Anti-Money Laundering Compliance (AML) and Combating the Financing of Terrorism (CFT) policies and procedures are essential in meeting legal requirements to prevent financial crimes. While money laundering is commonly associated with these efforts, it is important to note that other related crimes such as terrorist economic activities, illegal trafficking, drug dealing, and fraud transactions are also addressed under these procedures. Countries and international regulatory institutions, such as the European Union, have mandatory programs for all relevant companies to prevent such crimes. Sectors such as banking, payment systems, insurance, gambling, and international transfers are particularly susceptible and must comply with these requirements. Despite the existence of sanctions and financial penalties to discourage non-compliance, some companies remain unaware of the significance of these issues. Therefore, companies must take crucial steps to protect themselves, although initiating the process and maintaining up-to-date compliance programs can be challenging.
An AML Compliance program is essentially a set of rules governed by domestic and international laws to combat financial crimes. These rules are implemented, updated according to current circumstances, and monitored under the supervision of associated institutions. Compliance programs can vary in complexity, and it is crucial for firms to understand how to comply with them. The intricate nature of procedures and the rapid changes in the financial landscape make it challenging to develop comprehensive and purposeful compliance policies. AML Compliance Program encompasses all the measures that companies at risk of financial crime undertake to combat such activities and adhere to compliance processes. Money laundering and terrorist financing are global issues, and in addition to these, crimes such as corruption, bribery, fraud, drug trafficking, and human trafficking are interconnected with them.
Before the 2000s, the biggest threat was terrorism, their members’ financial transactions, and cross-border smuggling. However, the digitalization of economic activities, from managing money, financial transactions, and cryptocurrency to shopping via e-commerce websites came with higher potential risks for money laundering. Today, firms face cyber-attacks by individuals and organized crime groups and threaten to lose much more just in seconds. Companies should stop money laundering before it stops them with the help of a strengthened AML compliance policy.
Regulators and organizations mandated to enforce AML obligations have made significant progress in combating financial crimes in recent years. Global regulators such as the FATF and the European Union regularly publish guides and reports, outlining the necessary measures that countries and organizations must adopt. Furthermore, these regulators assess and analyze countries' performance in dealing with financial crime, which greatly impacts the country's reputation and international relations. Consequently, member countries prepare for these audits to ensure compliance with AML regulations set by the FATF and the European Union.
Which Businesses Require an AML Compliance Program?
Various businesses are obligated to have an AML Compliance Program to prevent financial crimes. Some of the businesses that need to ensure compliance include:
These are just a few examples, and many other businesses operating in sectors susceptible to financial crimes should also establish an AML Compliance Program. It is crucial for companies to understand the meaning of compliance and take appropriate measures accordingly. The collective efforts of these businesses to comply with the relevant regulations form their AML compliance program.
Non-compliance with AML obligations can result in significant fines and penalties. In 2019 alone, organizations that failed to meet AML compliance were fined a total of $8 billion. These substantial penalties underscore the importance for businesses to prioritize compliance efforts and establish a robust and effective anti-money laundering compliance program.
While AML regulations may vary from country to country, the fundamental goal remains the same: preventing financial crimes. This article will provide guidance on how to develop a comprehensive AML compliance program based on recommendations from the FATF, European Union regulations, and an understanding of compliance principles.
Steps for Effective AML Compliance Program
Learn About the Issue
In order to safeguard their clients and their business, companies must recognize the importance of AML compliance and the risks involved. While larger companies may have specialized employees and departments for this purpose, it is not sufficient. It is essential that all employees, especially CEO, managers, and executives, are informed about the potential risks their sector and company may face. Compliance policies and regulations vary according to various factors, such as the company's size, sector, and location, as well as the current global and domestic economic environment. Therefore, the AML approach must be tailored to these specific needs. It's important to remember that these regulations are in place to protect companies from potential threats and damages.
Measure the Risks
To ensure AML compliance, the next step is to conduct a thorough risk assessment to identify any vulnerabilities in your business. The outcome of this assessment will determine various aspects of the compliance process. The level of risk is influenced by factors such as the size of your company, the industry you operate in, the country you're based in, and any cross-border activities. Industries such as gambling, real estate, and cryptocurrency agencies are considered high-risk. It's important to develop a customized AML compliance program that caters to your company's unique risk profile. Once the program is established, the risk measurement process continues with customer and transaction scanning.
Customer Onboarding & Account Opening Processes
In accordance with the risk-based approach, organizations have an Anti-Money Laundering obligation to assess the risk level of customers before opening their accounts. This assessment is carried out through procedures known as Customer Due Diligence (CDD) and Know Your Customer (KYC). These processes involve verifying the customer's identity and conducting a risk assessment by checking the customer against sanction lists, politically exposed persons (PEP) databases, and adverse media sources. To facilitate these checks, businesses can utilize our AML Screening Software, which provides access to a comprehensive global AML database for customer screening.
The customer onboarding and account opening processes play a vital role in preventing money laundering and other financial crimes. By adhering to the risk-based approach and implementing robust CDD and KYC procedures, organizations can:
- Verify Customer Identity: Ensuring that the customer's identity is accurately established through reliable and verified documentation helps mitigate the risk of fraudulent activities.
- Assess Customer Risk: Conducting a risk assessment enables organizations to determine the level of risk associated with each customer. This assessment involves evaluating factors such as their geographic location, business activities, source of funds, and any connections to politically exposed individuals.
