Introduction
Time was, there were no concerns about money laundering, there was just money laundering. There were no rules, no laws, no regulations, there was just money, it needed to be laundered and banks and others duly obliged. Times have changed, laws have changed, tolerance has evaporated, money is the life blood of crime and governments want to stem the flow. Money laundering is now a crime and laundering huge sums of money is a serious crime. In the prior two years the global penalties for anti-money laundering and financial crime failures within banks have reached the incredible number of US$8.9 billion (1).
In a wider context since 2011 the top British banks have paid 61% of their profits in penalties and restitution. Whilst a former trader was imprisoned for 14 years (2).
All of this has heralded a demand for a change of culture in banks and the discipline of compliance has risen to the top of the agenda for the directors of banks and regulated firms. Holding on to profits, managing risk and avoiding criminal threats is at the heart of decision making. All of this has placed more pressure and expectation upon the shoulders of those in charge of anti-money laundering, commonly known as the money laundering reporting officer (MLRO).
1. The modern day challenge and mantra of the MLRO
The modern day challenge and mantra of the MLRO is more, more, more. More requirements, more expectations more work, more information, more documentation, more screening, more results, more analysis, more management information, leading to more requests, more expectations indeed the demand for more seems never ending. The nine others issues and requirements which most challenge the MLRO community, are set out below.
2. Sanctions
Perhaps the requirement which presents more anxiety than any other is compliance with sanctions, applied against multiple parties, by multiple governments, occasionally designed to counter sanctions applied by another government. Global conflicts have heralded the proliferation of sanctions in an increasingly dynamic environment. As the tensions with Iran reduce, the tensions in Ukraine increase. Different sanctions impact different currencies and different countries and the MLRO needs to know all in order to remain compliant.
3. The financial services supply chain
The financial services supply chain has also presented increased demands and these extend beyond a bank's own clients to the clients of their clients, and beyond. Whilst the MLRO has the ability to impose controls to know the bank's clients, these seldom extend to a client's own clients. Consequently the MLRO needs to secure some reassurance from clients and rely upon the same. The anxiety is the inability to influence and control the risks as effectively as he/she can do so in respect of the bank's own clients.
To comply with the sanctions requirements banks need to know both their private and corporate clients, The MLROs need to know the origin of the funds and to screen transactions in order to prevent money being paid to or received from sanctioned parties. It is essential that MLROs be connected to all areas of a bank wherever they may be situated around the globe through technology. By doing this they are able to ensure that the bank knows who the bankers are conducting business with or for.
4. Client due diligence (CDD)
Client due diligence (CDD) and the discipline of 'know your customer' (KYC) is the foundation upon which the MLRO builds a robust anti-money laundering (AML) framework. In the event a bank does not know who they are doing business with, they are exposed to the risk of doing business with sanctioned parties resulting in regulatory censure, and the possibility of punitive fines and enforcement of restrictions, as well as reputation damage. Thus, banks not only need to know their clients and increasingly, their suppliers, they also need to evidence the case, to conform with regulators expectations that they have conducted sufficient due diligence. Essentially banks need to hold up-to-date data files on all clients.
Original AML laws and regulations required banks to apply a simplified form of KYC, which solely required a bank to collect a client's name and address. The modern day requirements extend to knowing a client's source of wealth, source of funds, nature of business and the requirement to understand why a client needs a specific bank account, services or product. Moreover, it is necessary to assess the risks potentially presented by each client and ensure KYC and the risk assessment remains up to date. Consequently the application of CDD has become a never ending exercise.
5. Politically Exposed Persons
All of this accurate and up to date client information is deployed within automated screening processes. Not only are banks screening against sanctions lists, they are also screening against lists of politicians, former politicians, politically connected persons, judges, generals, admirals, central bank governors and many more. Collectively, these are referred to as Politically Exposed Persons (PEPs). Over a number of years despot leaders and other corrupt politicians have stolen vast sums from the countries they are supposed to govern. As a result, PEPs present a higher risk of financial crime and money laundering to banks and the MLRO. Thus, the MLRO must identify PEPs and apply an enhanced form of due diligence, as well as increased transaction monitoring.
As a consequence, the MLRO community is required to identify and report suspicious banking activity and suspicious funds. Nowadays it is incumbent upon MLROs to know the source of a politician's funds and wealth, as well as the total value of the remuneration and salary packages, as these better enable the banks and more specifically the MLROs to identify unusual and suspicious activity/transactions.
6. Ongoing negative media screening
The screening of clients and the related parties of corporate clients (directors and beneficial owners) is becoming very resource intensive. In relation to heightened risk clients, there is an increased expectation that they and related parties become the subject of ongoing (often daily) negative media screening, the results of which must be managed. More so than was hitherto the case, MLROs are expected to know when their clients (often global) are the subject of serious allegations and they must demonstrate they took action in relation to the same. The volume of negative media alerts can overload a MLRO and his/her team, such that they need to be carefully targeted, managed and results well documented.
7. Additional resources
The combination of increased expectations, leading to increased workloads drives the need for additional resources. Thus management needs to be kept-up-to-date with information to ensure that required resources can be deployed. Previously, banks may have asserted they had finite resources, but regulators have countered this claims by stating that the banks continue to sponsor major arts and sporting events, therefore the same banks have enough funds to pay for additional AML resources. Within this resource equation time is a static, there are only 24 hours in every day, without the application of additional resources, it will not be possible to keep up and meet with regulatory expectations, or even requirements.
8. Training staff
Training staff to deter and detect money laundering and money launderers is a legal requirement in most countries. Failing to provide training can lead to a prison sentence for the MLRO. Moreover, he/she needs to ensure they are trained in order to act as his/her deputies across all business, and all jurisdictions. Untrained staff represent a weak point in bank's AML framework and may also present such individuals with personal vulnerabilities. Having stated all that, the real challenge for the MLRO is to change a bank's culture in order to ensure AML and financial crime is always on the agenda for decision makers and on the radar of all other staff.
9. Managing and receiving information
Managing and receiving information is vital the day-to-day business of the MLRO. He/she needs to keep up with AML developments and emerging money laundering threats from around the world. MLROs should be aware of inter -governmental tax agreements, enforcement notices and penalties applied against banks, licences revoked from banks as well as the increasing threats posed by money launderers using corporate organizations to launder money. If he/she is unaware, there is an increased likelihood money will be laundered and they may well have committed a crime.
10. The US dollar
The US dollar (USD) is the international trading currency of choice for many corporations, as well as governments. The currency offers many benefits and guarantees, but simultaneously and often unknowingly, it also exposes users to the extra-territorial reach of U.S. law enforcement. Essentially, the U.S. has become an indirect international AML regulator and in doing so U.S. banks offering international USD clearing services have themselves become inadvertent deputies for U.S .regulators. In the event a bank were to lose the ability to clear USD it would likely go out of business, consequently a MLRO needs to be aware of U.S. requirements and ensure his/her bank meets with the same. The costs of U.S. regulatory enforcement are substantial.
Conclusion
The bygone days of a simplified approach to AML, have long since gone. There is a constant need to do more in relation to AML. By far, the biggest challenge is to change the attitudes of clients and staff, to persuade them money laundering is a real crime, directly connected to corruption, drug dealing, human trafficking, extortion, murder and more. There is a need to present a BIG picture, to join the dots together and enable all to see their actions can have a very positive impact in the fight against money laundering.
1. http://www.reuters.com/article/2015/05/01/us-bnp-paribas-settlement-sentencing-idUSKBN0NM41K20150501
2. http://www.reuters.com/article/2015/08/03/us-libor-hayes-verdict-idUSKCN0Q81IZ20150803
