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.

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