Financial service companies are vital players in the global market. They pose the risk of ensuring that their business does not get involved with money laundering. The regulators of the world have developed stringent anti-money laundering rules for these companies. AML requirements must be met, but AML enforcement is challenging with such complex rules.
FATF stands for Financial Action Task Force. It is an inter-governmental body that sets out global AML standards. Through its 40 recommendations, the body members agreed to make the recommendations part of their local laws. Penalties for non-compliance are severe and go up to reputational risks.
This article highlights some of the vital AML rules globally and gives practical insight into the various ways that financial services companies can enforce the prescribed requirements.
FATF Recommendations Key Requirements
The primary objective of the FATF recommendations was to develop a global benchmark to prevent money laundering. Some of the most popular recommendations that were adopted in the program were customer due diligence, record maintenance, and reporting of suspicious transaction reports. According to the recommendations, it is the role of the financial institutions to recognize the customers and verify their information using credible and independent data.
Know Your Customer: Basic Customer Due Diligence
CDD and identification are the primary building blocks of an effective AML-CFT regulations program. Financial institutions are required by regulators to have clear guidelines regarding when to carry out CDD. This is based on the AML risk that the client exposes them to. This includes documents like photographs, signatures, or domestic proofs of identity to verify the identity. It helps maintain the accuracy of CDD records as the regulator may test or analyze such records to detect any criminal patterns, as per its AML/CFT monitoring and investigations.
Monitoring Transactions and Detecting Suspicious Activity
Financial institutions have to monitor all customer transactions from time to time. Any transaction that doesn’t have a clear legal purpose has to be reported following the red flags in the AML rules. This way, it is possible to detect a money laundering case only at the initial stage. For example, transactions of international wire of a large and complex nature with no sound economic reasons.
If transaction analysis is done well, along with customer profile and peer checks, this can help identify suspicious activity. The timely submission of suspicious transaction reports is a primary expectation of all global AML regulations for financial players.
Implementing an Effective AML Compliance Program
Financial institutions have to design an effective AML compliance program based on global regulatory standards. A compliant program has critical elements:
- Risk assessment, policies, and procedures
- Monitoring and detection
- Audits and independent testing of the program
It should include all parts of the company’s operations that are covered under the AML laws and regulations. Last year, over 60 percent of fines were related to deficiencies in the compliance program.
Designating an AML Compliance Officer and Training Staff
Financial firms need to appoint a qualified individual to act as the AML Compliance Officer, according to the BSA/AML regulations. They will be responsible for developing and overseeing the AML program. He also serves as the main link of communication with regulators and law enforcement officials regarding issues related to anti-money laundering.
Maintaining Accurate Records and Filing Required Reports
Most anti-money laundering laws in various jurisdictions require a country to keep all core business and transactional records for five to seven years. This includes documents relating to every customer due diligence performed on clients and reports of suspicious transactions reports. Such records must be kept in a manner consistent with globally acceptable record-keeping requirements since they might be subject to scrutiny in investigations.
Consequences of Non-Compliance with AML Regulations
Failure to comply with anti-money laundering regulations may lead to the doldrums for financial institutions. Companies failing to comply with all craft measures are also fined huge by the regulators. The globally systemic banks have been fined over $5 billion for different violations of AML/CFT regulations this year alone.
Emerging Trends and Technology for Strengthening AML Compliance
With the evolution of threat patterns, the AML compliance programs of financial regulators have been focused on using modern technology. This includes tools such as big data analytics, revealing complex networks of money laundering by identifying the linkage between a vast amount of data on transactions. It also helps in automation by reducing some manual tasks that are involved with compliance. The integration of advanced solutions within the framework of existing anti-money laundering regulations will make it possible to manage risks related to financial crime actively.