- Sanction Screening: Checking customers against sanction lists helps identify individuals or entities involved in illicit activities or prohibited by regulatory authorities.
- PEP Screening: Scrutinizing customers for any links to politically exposed persons helps identify potential risks associated with individuals holding prominent public positions.
- Adverse Media Screening: Monitoring adverse media sources helps uncover any negative news or reputational risks associated with the customer, such as involvement in criminal activities or financial scandals.
Have a Compliance Officer or a Team
The field of AML requires specialized knowledge due to its unique information requirements and constantly changing nature. In terms of who is responsible for addressing this issue, it largely depends on the size of the company. Smaller firms may not have adequate resources to combat money laundering internally, but it is crucial for all employees to be well-informed and responsible in order to effectively combat AML.
AML Compliance Officers are responsible for ensuring the security of both the company and its clients by closely monitoring financial transactions and staying up-to-date with regulations. They investigate potential risks and report on their findings regularly. They assess threats at every stage of the customer journey, from onboarding to ongoing monitoring, and work to detect any suspicious activity in order to prevent financial crimes. Compliance Officers are also responsible for implementing and adhering to existing regulations, as well as following domestic and international laws and updates to ensure compliance.
In high-risk sectors, Compliance Officers must collaborate with other departments to reduce potential threats. They are also responsible for training employees in departments that may face these risks.
Support of AML Software Solutions
In today's digital age, financial risks have become increasingly difficult to prevent, as the sheer volume of people and transactions involved is too vast for manual screening and monitoring. However, technology has introduced some helpful solutions to this problem. AI-powered software can now handle many of the operational tasks for companies, including scanning names, verifying identities, monitoring transactions, and assessing customer risk levels. These programs use machine learning to detect anomalies and alert companies of any potential risks. Furthermore, they can be customized to meet the specific needs of different industries and businesses.
One such solution is Sanction Scanner AML Name Screening, which provides real-time name scanning using global AML data. It uses over 3,000 sanction lists, PEPs lists, and adverse media updated every 15 minutes. Additionally, it can scan remittance, payment, vessel, and aircraft screening by integrating with name, identity, or passport number options in a batch.
Another helpful tool is the Sanction Scanner Solution Transaction Monitoring, which tracks customer transactions in real-time and detects any irregularities. It can even stop risky actions and record them for future investigation, protecting companies from any potential losses. By reducing false positives, this program can strengthen AML compliance programs. Companies can tailor the program to meet their unique needs by setting specific rules and rule sets, determining the risk level of alarms, or scoring customers accordingly.
Record All Actions Regarding the AML Compliance
This is an unstable field and works under the legal processes of states and international non-governmental organizations. The circumstances require recording all financial actions considering the compliance program, even if it does not seem risky at that time. It is suggested that recording must be regardless of the parties, amount, or transaction type.
The company needs to record for two basic reasons additionally to many others. First, it is necessary to record for comparison of a customers’ transactions and detect anomalies. Secondly, a transaction might be seen as less risky but it could be changes on regulations, thresholds or even data of suspicious people. Therefore, recording provides a chance to go back and find past information.
How to Maintain AML Compliance
KYC and KYB
As a part of onboarding, Know Your Customer (KYC) involves collecting personal information from clients to verify their identity and potential risks to the company. Similarly, Know Your Business (KYB) is a process for business partners and suppliers that entails obtaining important information about customers or partners for financial service providers. These procedures aim to prevent financial crimes by identifying high-risk individuals. As a result, KYC and KYB are the first steps in complying with AML regulations.
Enhanced Due Diligence (EDD)
As part of the ongoing Know Your Customer/Know Your Business process, Enhanced Due Diligence (EDD) is crucial in helping companies safeguard themselves against high-risk profiles. It involves a thorough investigation that covers any gaps left by KYC/CDD. EDD is necessary in several scenarios; for instance, when working with firms located in one of the countries listed as High-Risk Third Countries, or when working with PEPs. Additionally, companies operating in higher-risk sectors, such as gambling or banking, must implement EDD processes.
Keep Track of Regulations
Authorities systematically publish reports on AML and CFT and update their rules according to economic and technological developments. They also follow the implementations and share regular suggestions. An AML officer or the software provider must check that kind of improvements, especially for the sectors they are working with. It would be a meaningless effort if a company does not keep its compliancy policy up to date.
Independent Third-Party Audits
Sometimes, amidst the vast amount of records, actions, and customers, it's easy to overlook minor details and potential risks. Keeping up with both domestic and international regulatory updates can also prove to be quite challenging. To avoid such lapses and ensure compliance with laws and regulations, seeking regular audits from external professionals could prove to be beneficial.
To deal with these challenges, institutions must plan each step to prevent those kinds of attempts. After an elaborative risk assessment, a program that is prepared uniquely respecting the companies’ service, customer, risk level, and regulations is put into operation. The essential point is that the process is not completed after these steps, as mentioned above. The compliance program needs to be regularly improved against changing risks, new techniques, customers, etc. AML compliance officer has a vital role in driving the teams in planning and executing the program. Also, regular checks by an independent audit can be helpful to find whether some point is overlooked.
On the other hand, systems powered by AI can streamline the workflow and management of the program. Especially it can be effective and level the program up if the company does not have a special team for AML compliance. While the AML compliance program becomes more challenging for companies during the age of digitalization, companies can have advantages by leveraging AI-based systems. Challenges coming with digitalization can only be survived by having fast and accurate compliance systems. Digitalization can be both a difficulty in being satisfied with simple measures and a solution to the same problem as well.