Combating money laundering and terrorist financing

THE Money Laundering survey recently conducted by OpRisk & Compliance and Protiviti confirms the widely-held view that the cost of money laundering compliance has increased significantly in recent years – both in terms of technology costs and resource allocations. On the positive and somewhat more surprising side, however, nearly two-thirds of survey respondents from across the globe (81% of which have total assets in excess of $1 billion) and representing all major segments of the financial services industry believe that the value of their contribution to law enforcement's efforts to fight money laundering and terrorist financing more than compensates for the cost of compliance.

More than half of the survey respondents ranked anti-money laundering (AML) compliance as an above-average concern for their institutions. Respondents cited, in order of significance, monitoring and investigating, changing regulatory requirements and expectations, and the use of technology as the most significant factors affecting their AML compliance efforts.

These factors were closely followed by the cost of compliance and the ability to recruit and retain qualified personnel. Despite the challenges posed by changing regulatory requirements and expectations, nearly two-thirds of the survey respondents thought that their primary regulator was consistent in the way it enforces regulatory compliance and only 18% cited inconsistency in enforcement – a compliment to the regulators in some jurisdictions who in recent years have been often criticised for uneven and unpredictable enforcement of AML requirements.

Two-thirds of the survey respondents said the size of their AML compliance departments had increased over the last three years. However, the reported staffing of AML compliance departments varied significantly across the respondents, with nearly half reporting that their AML compliance departments numbered only 1–3 people, and more than 25% reporting departments of more than 11 people. Reporting lines for AML compliance officers also varied among the respondents: while nearly half (44%) indicated that their institution's AML compliance officer reported to the Chief Compliance Officer, 24% reported a direct reporting line to the board of directors or a board-level committee.

Other reporting lines included Senior Management Committee (9%), Chief Executive Office (9%), Business Line Management (6%) and Chief Counsel (4%). Responsibilities of AML compliance departments were largely consistent across the survey respondents and included developing AML policies and procedures, liaising with regulators, monitoring business unit compliance with AML compliance requirements, filing regulatory reports, developing and conducting AML training, and monitoring for suspicious activity.

Just over half (54%) of the respondents said they use an automated system for monitoring for unusual or suspicious activity. While this response suggests less use of technology than many might have expected, more than two-thirds of those responding said they plan to make investments in AML technology over the next two years. Of the institutions currently indicating they use automated monitoring systems, the majority (71%) purchased the system rather than developing it in-house. The systems in use by the respondents are largely rules-based (81%), with only 19% of the respondents reporting they use systems fuelled by artificial intelligence.

More than half of the respondents said the cost of their AML compliance programme had increased by at least 10% over the last three years; more than a third reported increased cost of more than 25%. Only 1% of the respondents reported a decrease in the cost of compliance. While 37% of the respondents attributed the increased cost of compliance to people, more than half (59%) ascribed it to a combination of people and technology.

Focusing on AML training, a somewhat larger percentage of the respondents reported delivering AML training via computer rather than in person (73% vs. 62%). Approximately half of those responding indicated that AML training is provided annually for permanent employees (54%), senior management (51%) and boards of directors (46%). Nearly three-quarters of the respondents said they provide AML training to new employees at hiring. One possible training gap was identified through the survey responses: more than 40% of the respondents said they never train contractors/temporary employees, or did not know whether these individuals received training.

In certain markets, such as the United States, where there has been increased reliance in recent years on contractors/temporary workers to meet staffing shortages, this lack of training for temporary personnel could have a significant adverse effect on compliance programme effectiveness.

Respondents were overwhelmingly confident that they have appropriately identified and assessed the money laundering risks of customers (83%) and their business lines (84%). More than half of the respondents also expressed confidence in their ability to detect terrorist financing; this is an area that many institutions view as especially challenging since much of the activity is conducted below the radar of traditional monitoring.

And, more than 75% of respondents think – perhaps because of the enhancements they have made in recent years – that regulatory scrutiny of AML compliance will decrease over the next year. Time will tell whether this optimism is deserved. OR&C