10-09-2013, 11:46 AM
Tackling Money Laundering in a New Age
Jim Muir, AutoRek - 8 Oct 2013
Governments have been stepping up their initiatives against money laundering with the introduction of heavy penalties for financial institutions whose anti-money laundering (AML) systems are lax. This article examines what companies should be doing to ensure compliance.
Since the 2008-09 recession, the financial industry has been hit by a flood of scandals. Money laundering, London interbank offered rate (Libor) rate-fixing and tax evasion have all impacted the reputation of the market, thrusting leading organisations into the spotlight for poor financial controls. For example, HSBC was fined US$1.9bn in December 2012 for breaking anti-money laundering (AML) obligations in its Mexican operations and ING was fined US$619m for violating screening sanctions through its Netherlands Caribbean Bank subsidiary.
A lack of governance, risk and compliance policies has emerged as the root cause of the problems. Regulators have responded with an overload of new initiatives, designed to position financial services as an efficient and viable market for customers. However, we are now at a peak in the rule-making process and AutoRek’s recent research reveals that nearly half of UK executives (46%) still believe that a failure in financial controls will be the underlying cause for the next financial crisis. As we move into 2014, a plethora of stricter regulation is set to emerge that will force the largest global banks to prioritise regulators demand. The European Union’s (EU) Fourth Anti-Money Laundering Directive is just one example of hotly-contested legislation that is due to be finalised in the year ahead, which will require a huge change in what is required to prove compliance in one of the industry’s most sensitive areas.
AML: What’s the Problem?
Ultimately, AML is about reducing risk. When financial businesses are battling complex, multi-product and multi-customer systems, holes can quickly open up in IT processes when receiving cash from unknown or hidden sources. Data is usually processed very quickly using linked transactions and the clunkiness of systems within many organisations can lead to manual overrides in an effort to process new business, especially in difficult trading conditions. As a result, it’s not unusual for payments to be made to an unintended, illegitimate recipient before all the necessary checks have been completed.
While alerts and escalations after the event are all very well, investing in rapid account opening capabilities and better client identification software will reduce the risk of the temptation to override and create more robust processes that combat money laundering, sanction breaches and the financing of terrorism in the long-term. A recent survey found that almost one in four of those who responded in financial services said they felt they had to do something criminal or unethical to be successful, so overriding controls to make targets is evidently not beyond the realm of the imagination.
As regulators seek to curb money laundering, it is not surprising that industry officials and policy makers are taking a much tougher line with businesses that fail to combat financial crime. The size of fines levied against financial institutions (FIs) are generally on the up and the EU’s proposals suggest that banks could face fines as high as 10% of their annual income if they fail to prevent further instances of money laundering from occurring.
Many commentators are surprised that the EU’s latest AML proposals include measures that lower the size of the qualifying transactions requiring money laundering checks. When compared to the challenges of monitoring for the deliberate circumvention of controls, the threshold for checks has never been a significant factor in the fight against money laundering. However, parcelling up smaller transactions to get ‘into the financial system’ will now be made even more cumbersome. The real challenge for businesses will be building strong procedures that are supported by excellent data management and underpinned by really rigorous internal checks and controls which ensure policies are being adhered to.
At the heart of AML legislation, is know your customer (KYC) checks. Regulators are intent on imposing strict rules requiring organisations to identify and understand the activity of their clients at all times, making the on-boarding process even more complex. Retail banking organisations now need to complete money laundering risk assessments for prospective clients at the start of the relationship but also regularly review the assessment on an ongoing basis for any existing customers. This means developing strong data management processes which effectively establish the identity of ‘beneficial owners’ of corporate bodies or partnerships, monitor customers’ business activities and automatically escalate anything suspicious whilst storing all documents relating to financial transactions, procedures and processes.
The End Game
Compliance will come at a cost and more stringent AML measures may result in some vendors leaving the market. Both Credit Suisse and Barclays have already announced that their wealth management divisions will exit several countries, because they can not make enough profit to justify installing the necessary safeguards.
In contrast, several of the large global banks, such as HSBC and Morgan Stanley, hope to cut the cost of compliance by pooling their resources. To meet stricter regulations, retail banking institutions are exploring the opportunity to set up an industry wide-service for AML that will pool information about customers within a library that would be owned and operated by a third party. The emergence of repositories to collect and disseminate data would be welcome but would still involve a huge amount of work to establish listings and match the internal records held by banks to any centralised or publicly-available data.
As regulators seek to create a heavily-regulated market that avoids repeating mistakes from the past, the financial industry is experiencing an irrevocable change. Stricter regulation is forcing banks to become more willing to co-operate, but savvy businesses will use their investment in AML to gain wider business benefits.
AML and the associated KYC checks provide FIs with a real opportunity to optimise systems and generate a single view of customers making it possible for organisations to understand their customers and how they are using business services. In a competitive environment, understanding customer needs is the key to developing personalised propositions that offer customers the right service and contact at all times.
Despite the challenges associated with meeting new regulations, investment in financial controls including people, processes and systems is deemed as a ‘help’ in achieving growth according to AutoRek’s recent UK survey, with 82 % admitting that it enables more rigorous profit and loss control. In total, nine out of 10 respondents believe that financial controls are either important or very important when making strategic business decisions, highlighting an attitude shift that is currently occurring within financial services.
With increasingly complex regulation and more severe penalties already on the horizon, the financial controls agenda has become an inescapable part of day-to-day business for firms operating in the financial sector. However, this environment is one that can be used as an opportunity to invest in governance policies and empower business executives to benefit from the greater information available and better inform decisions about the overall direction of the business.
