For compliance executives, steering clear of inadvertent involvement in money laundering should be a top priority. The challenge, of course, is that money laundering typically happens in the financial shadows and is, by design, difficult to spot.
The Challenge of Truly Knowing Your Customer
The Bank Secrecy Act, USA Patriot Act, and their associated regulations impose a heavy burden on U.S. financial institutions to combat money laundering. Similar obligations saddle firms in other jurisdictions. So-called “Know Your Customer” (KYC) obligations form the centerpiece of the laws’ anti-money laundering (AML) provisions affecting the financial sector.
KYC programs typically comprise two related, but separate, efforts: Customer Identification Programs (CIP) and Customer Due Diligence (CDD) initiatives.
Each requires firms to gather, verify, and monitor information on their “customers” (a term that encompasses a variety of counterparties) in order to flag suspicious profiles, behaviors, and transactions that may raise the red flag of money laundering.
Straightforward in concept, the devil for these duties is in the details. Most firms meet their obligations through a combination of low-tech, customer-side information gathering followed by efforts to verify and monitor that information through third-party databases.
Those efforts can be effective as a first pass, but compliance officers often feel understandable angst about whether they’re enough. After all, no one wants a FinCEN enforcement action or, worse, a subpoena from prosecutors in the Southern District of New York, to serve as a test of the effectiveness of their firm’s KYC program.
A common question posed by compliance teams: Is there more we can do?
The answer is yes, there is, and it’s not as expensive or time-consuming as you might think. Here are a few of the options for boosting your AML due diligence efforts:
1) Building on Existing KYC & Due Diligence Programs by Having Third-Party Investigators on Standby
As we said at the outset, one of the biggest challenges of detecting money laundering is that money launderers are sophisticated about not getting caught.
And, while it may be a defense that a client or customer was too good at money laundering for you to sniff it out, it’s far better to be the firm that earns kudos and credibility by spotting an illegal practice that others missed.
When something smells a little fishy to a compliance officer, asking experienced investigative due diligence firms to look closer can make for a smart insurance policy.
One way of doing this is to have a third-party investigation firm, such as our partner Prescient, on call to take a deeper dive into a customer’s business and its associated dealings. For instance, compliance officers tending to customer due diligence efforts sometimes find it particularly difficult to get to the bottom of identifying the beneficial owner of a company.
This can relate to both a direct customer account, or a 3rd party in which the customer conducts business.
These types of firms are experts in using open-source investigative tactics to peel away layers of (sometimes intentionally) complex corporate ownership structures with numerous shell entities buried deep in corporate filings to uncover the ultimate beneficiaries of the company.
There is an up-front expense, but when something smells a little fishy to a compliance officer, asking experienced investigative due diligence firms to look closer can make for a smart insurance policy without having to turn away business done in good-faith.
2) Achieve Regulatory Clarity
Small and mid-size financial firms often blanche at the prospect of deciphering, much less complying with, the AML regulations across the numerous regulatory bodies and legal statutes that apply to them.
Many small and mid-size firms choose to avoid the regulatory headache and associated risk of taking on [certain] customers, effectively leaving unnecessary money on the table.
This is particularly true of firms doing domestic business who are worried that taking on a new customer with, for example, a foreign address or business ties, may subject them a host of obligations for which they’re not prepared.
Unfortunately, many small and mid-size firms choose to avoid the regulatory headache and associated risk of taking on these types of customer, so they choose to not onboard the customer; effectively leaving unnecessary money on the table.
Enter RegTech to the rescue. With modern advances, RegTech can help solve the conundrum of unfamiliar and shifting regulatory obligations. At Ascent, we are putting our AI-driven solutions to work in parsing and analyzing millions of lines of raw regulatory text.
Our goal is to give firms tools to evaluate quickly and accurately not just whether they are subject to specific regulations, but if so, what steps the specific regulations require them to take.
By automating the process of regulatory development and change management, we aim to alleviate the pain felt by firms who are (rightfully) daunted by the prospect of learning how to comply with new and unusual AML compliance obligations.
3) Automate Compliance Tasks
Once a firm knows what and how regulations apply, there are also solutions on the market that can help automate the process of AML compliance.
These products run the gamut from facilitating the process of client-side information gathering, screening and monitoring customer information against international watch lists, examining and flagging suspicious transaction activity, and reporting flagged activity to regulators.
These solutions offer the promise of making compliance more efficient, cost-effective, and accurate.
4) Know Your Jurisdictions
The more jurisdictions where a firm’s customers operate, the more challenging any AML compliance efforts can become.
Firms can leverage the knowledge and experience of their peers regarding foreign jurisdictions and even specific customers – a potentially significant boost.
Any firm with international business should ensure its AML compliance officer has a working knowledge of the regulatory and business landscape in that jurisdiction.
That may seem like a tall order for many firms, which is why in addition to hiring the right staff, it is also important to take advantage of information-sharing and learning opportunities.
One way to gain critical knowledge about foreign (and domestic) customers and the environments in which they operate is for a firm to opt-in to information sharing under section 314(b) of the USA Patriot Act.
As FinCEN explains, opting-in allows participating financial institutions to “share information with each other regarding individuals, entities, organizations, and countries for purposes of identifying, and, where appropriate, reporting activities that may involve possible terrorist activity or money laundering.”
In short, firms can leverage the knowledge and experience of their peers regarding foreign jurisdictions and even specific customers – a potentially significant boost.
5) Take Advantage of Learning Opportunities
Another way compliance officers can grow their knowledge-base is to attend AML conferences, such as ACAMS-sponsored events, where they can share insight and techniques with their peers in the AML world.
These types of conferences can keep compliance officers abreast of the latest techniques, products and industry happenings, as to always stay on the cutting edge of the industry, so they can get in front of any malicious activities as much as possible.
Check out our Ultimate List of Compliance Conferences and Events.
In sum, these are just a few of the many quick, easy and cost-effective ways to enhance your program.
Money laundering is not a static crime, as criminals and non-do-gooders are getting smarter and are incorporating more advanced techniques by the day; therefore your AML program shouldn’t be static either.
As a best practice, it is highly recommended that financial services firms should stay on top of the latest industry trends and updates, and if you consider at least some of these options, you are well on your way to doing your part to not only stay compliant with laws, rules and regulations, but to also make the world a safer place.
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