A well-structured Anti Money Laundering (AML) compliance program is essential for institutions in the fight against financial crimes. It protects the business from illicit money, and regulatory fines for noncompliance, and exposes criminal acts in their tracks.
Due to the high rate of money laundering and terrorist financing, global regulatory bodies like the FATF and the European Union have set AML standards to which institutions should adhere to. These regulatory compliance standards are laws and procedures that a business must comply with to reduce money laundering. However, there are also other laws to follow, such as the Patriot Act and Bank Secrecy act in the US, the AML act by the NDA in India, and the AML act by the CBN in Nigeria. Essentially, countries have their specific regulators that create and amend AML guidelines respectively.
This leaves institutions having to keep an eye out for several rules, regulations and AML guidelines to remain on the right side of compliance. These guidelines vary from one industry to another and mostly affect casinos, financial institutions, forex brokers, fintechs and more.
The dynamic nature of the compliance industry means that AML's best practices are ever-changing to keep businesses free from fraud. However, most businesses find it difficult to keep up, as simply incorporating new measures doesn't always come smoothly or effect the desired changes. Institutions are required to invest resources in Anti Money laundering (AML) and Counter-Terrorist Financing (CFT) policies/ structures to establish an effective AML compliance program.
What is an AML Compliance Program?
An Anti Money Laundering (AML) compliance program is a robust system that includes the steps and activities an institution undertakes to satisfy AML compliance requirements. It includes user-processing policies, user-onboarding policies, transaction monitoring and detection, employee training, internal operational procedures and reporting to relevant AML authorities.
The goal of an AML compliance program is to early detect, react and eliminate potential money laundering, terrorist financing, financial and fraud-related risks. Having an effective AML compliance program will flag suspicious customers and their transactions before or while they are executed. However, because criminals invent new ways to operate under the radar, it is necessary that a business’s AML program is able to handle complex fraud attempts in real time.
Which Businesses Need AML Compliance Program?
Some of the companies that require an AML compliance program include:
- Financial institutions; banks
- Fintech/ Payment processing companies
- Cryptocurrency exchange companies
- Payment companies
- Credit companies
- Casinos/ Gambling operators
- E-wallet companies
- Insurance companies
- Credit companies
Note: this is a comprehensive list of the companies that require AML compliance programs however, it is not limited to them alone.
Companies that fail to comply with AML requirements are fined and sometimes, compliance decision-makers receive jail time. These heavy implications mean businesses should pay extra attention to their compliance work and establish an effective AML compliance program based on their operational jurisdiction.
A Step-by-Step Guide on How to Develop an Effective AML Compliance Program
Here is a step-by-step approach to how to establish an effective AML compliance program for your business:
Step 1: Employ a Competent AML Compliance Officer
The very first step is to employ a competent and experienced AML compliance officer (AMCO) or Money Laundering Reporting Officer (MLRO). Their job is to understand the relevant compliance laws that involve the business and handle them internally and externally. This ranges from internal audits to developing guidelines, compliance analysis, training programs, etc.
Such an individual must possess deep knowledge of compliance analysis tools, regulatory data sources and requirements. Experience in the financial sector is a good plus to have, preferably in legal, internal risk audit and AML compliance. They should also possess relevant certifications like CRCM, CAMS and CAPF.
Step 2: Training of Employees
Employees are one of the weak links of a business that is not given enough attention when it comes to AML compliance. The next step is to design an employee training program to satisfy AML requirements of the company. Such a program should be designed to include recent legislation and laws in mind.
Employees to Train:
Although all employees need to undergo this training, priority should be given to high-risk departments that come in direct contact with clients. Others include the senior management, audit teams and compliance team.
What to Train on:
- Legal Implications: this covers the legal implications of anti-money laundering regulations for them as respective employees and the business as a whole.
- General Information: this focuses on the importance of identifying and putting a stop to AML crimes as well as the consequences of failing to comply with AML/ CFT laws.
- Relevant AML Penalties: this is an overview of the relevant penalties for noncompliance.
Mode of Training:
Training is carried out through several methods including;
- Interactive e-learning courses and evaluation to test employee knowledge of AML
- Educational presentations
- Frequent employee meetings and briefs about the latest AML industry news
- Updating AML guidelines in accordance with relevant legislation and sharing changes with staff.
Step 3: Risk Assessment
Business-wide risk assessment is important to help you understand the risk in your particular industry and AML jurisdiction. According to FATF, financial institutions should take necessary steps to identify and assess their money laundering and terrorist financing risks. This should consider factors relating to customers, countries, products, services, delivery channels, geographic areas and transactions.
After a thorough risk assessment, money laundering and terrorist financing risk associated with customer/ business relationships should be addressed through Customer Due Diligence (CDD)/ KYC policies. The business should also decide on the level and type of CDD relevant for respective customers.
As a bare minimum, Customer Due Diligence measures should include the following:
- Identification of customers and their respective beneficial owners where applicable through relevant KYC
- Verify customer identity through reliable independent sources and also verify the beneficial owner’s identity where applicable
- Establishing the risks that surround the customer-business relationship as well as identifying its purpose and nature.
The final step of risk assessment is to develop policies to detect monitor and report suspicious customers and or their transactions where necessary based on the due diligence results. For example, customers from high-risk countries should not undergo the same due diligence as those that are not and Politically Exposed Persons (PEPs) require enhanced due diligence (EDD) instead of regular CDD.
Step 4: Establish Internal policies and procedures to meet the business AML needs
This step involves incorporating all the findings from steps 1 to 3 into the company’s policy. For starters, this involves putting the right due diligence procedures based on the customer risk profile in place. These procedures should be in line with regulatory compliance demands based on your industry.
Another key aspect of a business’s internal policy is reporting suspicious activities. There should be a structure to immediately report information about potential money laundering activities to the authorities. Depending on the severity of the situation, suspicious transactions may be reported to management first, after which evidence is gathered and sent to the appropriate Financial Intelligence Unit (FIU) if need be.
Some of the red flags to take note of include:
- Large transactions against the AML threshold
- Accounts with incomplete or insufficient client information
- Irregular transaction patterns
- Customers who provide fake data during account opening.
Step 5: Regular independent audits
Holding frequent independent audits is one of the most effective ways to spot weaknesses in a company’s AML compliance program and risk assessment procedures. The independent auditor will take a look at the set KYC due diligence procedures, employee compliance training, reporting system and transaction monitoring structures in place.