Behind almost every major AML failure is bad AML Governance. Why do so many firms do AML Governance badly and how can you avoid their mistakes?

Money Laundering and Bad Governance

Anyone reading the business news will be struck by how often retail and private banks get hit with eye watering fines. The big question on everyone’s lips is “why don’t they learn?” To answer this question, we need to take a quick look at some recent money laundering fines:

  • Allied Irish Bank (IRL) – fined for “significant failure” in controls, policies and procedures. AIB had an 18 month suspicious activity backlog and 4,200 cases over 30 days old.
  • Coutts (HK) – fined for failing to establish and maintain effective AML procedures. One of Coutts failings was correctly identifying PEP’s but not promptly performing EDD.
  • Deutsche Bank (UK) – fined for setting up 2,400 complex “mirror trades” which were designed solely to circumvent sanctions on Russia.
  • Ulster Bank (IRL) – fined for “significant failure” in controls, including: having no SLA for 19 out of 25 outsourced AML activities, failing to monitor them and having no AML training for Non-Executive Directors.
  • Coutts (CHE) – fined for ignoring numerous “red flags” from their legal and compliance teams regarding 1MDB.
  • Citi Banamex (USA) – fined for flagging 18,000 suspicious transactions but employing only 2 people to investigating and only making 8 SARs. Citi failed to clean the bank and are closing it.

Behind each case listed is a failure of AML Governance. Senior management could not all have been unaware of their AML shortcomings, at best it looks like some chose to ignore the red flags, at worst it looks like some promoted poor AML practices.

To make matters worse, a lot of firms getting AML fines are repeat offenders.

Good AML Governance would prevent almost every firm getting fined for AML failures.

The UK FCA went to the trouble of writing a highly detailed Financial Crime Guide which, if followed, would safeguard firms from money laundering fines, but good practice seems very hard to implement and maintain.

Many people would argue that senior management are committed to good AML Governance but AML failures keep surfacing every few weeks along with hefty fines.

AML Governance: Hard To Do

Before a firm can address its AML exposure, it needs to recognise why AML Governance is a challenge. Why would well qualified, dedicated, respected, experienced senior management fail in their AML Governance responsibilities?

a) Commercial Reality

Money laundering is profitable, not least because people trying to launder money accept high transaction charges as a cost of cleaning their funds. Senior management are in a dilemma when clients present them with huge amounts of money; take the money and make money or turn it away and make nothing.

Pragmatists in finance think that if they don’t accept money from a client it will be taken by a competitor so they might as well take it to prevent the competition winning business.

b) Above the Law

Some senior managers think that they can ignore the laws and rules that they don’t like.

AML is a hot button because it transcends national borders and seems “unfair” to a lot of senior managers who are used to getting their own way. To illustrate this point, it was widely reported that the finance director at Standard Chartered said, “You f***ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

c) Responsibility

AML fines are almost always at a corporate level which means the people that made decisions are rarely held personally responsible. In addition, AML cases usually relate to events over a decade ago which makes it harder to hold people responsible. Senior managers change jobs or retire and they can’t be pursued.

d) “Not My Problem”

Senior managers spent most of their careers working at a time when AML was a non-issue.

AML is considered to sit with the ML Reporting Officer and is not something some senior managers want to get involved with. When senior managers are told about the new AML requirements there is a tendency to ignore them, shoot the messenger and hope the world will carry on as before (it won’t and hasn’t). We all know AML Reporting Officers who had to leave firms because they told senior management things they didn’t want to hear.

AML Governance: Good to Great

AML Governance is easy to develop if senior management buy into its importance.

In each firm, it is the ML Reporting Officer (MLRO) who carries the primary burden for AML Governance while other AML professionals share part of this burden. If AML goes wrong in a firm the AML team are most likely to face regulatory censure and career blight. This means the MLRO and other professionals in the AML team have to ensure senior management sponsor and operate good AML Governance.

a) Culture

Strong AML starts with a supportive governance culture. If the senior management and the Board of Directors, in particular, are committed to operating great AML you are half way to AML success!

Culture doesn’t just happen; the Board of Directors have to understand the importance of good AML and understand that the regulatory requirements keep getting more onerous.

a) Training

Each senior manager and non-executive directors should receive training which is relevant to their expertise, the nature of their business, clients served and geographical location(s).

For Board Directors the AML training can be more “tutorial” which gives participants a chance to raise concerns and argue points – traditional “one-way” training is ineffective for people more used to being listened to than listening!

c) Auditors/Lawyers

The Big 4 professional services firms or the major law firms all have expertise in AML which can be used to bring your Board of Directors up to speed on their AML responsibilities. If any Board Director isn’t committed to their firm’s AML Governance, a meeting with their auditors or external lawyers should help them understand their responsibility and liability.

Although the Big 4 professional services firms carry great gravitas, the smaller specialist compliance and AML consulting firms also have a role to play, especially in specific geographical markets.

d) AML Reporting

The periodic reports prepared by the ML Reporting Officer can usefully include a couple of lines on each relevant AML fine since the last report to remind senior managers that AML is serious. A more detailed analysis of an AML case which could apply to one’s own firm would be especially useful in getting senior management to focus on their own AML risk.

e) ML Reporting Officer

Good AML Governance starts with selecting the right ML Reporting Officer. The ML Reporting Officer is logically the person who owns the firms AML Governance administration since they should be the most familiar with AML best practice. If senior management get the right person in the ML Reporting Officer role then they are well on the way to getting good AML Governance in place.

Dynamic-GRC

As compliance specialists who built a dedicated RegTech platform, we have always seen the need to make AML Governance easy to use and low cost.

We recently included AML Governance on our RegTech platform. We have kept the pricing of AML Governance very low to ensure all regulated firms can stay compliant.

Clients can use pre-built templates for AML Governance based on their regulations or can edit them to meet more complex requirements. Firms who want regulatory consulting expertise can work with our local professional services partners.

For more information click here.

Conclusion: AML Compliance is a Choice

Analysing AML failures one has to scratch one’s head because they are so embarrassing that you couldn’t make them up, no one would believe you. It seems to be normal business practice for firms to continue failing to prevent or identify money laundering even when they are under investigation.

The “tone from the top” is critical in preventing or identifying money laundering. If the Board of Directors are committed to AML then the whole senior management team are likely to fall into line and your firm’s AML risk is dramatically reduced.

It is for the AML professionals in each firm to help their Board and other senior managers make the right AML choices because this is far more important than doubling your team’s head count or upgrading your software.

Adrian Pay

Author Adrian Pay

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