Anti-Money Laundering

Money laundering destroys value. It facilitates economic crime and nefarious activities such as corruption, terrorism, tax evasion, and drug and human trafficking, by holding or transferring the funds necessary to commit these crimes. It can be detrimental to an organisation’s reputation – and its bottom line.

Money laundering destroys value

Global money laundering transactions are estimated at 2 to 5% of global GDP, or roughly U.S. $1-2 trillion annually. Yet according to the United Nations Office on Drugs and Crime (UNODC), less than 1% of global illicit financial flows are currently seized by authorities.

With the rising visibility of terrorist attacks, money laundering and terrorist financing are escalating as priority issues for governments across the globe. Over the last few years, in the U.S. alone, nearly a dozen global financial institutions have been assessed fines in the hundreds of millions to billions of dollars for money laundering and/or sanctions violations. There are strong indications that other countries will follow in substantive regulation and enforcement.

But it’s not just financial services institutions. Any organisation that facilitates financial transactions – including non-bank money service businesses such as digital/mobile payment services, life insurers and retailers, to name a few – is also coming within the scope of anti-money laundering (AML) legislation worldwide. Alarmingly, but not surprisingly, many of these new participants are not yet up to speed on the requirements they must meet or on the compliance programmes they will need.

As regulation deepens in complexity and scope, the cost of compliance continues to rise. According to new figures from WealthInsight, global spending on AML compliance is set to grow to more than $8 billion by 2017 (a compounded annual growth rate of almost 9%). But many balk at increasing compliance spend – notwithstanding the cost of enforcement actions and large-scale penalties resulting from compliance failures.

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Imran Farooqi, PwC Partner, Anti-Money Laundering
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Regulation by examination

Heightened regulatory standards are driving sharp increases in enforcement action. Our survey shows that the level of enforcement of anti-money laundering and combating the financing of terrorism (CFT) measures has created challenges for even sophisticated financial institutions.

Certain governments have imposed fines – and in some cases, pursued criminal actions – against financial institutions that have not implemented sufficient controls to monitor their global transactions. Some financial institutions have come into the crosshairs of regulators in one country for illicit business practices in another. Often there is confusion about where an institution can legitimately operate, if it is under sanctions elsewhere.

Inspections and remediation are on the rise

As financial services organisations grow by acquisition (as many have done of late), their legal vehicles, businesses and markets are not immediately consolidated into group processes or standards. Many still struggle in the aftermath of regulatory actions or sanctions. All of these factors increase the risk profile for AML enforcements. Our survey indicates that 18% of banks – a very significant number in our opinion – have recently experienced enforcement actions by a regulator.

Seven in ten organisations believe that opportunity is the main driver of internal economic crime. This far outweighs the other two elements of the fraud triangle, which are incentive/pressure to perform and rationalisation of the crime.

Your people, your processes

Our survey respondents said that hiring experienced staff is the most significant challenge they face in the AML arena, tied at 19% with concerns on the pace of regulatory change. Unfortunately, the supply of talent continues to fall behind demand. Churn among AML and compliance staff is high, and competition for top-shelf people is significant for both financial services and non-financial services companies.

Right people, right skills, right places. What skills do you need?

When your best line of AML defence is having the right people in the right roles with the right skills, you need to know what you are looking for. There’s significant demand for specialised expertise and skills around:

• Global standards and requirements
• Jurisdictional regulations and obligations
• The global regulatory ecosystem
• Customer due diligence
• Technical expertise in transaction monitoring
• Data analytics

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Risk assessments are critical

Over the last decade, increased money laundering control measures in the formal financial systems have forced criminals to seek new ways to “move” the proceeds of their crime. That’s why regular risk assessment is crucial. It’s a tool that enables your organisation to identify and address the money laundering and terrorist financing risks you face – wherever and with whomever you do business.

Risk assessments should be conducted on a periodic basis, and should be closely attuned to changed circumstances such as the operating environment, global standards and regulation in countries of operation. The risk assessment includes the profiling of customers into different money laundering and terrorist financing risk categories. It is also the global standard recommended by FATF and regulators to curb threats. It enables organisations to:

• Identify and measure higher-risk areas
• Develop frameworks and processes to help mitigate the risks
• Apply appropriate control measures, oversight and resources to areas of higher risk

Despite these clear advantages, more than a quarter of the financial services firms that participated in this survey either are not currently conducting an AML/CFT risk assessment across their global business footprint, or don’t know if they are.

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Know your customer, today and tomorrow

Knowing your customer today means going beyond identifying and verifying the information they provide. It must be a dynamic act, not a static one. It is essential to keep monitoring for red flags and suspicious activity on a regular basis. Special attention should be paid to clients’ business relationships and transactions – especially when they conduct business with persons residing in countries with weak or insufficient AML regulations.

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Technology

Financial institutions seem to be stuck in a bind. Most are facing the challenges of “rightsizing” their AML programmes for their changing business in an evolving global regulatory landscape. Yet many are hampered by legacy monitoring systems that are proving to be burdensome and extremely expensive to tune, validate and maintain.

Unfortunately, the cost and complexity of implementing some of the new, more sophisticated data-analytical platforms – leading-edge algorithms which could help them move from a cumbersome transactional basis to a more strategic and efficient approach – is likely prohibitive to many.

Our respondents seem to be well aware of the challenges of their systems, with data quality cited by one in three as the most significant technical challenge they face.

AML alert monitoring, too, is performing poorly. Only half of identified suspicious money laundering or terrorism financing is getting flagged by transaction-monitoring systems. Current AML typologies might not be catching the nuances and complex structures necessary to identify high-risk transactions.

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Contact us

Didier Lavion
Principal, United States
Tel: +1 (646) 471 8440
Email

Andrew Clark
Partner, United Kingdom
Tel: +44 (0) 20 7804 5761
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Malcolm Shackell
Partner, Australia
Tel: +61 (2) 8266 2993
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