Taking the Pain Out of AML Compliance
“It is not so much about the boys who are afraid of the dark, but men who are afraid of the light”
Those famous words kept ringing in my ears as I sat through a brainstorming session that was aimed at arriving at a strategic solution for anti money laundering compliance at a major investment bank.
With the list of regulatory requirements growing longer by the day, it is an irony that these regulations, aimed at creating a sane marketplace, are increasingly being looked down upon as show stoppers by business houses. Nevertheless, complying with them is easier said than done.
Businesses face numerous dilemmas in their attempt to run profitable ventures in an environment shackled by regulation. I encountered one such experience during the process of implementing a strategic solution for one of the latest and the hottest regulatory requirements – anti money laundering (AML). AML is a global regulatory initiative aimed at identifying, reporting and preventing the process whereby criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds.
With news of big banks being fined millions for not complying with AML regulations, the whole industry is scurrying to implement a solution. The very fact that the decision is driven by regulation makes the investment approval process simple, but at every stage that follows there is the great dilemma of business versus regulation. The trick is to reach a solution that is big enough to comply with regulations and short enough to ensure business as usual.
It may be great to report that you have a state-of-the-art, sophisticated technology tool that uses neural networks and fuzzy logic to identify a money laundering transaction. But what’s in it for the business if this prevents your transactions being processed quickly? In an environment like trading, where every second is a lifetime, it proves to be a problem. One solution is to have a vanilla monitoring tool that is not a bottleneck in your straight through processing. You have a tool for the record and your trades are processed in real time.
What happens in a technical disaster, if your transaction instructions are stuck in the AML tool? The rule seems to be to cut the compliance check, flush the transaction instructions out of the system and send them for processing. After all, there are always exceptions to every rule. While it makes a great deal of business sense, seamless compliance loses its meaning. Banks are increasingly moving towards selective compliance, whereby high value transactions or priority messages are manually checked for AML compliance.
So who should bear the cost when a transaction fails due to internal factors? This is always a major concern for financial institutions. Imagine a situation where a transaction, held up in the AML process, later proves to be innocent. If the transaction is of high value, the bank takes a beating on both sides – reputation with the customer and the cost of having failed to cash in on the financial gain of executing the transaction. It is therefore quite natural that institutions try hard not to hold any transactions unless the probability of it being fraudulent is very high.
Ironically, for these financial institutions, the penalty for holding up a transaction that later proves to be clean is much higher than the penalty for letting through transactions that seldom prove to be dirty.
Though a large number of institutions depend on off-the-shelf products or technology vendors to satisfy their needs in regulatory compliance, how often do they think about the credibility of the products or technology vendors they are using? While it may not be right to blame the financial institutions that are already saddled with their own problems, regulators can be proactive and certify products or product vendors that meet certain minimum requirements.
Dealing with a transaction that proves to be a front for money laundering is still a grey area. With different regulatory regimes advocating different treatment of money laundering transactions, an organisation with a global operation faces a tough challenge. If the party to the transaction is lucky enough to be living in a soft regulatory regime, the funds are returned back stating the reason. Otherwise, the funds or assets are frozen by the bank. While this topic is being debated at various quarters, any small amount of uniformity and clarity around this from the regulating fraternity is clearly welcome.
With the estimation of financial institutions (banks, broker-dealers, and insurance carriers) spending close to $632m on AML technology and services between 2003 and 2005, it is hardly a sum to be ignored and no one understands and appreciates cost/benefit better than the financial institutions themselves. A smarter firm will be the one that makes the best out of its investment by leveraging it for both mandatory regulation and reputation building, while not forgetting the benefits it can feed into its big brother – Basel II compliance.
While a lot has already been done by both the regulators and financial institutions in their effort to ensure compliance with AML regulations, proactiveness on both sides in addressing issues that are unclear or perceived to be hampering business, will go a long way in making things easier for both players. After all, regulations like AML have a human face to them.