FINANCIAL SERVICES

From police officers patrolling the streets to surveillance drones in the air, crime prevention can take on many forms. Stopping criminals and terrorists as they attempt to hide and move their illicit funds is also a critical component of crime fighting. That’s where banks and financial services institutions come in, with the assistance of anti-money laundering (AML) programs.  

Anti-Money Laundering (AML) is a set of laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate ones. Financial services firms, banks, and other organizations are required to carry out efforts intended to combat money laundering. Under AML regulations, firms must develop systems of safeguards that detect and prevent suspicious activity. 

But what key points do these financial organizations need to consider when implementing a robust and compliant AML program and what comprises a good one? 

What is AML in Financial Services?

Financial services firms have a big challenge in keeping up with evolving anti-money laundering (AML) regulations and staying compliant. And stopping money laundering is a monumental task. According to a United Nations panel, it’s estimated that annual money laundering flows amount to $1.6 trillion, which accounted for 2.7% of global GDP in 2020. Used for a variety of criminal activities, from small-time tax evasion and drug trafficking to public corruption and the financing of terrorist organizations, governments and agencies around the world have set their sights on stopping money laundering.  

Financial institutions and other regulated entities must have an effective AML program that includes written internal policies, procedures, and controls, a designated AML compliance officer, and ongoing employee training. These measures aim to detect suspicious activity that could indicate money laundering or terrorist financing.  

History of Anti-Money Laundering

The need for AML legislation has risen due to the growth of the financial industry and the increasing ease with which complex financial transactions can now be conducted. But the history of anti-money laundering legislation in the United States dates back to the 1970 Bank Secrecy Act (BSA). The BSA required banks to report cash deposits of more than $10,000 and identify individuals conducting transactions. The BSA was followed by the Anti-Money Laundering Act of 2020, which among its many other provisions, included the Corporate Transparency Act, making it harder to use shell companies to evade AML measures. The act also subjected cryptocurrency exchanges and arts/antiquities dealers to customer due diligence requirements. 

In addition to U.S. legislation, international organizations such as the Financial Action Task Force (FATF) and International Monetary Fund (IMF) have pushed for global measures to prevent money laundering and promote the adoption of AML programs.  

How to Create an AML Compliance Program in Financial Services

Businesses must follow a bevy of regulatory compliance procedures to comply with AML laws and regulations. The potential for large fines looms for those institutions found to be out of compliance with AML standards. Part of what makes AML compliance challenging is the country-specific guidelines that are regularly amended. The following actions, however, will put the pillars in place within your financial services organization to ensure that the right internal resources are watching the right areas of your business to comply with international directives like the FATF’s recommendations or the Patriot Act in the United States. At a minimum, an AML program must: 

Designate a Compliance Officer

This individual is tasked with heading the AML program. Usually an industry veteran, the compliance officer oversees regulatory procedures, determines new policies, and improves existing processes. 

Develop Internal Policies

Companies should implement procedures and protocols to detect and respond to suspicious activity. Processes like sanction list screening, identity verification, and documenting how a company will respond to law enforcement requests for information are commonly seen in an organization’s internal policies.  

Deploy a Risk Assessment

The United States Treasury’s Financial Crimes Enforcement Network (FinCEN) Due Diligence Rule requires companies to identify and verify the identity of customers and conduct ongoing monitoring for suspicious transactions. A risk assessment is essential to this process, as it helps businesses identify potential risks and vulnerabilities that could expose them to money laundering or terrorist financing activities. The complexity of the risk assessment must consider clients, business relationships, products, services, delivery channels, geographic locations, technologies, and other relevant factors. 

Digital identity verification, like through biometrics, allows financial institutions to accurately identify and authenticate a person’s identity and can play an important part of identity verification and authentication rule compliance within financial institutions. 

Educate Employees and Personnel

Bad actors are constantly improving and evolving their money laundering techniques, and an organization’s personnel must know what to look for and how to respond as the AML landscape changes. Internal education programs usually cover areas like transaction monitoring, suspicious account criteria, and ongoing changes to the AML program so personnel knows what to look for in the fight against money laundering. 

Include an Independent Review

Internal controls are an important requirement of an AML program, but those controls could still contain weak spots. Financial services organizations must submit their AML programs for review and testing by accredited third parties. This external review can help surface areas for improvement and act as proof that an organization is compliant with overall regulations. 

By implementing an effective AML program, financial institutions can protect themselves from being used by criminals for money laundering purposes. Of course, no legitimate bank or financial services entity would knowingly participate in money laundering activities. But a real risk exists for significant fines or even harsher penalties for financial institutions that, even inadvertently, don’t comply with AML stipulations. Each financial institution must be sure they have due diligence in place to help identify money laundering or money laundering-connected activity.