundered globally every single year. Yet, only 1% of illegal funds are detected by authorities, leading to a huge amount of money flying under the radar.
When it comes to anonymous payment services, peer-to-peer transfers through mobile phones, virtual currencies, and other online financial relations, money launderers may use anonymizing software, VPNs, and other technologies.
Therefore, the financial institutions providing the above-mentioned services can get used as money laundering instruments, especially if they have weaknesses in their AML compliance programs—which, in most cases, are discovered by regulators and accompanied by fines.
The consequences for non-compliance are severe for all participants in the financial services industry.
Banks involved in money laundering receive hefty fines. During the first half of 2021, the total amount of fines reached $2 billion. For example, Deutsche Bank appeared to be involved in a commodities fraud case and was fined $130 million. Meanwhile, one of the largest banks in the Netherlands, ABN AMRO, was fined $574 million due to serious shortcomings in money laundering prevention.
The World Trade Organization (WTO) states that the average annual global trade in goods is about $20 trillion—$2 trillion of which is laundered. Organizations receive hefty fines for violations. For instance, the FCA fined Sunrise Brokers LLP £642,400 for serious failings in financial crime control in relation to cum-ex trading.
In August 2021, the owner of several payroll companies in the USA was sentenced to 24 years in state prison for a $4 billion money-laundering scheme.
Gambling is one of the highest-risk industries for money laundering. In the first quarter of 2021, the UK Gambling Commission issued $33,505,885 in fines to online and land-based gambling operators.
In 2014, the UK’s Office of Fair Trading fined three real estate agents a total of £247,000 for “significant and widespread” anti-money laundering lapses, including failures to apply proper due diligence measures.
Above are just a few examples of the consequences that occur due to incompliance with AML requirements. An effective and regularly updated AML compliance program helps to avoid the above mentioned fines and conduct business safely.
Before getting licensed by a regulator, companies are required to develop and implement an AML compliance program, which is mandated to include the following:
In addition, the MLRO is responsible for external reporting and arranging AML training for relevant employees. The role and responsibilities of the MLRO in UK-based regulated companies are described in the FCA handbook.
Thus, AML compliance programs include various complex processes that vary depending on the specifics of the company. If the program works well, companies can grow their business in a safe environment without fearing consequences from legal authorities. Plus, they’ll be well protected from financial criminals and more attractive to customers thanks to a stronger reputation.
There are some things that can make the AML Compliance Program much more efficient.
1) Developing an AML culture in a company
It’s important for company management to work together with the AML compliance team to create a solid compliance culture. This helps identify and reduce ML risks and leads to more effective compliance solutions.
Regulators use the concept of AML culture to refer to consolidated AML/CTF efforts. In other words, a company with a solid AML culture takes initiative in combating money laundering at all levels of management. On the other hand, there are companies that are far less compliance-oriented. These may have senior management that underestimates the importance of AML compliance, or AML-responsible employees that see compliance as a mere burden. In such cases, serious penalties are inevitable. Just last year, the total amount of fines issued to financial companies worldwide totalled more than $10 billion, underscoring the importance of building a strong compliance culture.
2) Using high-tech AML solutions
It’s much more convenient for companies to use new technologies for AML compliance, including AI-powered solutions. For example, innovative screening software collects all required information, verifies the identity of a customer, and then screens the data against regularly updated global watchlists. Whereas manual verification can be much more time-consuming and may lead to mistakes, which can be much more costly than simply using an AI-powered solution.
3) Establishing an independent internal audit
In general, the effectiveness of a particular AML compliance program is determined in the process of independent internal audits. If the company successfully complies with all required regulations (while avoiding the administrative burdens of over-compliance and the legal dangers of under-compliance), the program can be considered successful. Therefore, companies should constantly evaluate the effectiveness of their measures in meeting compliance standards.
To sum up, AML compliance isn’t just another regulatory burden. It’s designed to create a safe business environment beneficial for both financial institutions and their customers. But it’s not enough to simply create an AML compliance program; you have to keep it up to date, which is a time-consuming process.
