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The Fight against Money Laundering
Winston Ngan, Ernst & Young - Goh Ling Ju, Ernst & Young - 4 Oct 2013
Companies are stepping up their internal processes for anti-money laundering (AML) in response to the ever-changing regulations, but doing so is not without challenges. We discuss some of the industry best practices and how treasury desks can contribute to the fight against money laundering.

The Monetary Authority of Singapore (MAS) recently revised its Notice 626 (the Notice) on the prevention of money laundering and countering the financing of terrorism, to include additional requirements regarding account opening and wire transfer payment instruction. The Notice is also more prescriptive on the type of training required for staff. Subsequent to the change, the MAS also released Notice 641 on the reporting of suspicious activities and incidents of fraud.

Similarly, regulators across the world are stepping up on their anti-money laundering (AML) initiatives against to cut off financing to criminal and terrorist organisations. Inter-governmental body the Financial Action Task Force (FATF) revised its recommendations in February 2012 and its guidance on financial inclusion in February this year. Most notably, China has mandated banks to rate their clients' risk of criminal conduct on a scale of 1-5 as part of the People’s Bank of China’s (PBOC) moves to curb money laundering and fraudulent transactions, which are estimated at hundreds of billions of dollars annually.

1. Framework and training

The AML framework of the institution will form the spine of its AML modus operandi. It should comprise policy and procedure, customer due diligence (CDD), suspicious transaction monitoring (STM), name screening, training and suspicious transaction reporting. Implementation of AML systems to effect STM and name screening, and the adoption of a risk-based CDD approach are among the ways that can help companies mitigate money laundering risk.

Policies and procedures on AML should be clear, concise, relevant and applicable to the industry in which the company operates. They should also be updated regularly to reflect regulatory and procedural changes. Non-compliance with the policy and procedures could be duly penalised via the remuneration package to demonstrate the severity of such behaviours and a culture of zero-tolerance for non-compliance.

Compliance training should be provided to all employees upon onboarding to educate them on the laws and regulations and company policies applicable to their work. Subsequently, the company should also provide regular refresher training to keep employees abreast of their compliance obligations. The training programme can include real-life case studies to allow employees to relate to their field of work and also apply the AML concepts that they have learnt in a practical situation.

2. AML system

There are two types of AML systems that companies can consider for suspicious transaction monitoring and name screening.

Having an effective transaction monitoring system allows the company to systematically filter suspicious transactions based on certain set parameters. Some examples of parameters include cash inflow or outflow exceeding a certain amount to a sensitive country that is known to be AML-deficient, ranks high on the corruption indices or is subject to embargoes and sanctions. There are also systems that can profile customers based on historical transactional trends such that any trades unaligned with past trends will be flagged.

Another purpose of AML systems is to perform name screening against higher-risk names such as politically exposed persons, individuals or organisations on the sanctions list, and those linked to negative news; for example being convicted for bribery or laundering. Maintaining relevant watch lists can be a challenge. The AML system should be flexible enough to adapt to the evolving regulations and watch lists of various jurisdictions. Name screening should also be conducted on a regular basis for timely detection of names of higher risk.

Many financial institutions (FIs) outsource their transaction monitoring system and the maintenance of watch lists to external vendors. While the system can be outsourced, the responsibility of suspicious transaction reporting still resides with the FI. The company must have an effective monitoring process in place to ensure that all alerts are cleared in a timely and proper manner, and all suspicious transactions are duly escalated to the regulators.

3. Risk-based approach

Know-Your-Customer (KYC) procedures are performed prior to customer onboarding. A proper due diligence checks is core to subsequent monitoring of transactions. Adequate due diligence procedures will allow the FI to identify and verify the background of the customer and understand the purpose of the account. Increasingly, FIs are adopting a risk-based approach on their KYC procedures. By doing so, they channel their resources to focus on scenarios where additional measures and controls need to be applied. The FI will need to decide on its risk factors based on its operation model as well as the existing regulations. The risk-based process and factors need to be reviewed periodically to ensure relevance.

Treasury’s Role

The main objectives of the treasury department are managing the company’s liquidity, ensuring that funds are available whenever required, and structuring a range of products that the relationship managers can market to clients depending on their needs.

Treasury’s role is to execute the trades and recommend suitable products based on client’s investment needs and risk appetite. It is deemed that the main responsibility of AML lies with the relationship managers, who are usually entrusted to complete the due diligence and fact-finding process, given that they know the customer the best.

Nevertheless it is the dealer in the treasury that handles the client’s orders. Given the constant interaction with clients on their investment requests, treasury is likely to be in a better position to appreciate the client’s risk appetite and investment trends. Further the treasury is armed with market and product knowledge that allows them to better appreciate the rationale for certain investments, enabling them to detect investment requests that do not make any economic sense or are misaligned with the client’s profile. These are potential red flags for suspicious transactions that could be linked to money laundering.

Treasury can also perform analysis to provide the management a sense of the hot money movements. They can deliver more timely information on investment trends and the locations of fund inflows and outflows, such that the management is aware of the level of transactions involving countries that are notorious for supporting terrorist activities.

The entire bank, from the treasury, relationship management, operations to compliance departments, shares the responsibility in the fight against money laundering activities. To that end, the education and vigilance of each and every employee in the bank will be critical.