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Regulatory inconsistencies provide opportunities for money launderers 

By Samantha White 
March 12 2014

Financial services institutions are struggling to keep up with globally connected money launderers, which are adept at exploiting inconsistencies in regional anti-money-laundering (AML) regulation/enforcement, according to research by KPMG. The sector continues to face persistent challenges despite significant investments and the involvement of a broader range of business functions including legal, risk, operations and tax.

Within their business risk assessment, 84% of respondents to KPMG International’s 2014 global anti-money-laundering survey consider money laundering to be an area of high risk. Furthermore, 98% of respondents confirmed that AML issues are discussed formally at the board level.

This is not surprising given the potential impact on the institution’s reputation, share price and economic viability. Regions with more developing countries, such as the Middle East and Africa, Asia Pacific, and Central and South America, reported a need to take a more proactive approach to reduce their vulnerability to financial crime.

The survey, which gathered responses from 317 AML and compliance professionals at the world’s top banks, examined the financial services sector’s response to today’s global AML challenges.

The findings underscored three key AML challenges facing the sector: (1) the pace of regulatory change; (2) implementing a globally consistent AML framework across the business; and (3) the rising costs of compliance.

Compliance challenges

Regulatory approach was ranked as the top AML concern. Eighty-four per cent of respondents stated that the pace of regulatory change poses a significant challenge for financial services institutions, with 63% stating that regulators should provide more guidance.

While progress is being made towards a uniform global approach, there are inconsistencies in terms of how/what AML controls are implemented from region to region.

Implementing a globally consistent framework within the company was deemed particularly challenging by survey participants due to differences in national legislation and data privacy standards. However, 75% of respondents said that they had succeeded in establishing the same AML policies and procedures throughout their branches and subsidiaries.

Rising compliance costs

Compliance costs are increasing at an average annual rate of 53% for banking institutions, and further rises are likely over the next three years, according to the survey. Transaction monitoring systems were the main focus of AML budget expenditures in recent years, followed by “know your customer” reviews and updates, and staff recruitment.

Transaction monitoring remains an area of weakness and a key challenge for institutions. The report identified declining satisfaction with the efficiency and effectiveness of monitoring systems and highlighted that there is still room for a more consistent approach across the globe. Other challenges mentioned include maintaining up-to-date customer records as well as obtaining and retaining adequately skilled staff.

Recommendations

There is also a need for greater training at the company level, with 86% of respondents saying that front office staff receive AML training, while the figure for board members was just 62%. The report states that “a knowledgeable Board of Directors is an essential component in the successful execution of an AML compliance framework,” adding that such training enables the leadership to better understand and quantify the risks of being exposed to financial crime at both the business and client level.

The report also calls for greater collaboration in the sector. “Inconsistent regulations have left gaps in which money launderers thrive, and as such, it will become essential that regulators implement a consistent regulatory approach, but also foster a closer working relationship with industry professionals in order to leverage each other’s resources, align mutual interests, and effectively tackle financial crime.”

The report recommends that companies designate a board member to be responsible for maintaining effective AML controls. A broad-ranging assurance programme to test systems, processes and procedures should also be implemented. Effective preparation for visits from regulators and ensuring that the board can demonstrate awareness and oversight are also advised.

Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.

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