Jim Muir, AutoRek - 8 Oct 2013
Governments have been stepping up their initiatives against money laundering with the introduction of heavy penalties for financial institutions whose anti-money laundering (AML) systems are lax. This article examines what companies should be doing to ensure compliance.
Since the 2008-09 recession, the financial industry has been hit by a flood of scandals. Money laundering, London interbank offered rate (Libor) rate-fixing and tax evasion have all impacted the reputation of the market, thrusting leading organisations into the spotlight for poor financial controls. For example, HSBC was fined US$1.9bn in December 2012 for breaking anti-money laundering (AML) obligations in its Mexican operations and ING was fined US$619m for violating screening sanctions through its Netherlands Caribbean Bank subsidiary.
A lack of governance, risk and compliance policies has emerged as the root cause of the problems. Regulators have responded with an overload of new initiatives, designed to position financial services as an efficient and viable market for customers. However, we are now at a peak in the rule-making process and AutoRek’s recent research reveals that nearly half of UK executives (46%) still believe that a failure in financial controls will be the underlying cause for the next financial crisis. As we move into 2014, a plethora of stricter regulation is set to emerge that will force the largest global banks to prioritise regulators demand. The European Union’s (EU) Fourth Anti-Money Laundering Directive is just one example of hotly-contested legislation that is due to be finalised in the year ahead, which will require a huge change in what is required to prove compliance in one of the industry’s most sensitive areas.
AML: What’s the Problem?
Ultimately, AML is about reducing risk. When financial businesses are battling complex, multi-product and multi-customer systems, holes can quickly open up in IT processes when receiving cash from unknown or hidden sources. Data is usually processed very quickly using linked transactions and the clunkiness of systems within many organisations can lead to manual overrides in an effort to process new business, especially in difficult trading conditions. As a result, it’s not unusual for payments to be made to an unintended, illegitimate recipient before all the necessary checks have been completed.
While alerts and escalations after the event are all very well, investing in rapid account opening capabilities and better client identification software will reduce the risk of the temptation to override and create more robust processes that combat money laundering, sanction breaches and the financing of terrorism in the long-term. A recent survey found that almost one in four of those who responded in financial services said they felt they had to do something criminal or unethical to be successful, so overriding controls to make targets is evidently not beyond the realm of the imagination.
As regulators seek to curb money laundering, it is not surprising that industry officials and policy makers are taking a much tougher line with businesses that fail to combat financial crime. The size of fines levied against financial institutions (FIs) are generally on the up and the EU’s proposals suggest that banks could face fines as high as 10% of their annual income if they fail to prevent further instances of money laundering from occurring.
Many commentators are surprised that the EU’s latest AML proposals include measures that lower the size of the qualifying transactions requiring money laundering checks. When compared to the challenges of monitoring for the deliberate circumvention of controls, the threshold for checks has never been a significant factor in the fight against money laundering. However, parcelling up smaller transactions to get ‘into the financial system’ will now be made even more cumbersome. The real challenge for businesses will be building strong procedures that are supported by excellent data management and underpinned by really rigorous internal checks and controls which ensure policies are being adhered to.
At the heart of AML legislation, is know your customer (KYC) checks. Regulators are intent on imposing strict rules requiring organisations to identify and understand the activity of their clients at all times, making the on-boarding process even more complex. Retail banking organisations now need to complete money laundering risk assessments for prospective clients at the start of the relationship but also regularly review the assessment on an ongoing basis for any existing customers. This means developing strong data management processes which effectively establish the identity of ‘beneficial owners’ of corporate bodies or partnerships, monitor customers’ business activities and automatically escalate anything suspicious whilst storing all documents relating to financial transactions, procedures and processes.
The End Game
Compliance will come at a cost and more stringent AML measures may result in some vendors leaving the market. Both Credit Suisse and Barclays have already announced that their wealth management divisions will exit several countries, because they can not make enough profit to justify installing the necessary safeguards.
In contrast, several of the large global banks, such as HSBC and Morgan Stanley, hope to cut the cost of compliance by pooling their resources. To meet stricter regulations, retail banking institutions are exploring the opportunity to set up an industry wide-service for AML that will pool information about customers within a library that would be owned and operated by a third party. The emergence of repositories to collect and disseminate data would be welcome but would still involve a huge amount of work to establish listings and match the internal records held by banks to any centralised or publicly-available data.
As regulators seek to create a heavily-regulated market that avoids repeating mistakes from the past, the financial industry is experiencing an irrevocable change. Stricter regulation is forcing banks to become more willing to co-operate, but savvy businesses will use their investment in AML to gain wider business benefits.
AML and the associated KYC checks provide FIs with a real opportunity to optimise systems and generate a single view of customers making it possible for organisations to understand their customers and how they are using business services. In a competitive environment, understanding customer needs is the key to developing personalised propositions that offer customers the right service and contact at all times.
Despite the challenges associated with meeting new regulations, investment in financial controls including people, processes and systems is deemed as a ‘help’ in achieving growth according to AutoRek’s recent UK survey, with 82 % admitting that it enables more rigorous profit and loss control. In total, nine out of 10 respondents believe that financial controls are either important or very important when making strategic business decisions, highlighting an attitude shift that is currently occurring within financial services.
With increasingly complex regulation and more severe penalties already on the horizon, the financial controls agenda has become an inescapable part of day-to-day business for firms operating in the financial sector. However, this environment is one that can be used as an opportunity to invest in governance policies and empower business executives to benefit from the greater information available and better inform decisions about the overall direction of the business.