4 AML errors that could expose firms to fines

With fines rising sharply, it’s time to crack down on AML errors, says Maria Evstropova, director of compliance and regulatory consulting, Duff & Phelps.

This year businesses have understandably been focused on surviving the coronavirus crisis. However, during this time, anti-money laundering (AML) failings have increased to the extent that more fines were issued in the first six months of 2020 than all of 2019, albeit these outcomes relate to past failings.

Duff & Phelps’ seventh annual Global Enforcement Review found £549 million in global AML fines were issued in the first half of this year compared with £345 million last year. In one respect, the situation may be worsening as businesses repeat mistakes of the past.

In this current period of disruption, that criminals may be taking advantage of firms’ weaknesses, meaning that even more needs to be done on the prevention side. A good starting point is for firms to recognise the mistakes that are being made by others and how to avoid them.

1. Poor management of AML risks and lack of resources

The starting point for building a robust AML defence is a risk assessment, which is a vital process that underpins how resources are then allocated. If not done properly, a poor business risk assessment can have knock-on effects and result in staff and senior management misunderstanding the risks the business faces. While there is often a broad awareness of different financial crime risks, not everyone will fully understand what this means for their business.

Failings in firms’ overall management of AML, which includes risk assessment,  were recorded in 109 separate examples of significant AML fines between 2015 and 2020.

From a top-down perspective, AML management failings can include a lack of resources being assigned to compliance teams, in terms of both personnel numbers and quality of talent. Even if a business has invested in robust technologies and systems, lacking the resources to use these tools properly can have a detrimental effect on monitoring.

Ideally, an AML team will be properly funded, and senior and middle management will have the appropriate levels of skill, experience and tools at their disposal. Internal segregation of duties and clear accountabilities have become increasingly common themes in the evolution of regulation more widely, but these are also crucial to efficient AML functions. There is a risk, especially in smaller organisations, that everyone assumes the second line of defence (compliance) is responsible for many core processes that are more properly the remit of the first line of defence (the business). This blurring of lines is frequently seen to have a negative impact on the effectiveness of AML functions.

2. Failing to see the big picture

Customer due diligence was identified as the main failing in 115 significant AML fines between 2015 and 2020. This generally reflects firms not taking a sufficiently holistic approach to on-boarding and monitoring processes.

It’s an unfortunate fact of life that criminals seeking to launder illicit funds will often be a step ahead of the firms they target, and the money launderers are highly motivated to achieve a result. This means they will go to great lengths to research the AML practices they will need to bypass. While no business can ever have a 100% impenetrable AML defence, much more still needs to be done to allow firms to recognise potential criminal activity.

The staff involved in the on-boarding processes, as well as those who are tasked with monitoring for unusual and suspicious activity throughout a business relationship, need to be trained on what they are looking for. It is all too easy for organisations to adopt a blinkered approach, where their processes become all about document collection. An onboarding team may be focused purely on ticking the right boxes and filing the necessary paperwork – without taking a step back and having a wider and more objective look at the risks of taking on a potential customer.

3. Not going a step further

Most firms should take a much broader view from a suspicious activity monitoring perspective at all stages of the customer relationship. Failings in this area were present in 82 significant AML fines between 2015 and 2020.

This broadening of approach may involve putting potential customers through additional scrutiny. After all, criminals will be doing everything they can to come across as legitimate, so it is incumbent on firms to be considered and objective in their approach. Criminals are known to use advisers to prepare “too good to be true” packs to be presented to firms at the on-boarding stage (and also used subsequently).

At the point of client due diligence, it is about understanding what the potential client business does or the background of the individual, in order to be able to monitor effectively what then takes place during the business relationship. For example, imagine a student goes into a bank and says they want to open an account. They explain their income will solely come from their parent who earns £100,000 a year and this will result in deposits of up to £5,000 coming into their account every month. While on the face of it those numbers may make sense, a more objective AML officer would quickly realise that, after taking tax into account, this level of parental allowance is unrealistic based on the parent’s reported salary.

The concern here is that compliance departments may not be taking that extra step, which can sometimes be as simple as researching a prospective customer online. Cultural issues within the wider organisation can sometimes be the cause of this reluctance to act, as relationship managers at times may not feel comfortable asking “high-profile” customers too many personal questions, perhaps for fear of them going elsewhere.

4. Imbalance between growth and AML processes

Understandably, a business will be focused on revenue and growth, but this should never be at the expense of following the right AML procedures. Quite often, Duff & Phelps has found that in cases of suspected money laundering, the initial information provided by a criminal simply did not make sense. The problem is that, in some organisations – especially those dealing with high-net-worth individuals, there can be a reluctance to dig deeper and ask intelligent questions about sources of funds and wealth.

As a result, oversight and compliance monitoring failures were found in 62 cases of significant AML fines between 2015 and 2020. Firms will be aware of the regulations they must follow, but these obligations may be forgotten or ignored as they seek to grow, especially now when many businesses are striving to recover revenues lost during months of lockdown.

At all times, but especially in a challenging business environment, when many businesses are facing financial uncertainty, it is vital that they strike the right balance between their financial ambitions and meeting their AML obligations. Ultimately, the risks of financial crime are too important to be overlooked, regardless of the pressures the business is facing.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.