Over the past five years, anti-money laundering (AML)1 compliance has taken centre stage among global corporations. Adherence to AML law is no longer seen as regulatory compliance alone but as a strategic investment in building corporate reputation and remaining a preferred business partner for clients.
Perceptions of AML Regulation
Many institutions regard AML regulation as a ‘no gain, just pain’ exercise, and equate regulation with significant capital cost, hindrance to their business and loss of business opportunity. Institutions, therefore, often establish the minimum requirements for AML compliance. It is also argued that the time spent on AML compliance adds to the costs of doing business, thus leading to a lower return on investment (ROI). In addition, many individuals continue to be concerned about significant privacy breaches as a result of AML law.
Although many participants feel that an AML solution is merely a regulatory burden, the risk of non-compliance and regulatory violations, which attract stiff penalties (both monetary and legal), should outweigh the arguments against compliance. Though AML compliance is a difficult process, there are a number of benefits. One of the main benefits is that money laundering and the financing of terrorism, which damages an entire nation’s financial systems, can be prevented. Many organizations have now started to perceive the adoption of AML regulation as a risk mitigation tool.
There has been increased focus on AML investment and resources from senior management, mainly driven by concerns over operations and reputation. Institutions have also started to realize that compliance with regulation helps to enforce industry best practices in their existing business process.
Financial crime is a significant issue for the industry. The May 2006 gtnews financial crime survey revealed that there were high levels of concern among banks and corporates about the threat of fraud and financial crime to their business (read our survey on the lack of fraud prevention training among institutions). A survey by KPMG also found that 61% of respondents believe that AML is a high-profile issue within their banks, with the most senior level of management, including board members, taking an active interest. The KPMG survey results reflect a positive attitude to AML regulation where 84% of respondents believe that the level of the AML burden placed upon them is acceptable. These figures support the fact that AML regulation benefits the international financial community. The following section discusses some of the challenges in complying with AML regulation.
AML Challenges
High cost of implementation
Implementing an AML solution is invariably a long and expensive process so the time taken to implement a solution varies significantly between large and small institutions. In addition, institutions may have to devote substantial internal resources to assist the external vendors in implementing a solution. In a recent survey by the Securities Industry Association (SIA), it was found that the cost of compliance rose rapidly over the past three years, increasing nearly 95% since 2002.
Existing business process
Within institutions every line of business has a different process and legacy systems that are difficult to change. Nevertheless, institutions expect new compliance solutions to easily integrate into their IT infrastructure without compromising existing business and operational processes. This poses the greatest challenge to implementing a new compliance solution: keeping changes to the existing business process at a minimum.
Organization culture
Whenever a new compliance solution is introduced, it will interfere with existing systems and disrupt employees’ working practices. It is therefore important to manage cultural change within the organization effectively. Many institutions perceive AML as a business problem and tend to address it at business unit or country level. Money laundering is widespread and spans across geographies, it is therefore imperative that all employees have a broad level of compliance awareness and understanding.
Human resources
The most critical part of any regulatory compliance program is the human resource component – the need to recruit, train, develop and manage enough qualified AML specialists to achieve consistent compliance. In addition, institutions must allocate human resources to best comply with regulatory guidelines, and find the right person to monitor different lines of business and customer segments.
Strategies for AML Success
There are many critical success factors in managing compliance initiatives, but the most important are:
Integrated approach
A successful compliance implementation requires an integrated approach to address regulatory requirements, which helps institutions to substantially reduce investment, lower risk and increase returns. Many areas overlap in compliance and this is an opportunity to develop a common technology framework to address all compliance issues.
For example, banks and financial institutions implementing AML solutions should find appropriate links to Basel II regulations. Principally, both AML and Basel II regulation require collection and analysis of data. Synergies can be created by appropriately combining the resources needed in an AML solution with those required under Basel II. Institutions that take an integrated approach will gain tactical advantage in the competitive marketplace. This will increase efficiency, avoid duplication and provide high-system security.
Treat AML compliance as an ongoing process
Institutions should recognize that compliance is an ongoing process. As a result, good compliance solutions must be flexible and should efficiently manage current and future compliance requirements. This makes it necessary for an institution to fine-tune its corporate policy at regular intervals based on regulatory requirements, ensuring there is smooth co-existence between them.
Choose integrated IT solutions
IT solutions for compliance should have a ‘firm-wide view’ instead of a ‘department-wide view’. A compliance solution is not just a one-time implementation, it will require continuous upgrades to build in new rules and scenarios as existing regulations change and new ones are created.
Many institutions have already implemented individual solution components specific to their departments. In a recent TowerGroup survey, it is estimated that 30% of financial institutions spend on information technology for compliance is redundant, costing the industry US$10bn a year worldwide. These institutions should try and extend these individual components across other departments within the organization to reduce cost and time. This enables the solution to integrate with current system architectures and open up the possibility of developing interfaces with other internal systems. This will ensure, to an extent, that existing solutions integrate into a firm’s broader compliance system.
Training employees
Employee training is an integral part of every AML programme. Policy and procedure is only effective when adequate training takes place across the organization. Many firms provide generalized training for their employees, but an AML training programme should be customized to a firm’s policies, standards and controls that are implemented consistently across business units and subsidiaries. This ensures a constant and uniform training policy across the organization and helps keep compliance standards up to date. This can also foster a strong compliance culture among all employees.
Conclusion
Compliance is an opportunity to demonstrate the willingness of management to invest in regulatory requirements and strengthen an organization’s reputation. A successful implementation and adherence to regulatory requirements requires a well-planned execution program, alignment of IT strategy with overall business strategy, strong leadership, management support, teamwork and the right partners.
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