AML compliance aims towards fighting against the financial crimes. To know more about the process & importance factors for business to be AML compliant, click here!
Combating financial crimes and adhering to the law of the land is the prime activity carried out by companies under the AML compliance (anti-money laundering) programs. Anti-money laundering compliance helps to protect the integrity of the financial system by ensuring only legitimate funds enter and circulate in the ecosystem. It helps to keep suspicious activities like terrorist financing in check by enforcing a set of regulations and procedures for financial institutions.
The AML programs run in perpetuity as part of compliance measures. Governed under different entities by various countries—The Banking Secrecy Act in the US, Fifth Anti-Money Laundering Directive in the EU, Payment Services Act in Singapore, Prevention of Money Laundering Act in India—the main goal of these regulations is to promote financial transparency.
The goal of AML compliance programs for businesses is not only to steer clear of the regulatory hook but also to establish an orderly and transparent process. However, clear guidance gives firms direction on how to navigate and what to watch out for. Some regulations outline the must-haves to support AML compliance activities.
Let’s take a look at a few compliance programs must haves, or things companies can do to stay AML compliant.
This is perhaps the first step you should take to assess where you lie on the risk metrics. Mapping out internal and external factors which can potentially pose a risk such as financial controls, KYC (know your customer) parameters, AML reporting and, relationships with trade partners.
Every company is different and so the threats emanating will also be different. The measures taken, however, should not make the existing processes complex.
A robust AML compliance program should have the mechanism to facilitate independent audits and reporting. Companies can also engage third-party organizations to vet the resilience of the compliance program. In addition, it should comply with the procedures set out for compliance.
For instance, BSA has laid out the procedures under 12 CFR 21.21 regulation. It requires every national bank and savings bank to have the program approved by the board. One of the requirements is also the provision for independent testing for compliance.
Often the internal controls are the first in line to cause compliance failures. Therefore, it is important to have a systemic process to check internal controls and procedures on a regular interval. Other than process reviews, internal controls also extend to employees executing the compliance program. Their training, roles and responsibility, and knowledge can make a difference in the execution of anti-money laundering compliance.
The AML compliance program relies heavily on the shoulders of the designated compliance officer. It is important to appoint a suitable candidate who can expertly handle complex regulatory requirements. For example, trade transactions involving multiple jurisdictions.
Various regulators have given guidance on the same. The regulations require the appointment of senior officials-- like the BSA Officer under the Bank Secrecy Act in the US, Money Laundering Reporting Officer in the UK, and Principal Officer under PMLA in India—to oversee the program.
Even though the AML compliance regulations cover every financial and banking institution, NBFC (non-banking financial corporations), and money service businesses, among others, the factors affecting their compliance programs are different.
The type of business is a determinant of the factors that might impact AML compliance. Certain variables like the size of the business, transaction frequency, type of business, etc. may have an impact on the system.
Although designated programs like KYC address the issues related to customer compliance, the biggest factor certainly is the customer. Customer risks are more difficult to vet, especially long-standing customers who may have established a pattern of behavior.
The increasing penetration of digital transactions has made it easier for transactions of products and services to take place in seconds. FATF (Financial Action Task Force) has also recognized some specific products and services which pose a greater risk and impact AML compliance. They include private banking, non-face-to-face business relationships, payments from unknown or third parties, and anonymous transactions (including cash).
Some places may pose a higher risk than others. Factors like a customer’s relationship with certain jurisdictions or a business partner’s presence and association with some geographies may impact AML compliance.
The process to create an effective anti-money laundering compliance comprises these 4 steps, which also overlap with things one should keep in mind to stay AML compliant.
To oversee AML compliance processes in an organization is often required to appoint an officer. The role played by the compliance officer is crucial hence senior management of the organization should supervise the appointments. The exact role and functions of the officer may vary as per the country, though broadly it can be outlined as the following:
The ultimate goal of anti-money compliance and AML reporting is to safeguard every participant—banks, customers, and the financial ecosystem from fringe actors. In today’s time, it has become important to arm AML compliance processes with solutions that can reduce manual errors. Not just to avoid regulatory noose but inspire the trust of customers with user-friendly interaction channels.
There is a list of documents that can be used to provide information on AML compliance. However, they vary from one geography to another. They can include customer due diligence checks, KYC, customer identification files, risk assessments, company policies, controls, and systems.
The companies engaged in financial activities mostly come under the program. Though, the organizations which do not directly fall under the AML compliance program are mostly covered under other laws. For example, US-based companies not under the ambit of BSA or the USA PATRIOT Act are not required to have an AML program. However, their banks may still need to submit a SAR (Suspicious Activity Report).
Once the report is submitted, it is processed and checked against the databases. If further inquiry is needed, the SAR report is sent to the law enforcement agency.