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Anti Money Laundering In Banking Sector

A balanced blend of risk policy and bank’s business strategy is a vital element for the stability of the global financial sector, advocated by the Swiss Financial Market Supervisory Authority (FINMA). Failing to implement robust risk management, maintain risk ratings of high-risk clients, and violation to the Monetary Authority of Singapore (MAS) regulations for AML in banking, three so called big banks and one real estate firm helped the authority collect total fine of S$3.8 million in just first quarter of the year 2023.

In the virtual journey of compliance, this blog will address the five most crucial and frequently asked questions one might ponder on more often whenever they hear about how compliance measures in the banking sector impacts the global financial ecosystem. Let’s delve into it before you allow a potential compliance risk into the financial fabric of your business.

What is AML in Banking?

Working like an immune system for the financial sector particularly banks, a collective set of reforms and policies that cease the financial disease a.k.a money laundering to infiltrate into the system while facilitating the launderers in converting their illicit proceeds to legitimate assets is what AML in banking terms for. Banks being the pivotal point of concern for the imposters to launder their black money are required to implement resilient and effective AML reforms and prevent the exploitation of the financial system.

How did AML Come into Existence?

The history of money laundering and corruption can be traced back to ancient times when Chinese merchants used to dodge the existing trading bans by cleaning their assets over 2000 years ago. Talking about the somewhat recent events, for instance, the infamous 9/11 incident in the US followed by the US Patriot Act 2001 gave birth to strict anti-money laundering and combating terrorist financing (CTF) regulations which keep updating till date.

What is the AML Act for the Banking Sector?

Facilitating various crimes such as terrorism in any form and drug trafficking, money laundering with its circumventing nature exploits the stability and integrity of domestic and global financial systems. Obligated under the BSA (Bank Secrecy Act) established in 1970, financial businesses are required to report and monitor clients and their transactional activities along with maintaining CTRs (Currency Transaction Reports), administered by the Financial Crime Enforcement Network (FinCEN).

Supplementing the existing BSA rule, the Money Laundering Control Act (MLCA) was established in 1986 to reinforce vigilant AML measures including,

  • Money laundering should be considered as a federal offense while penalties and other legal consequences must be imposed to countermeasure money laundering.
  • Preventing the generation of CTRs when transactions exceed their limit ($10,000) through dividing it into smaller segments, should be avoided at any cost.
  • Assets gained through the violations of BSA act should be seized as a legal punishment.
  • Banks are mandated to implement efficient AML compliance measures along with maintained audit trails and recordkeeping as per the BSA requirements.

Why is AML Crucial for Banks?

The cruciality of functional AML measures in banks is non-debatable which can be better wrapped around through the consequences of failed AML and how the empires witnessed historic downfall because of weak compliance immune. Below is the comprehensive list of big banks penalized with hefty fines by the regulatory bodies as a consequence of AML non-compliance.

A list of banks who were penalized with monetary fines and legal consequences because their AML framework was too weak to cater evolving compliance needs.

What are the Common Practices of AML in Banks?

Aiming to protect the reputational and legal risks associated with money laundering at all levels, banks operating beyond the borders are compelled to align their AML policies and business strategy, as advised by AMLO FINMA in its global risk management principle, Article 6 para.1.

What are the Types of AML in Banking?

According to the International Federation of Accountants guide on anti money laundering, a responsive compliance culture along with a strategic risk management framework can be built through implementing following key areas.

Customer Due Diligence (CDD)

A globally endorsed AML measure, customer due diligence is primarily guided and regulated by the Financial Action Task Force (FATF) and Office of Foreign Assets Control (OFAC) to be a foundation of active risk management and compliance programs. Implementation of CDD requires financial institutions to ensure key areas of compliance including,

  • Collection of customer data for identification and verification of the data through reliable means.
  • Assessment of magnitude of risk associated with a client by understanding the nature of client business.
  • Maintaining the updated information of clients throughout the business relationship.
  • Building risk profiles of every customer to conduct risk based assessments.
  • Enhance the risk assessment for high-risk clients such as politically exposed persons (PEPs)

Know Your Customer (KYC)

Emphasizing the customer identity verification to ensure he is who he claims to be, KYC is the most implemented AML measure in every bank irrespective of their business scale. Overseeing the KYC regulations in the European Union and United States, 5th Anti-Money Laundering Directive (5AMLD) and Financial Crime Enforcement Network (FinCEN) requires banks and other financial businesses to ensure the following,

  • Verification of client identity and collected data through credible documents such as government issued identification proof.
  • Acquiring the beneficial ownership information for the legal entities to understand that structure and nature of client business.
  • Implementation of ongoing monitoring or checks to identify any unusual behavior or activity of clients.
  • Maintaining a record of customer identification and transactions for compliance audits.

