In today's financial landscape, a robust Anti-Money Laundering (AML) programme is not just a regulatory requirement. It is a critical component of any financial institution's risk management strategy.
In 2024, the banking sector alone racked up a whopping £2.5 billion in fines for insufficient AML procedures. This is something all companies can and should avoid - through a strong AML programme.
At the heart of this programme lies the concept of due diligence, a comprehensive approach to understanding and mitigating risks associated with financial crimes.
In this article, we explore how to build a strong AML programme that effectively combats money laundering and terrorist financing.
What does due diligence mean?
Due diligence in the context of AML refers to the process of thoroughly investigating and evaluating potential risks associated with customers, transactions, and business relationships.
It involves gathering and analysing information to ensure that a financial institution is not inadvertently facilitating illegal activities.
Customer due diligence (CDD) is a key component of this process, focusing specifically on verifying the identity and assessing the risk profile of customers.
Steps for building a strong AML programme
1. Identify and evaluate specific risks
The foundation of any effective AML programme is a thorough understanding of the specific risks faced by your institution. This involves:
- Conducting a comprehensive risk assessment of your products, services, and customer base.
- Analysing geographical risks associated with your operations, particularly supply chain based risks.
- Evaluating the potential for money laundering in your business model.
2. Identify high-risk customers
Not all customers pose the same level of risk. Identifying high-risk customers is crucial for implementing appropriate AML checks. It saves you time by focusing your efforts where they are needed the most. High-risk customers may include:
- Politically Exposed Persons (PEPs).
- Customers from high-risk jurisdictions.
- Businesses dealing with large cash transactions.
- Customers with complex ownership structures.
For these high-risk customers, enhanced due diligence (EDD) measures are typically required.
What is enhanced due diligence (EDD)?
Enhanced due diligence is a more rigorous approach to the due diligence process. It allows businesses to uncover potential liabilities and hidden risks that may not be apparent in standard due diligence. Company Watch helps businesses reduce their financial risk and get the most out of business deals through extensive enhanced due diligence checks.
3. Create internal controls and operational guidelines
Develop clear, written policies and procedures that outline the due diligence process. Some of these may include:
- Risk assessment methodologies - particularly, utilising AI and machine learning for quicker and more efficient functioning.
- Customer acceptance policies.
- Transaction monitoring procedures.
- Reporting mechanisms for suspicious activities.
These guidelines should be easily accessible to all relevant staff. They also must be regularly updated to reflect changing regulations and risk landscapes.
4. Implement Know Your Customer (KYC) procedures
Know Your Customer or KYC is a fundamental aspect of any AML programme. Powered by machine learning, robust KYC checks have the power to streamline your risk management by making it quicker and more accurate. In 2019, more than 85% of banks using machine learning based KYC were able to detect financial crime better. Since then, most industries have adopted machine learning based KYC for their risk management needs.
So, what does a good Know Your Customer programme look like?
Typically, it involves:
- Collecting and verifying customer identification information.
- Understanding the nature of the customer's business and expected transaction patterns.
- Conducting ongoing monitoring of the business relationship.
Effective KYC checks help in establishing a customer's risk profile and detecting unusual activities. Ultimately, they form a benchmark for future checks during the onboarding process.
As an end-to-end due diligence solution, Company Watch can help businesses conduct robust KYC checks in half the time and repeat the process quickly and efficiently in the future.
5. Implement automated monitoring systems
In today's digital age, manual monitoring of transactions is no longer sufficient. Neither is manually monitoring continued risk throughout a partnership.
According to a 2023 report by IBM and Ponemon Institute, organisations with fully deployed security AI and automation tools reduced the average cost of a data breach by over £1.3 million. Additionally, these organisations were able to identify security breaches nearly 70% faster than those without automated security monitoring in place.
To that end, implementing automated transaction monitoring systems is crucial for:
- Real-time screening of transactions against predefined rules and thresholds.
- Detecting unusual patterns or behaviours that may indicate money laundering.
- Generating alerts for further investigation by AML compliance teams.
6. Conduct regular staff training sessions
An AML programme is only as strong as the people implementing it.
Regular training sessions should:
- Educate staff on the latest AML regulations and typologies.
- Provide practical guidance on identifying and reporting suspicious activities.
- Foster a culture of compliance throughout the organisation.
Key components of AML training include:
- Regulatory frameworks and legislation
- Customer due diligence (CDD)
- Terrorist financing, including SAR (Suspicious Activity Reporting)
- Internal procedures and policies
Training must always be tailored to different roles within the organisation and updated regularly to reflect new threats and regulatory changes.
Conclusion
Building a strong AML programme is an ongoing process that requires commitment, resources, and continuous improvement.
By focusing on thorough due diligence, implementing robust KYC procedures, and fostering a culture of compliance, financial institutions can significantly enhance their ability to detect and prevent money laundering activities.
Remember, the cost of non-compliance far outweighs the investment required to maintain an effective AML programme. Not only does a strong AML framework protect your institution from regulatory penalties, but it also safeguards your reputation and contributes to the integrity of the global financial system.
Hence, it is important to have a trusted advisor with a deep understanding of the required AML solutions available in the market to avoid repeated lengthy market scans and selection processes. Company Watch streamlines your AML checks and proceedings by building you a strong and robust risk assessment system.
