Tackling Money Laundering in a New Age

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

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

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

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.

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.

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


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