Suspicious Activity Reporting (SAR)

Akin to frontline defense measures, reporting of suspicious client activities through SARs allows gatekeepers of money laundering to take required actions and prevent the exploitation of financial systems. Different financial intelligence units (FUIs) in different jurisdictions analyze the received SARs and take appropriate actions. The effective SARs generation can be made sure through,

  • Identification of irregular activities in the client account.
  • Automation of trigger generation when the transaction hits the threshold limit of allowable amount.
  • Documentation of the suspicious activity along with the reasons and basis for suspicion.
  • Timely submission of SARs to the relevant intelligence units.

Client and Transaction Monitoring

Measuring the effectiveness of AML measures within the compliance system, client and transaction monitoring by harnessing the advanced technology (AI/ML) empowers the businesses to proactively identify and prevent the potential money laundering activities and stay compliant for a global cause. Setting guidelines for implementing robust AML measures through client and transaction monitoring, Financial Conduct Authority (FCA) and Office of the Superintendent of Financial Institutions (OSFI) in the UK endorse the said practice to beat the crime actors. Ensuring below key factors aid in achieving the set goals of monitoring.

  • Employment of real-time and ongoing monitoring systems which oversee the changes in client data and transaction behaviors.
  • Automation of trigger alerts when the status of client changes in any database to initiate a need based assessment.
  • Establishment of risk based monitoring for high-risk profiles and a robust maintenance of risk profiles of every client.
  • Regular and need based audits and reviews of monitoring systems and processes to identify any loophole.

A brief overview of AML types in the banking sector along with the key factors to ensure robust compliance. The section includes customer due diligence (CDD), know your customer (KYC), suspicious activity reporting (SAR), and client and transaction monitoring.

Why Banks Fail to Implement Functional AML Compliance?

The vitality of AML compliance required by the financial sector particularly banks does not negate the fact that it comes with its own particular and global challenges making it an overwhelming task. Let’s dive into the intricacies of AML that expose the banks to non-compliance and unwanted reputational falls.

Dynamic Regulations and Implementation Lag

To keep pace with evolving ways of launderers, the regulations keep getting stricter and open to uncertainties while leaving the institutions off guard and vulnerable to non-compliance. The evolution of regulations causes banks to lag in implementing them in the existing compliance framework.

Integration of Evolving Technology

The ease of compliance empowered by technological advancements is unquestionable, however, technology has also facilitated the crime actors in carrying money laundering activities with more sophistication. Continuous upgradation of technology to cater the evolved criminal pathways often lead banks to use outdated technology which in turn results in AML compliance failure.

Resource Constraints & Complex Screening Tools

Draining the resources of institutions for regular training of compliance forces to align with monitoring requirements, the complexity of screening tools for AML checks makes it difficult for banks to identify and manage the AML risks.

Harmonizing Compliance & Customer Experience

A sophisticated balance between compliance measure and customer experience is an essential parameter to measure the effectiveness of banks business strategy. The prolonged customer identification and verification procedures put the customer at hold resulting in reduced customer satisfaction. To secure the business or meet client expectations, banks often overshadow the apparent risks and onboard the clients without performing required due diligence.

The visual reveals the key factors that lead the banks to AML non-compliance. It includes dynamic regulations & implementation lags, integration of technology, resource constraints and complex screening tools, and lastly compliance requirements & customer experience.

How AML Watcher Can Help You To Stay Compliant?

Aimed to make AML in banking an easy and efficient process, AML Watcher with its fully automated and research driven screening tools helps you to meet evolving tech and regulatory requirements. The user-friendly screening interface allows you to onboard new business clients or partners with swift and ease while the cutting edge technology integration empowers your compliance framework with ongoing monitoring and a structured reporting trail.

To foster a resilient compliance culture, contact AML Watcher compliance force and overcome the compliance challenges you might be losing your business over.

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