By C.M. Matthews
David Cohen, undersecretary for terrorism and financial intelligence, announced last week a federal task force of regulators and enforcement agencies has been created to “look under the hood and take stock” of the entire U.S. anti-money laundering regime. According to a Treasury Department spokesman, in the next year “we expect the task force to examine the overall AML regulatory, compliance and enforcement effort, and to develop ideas on how those efforts can even more effectively combat money laundering and other forms of financial crime.”
So, let’s get the ball rolling AML geeks. If there’s one thing you could change or clarify, what would it be?
Betty Santangelo, litigation partner at Schulte Roth & Zabel LLP. [The task force] is a great idea and comes at the right time, given all that Treasury has learned from the recent round of hearings on the [advanced notice of proposed rulemaking] on customer due diligence, and the appointment of a new director of FinCEN. For example, presently firms are required to sign reliance agreements with other regulated financial institutions in order to rely on their anti-money laundering procedures for shared customers. In my view, spending time on that documentation appears unnecessary given that the other institution is a regulated financial institution subject to the same AML regulations. That is one area that could potentially be made unnecessary, and permit financial institutions to focus on monitoring activity.
Michael Dawson, managing director at Promontory Financial Group. Regulators should approach AML risk management more like credit risk management, by testing programs for effective outcomes, not prescribed inputs. For example, banks must risk rate customers. Currently, regulators effectively list the factors that must be considered high-risk. In the credit context, banks have more freedom to choose the factors they consider high risk (provided they don’t use prohibited factors like race). By focusing on effective outcomes, rather than prescribed inputs, AML resources could be more efficiently targeted at the real problems.
Reetu Khosla, director of risk, fraud and compliance at Pegasystems . The review is a positive step forward as financial crime continues to become broader in scope ( i.e. tax evasion and FATCA). If looked at in the broader operational context, not only can the government and financial institutions gain benefit in terms of 100% auditability, streamlined customer experience and faster time to revenue, but organizations are able to efficiently manage changes within technology as new risks emerge.
With more regulation there will be increased costs, and the industry is experiencing this already. But in order to keep these costs level, this evaluation is critical, as manual processes that were once disjointed and had significant loop holes and internal control gaps are being increasingly replaced by sophisticated and agile technology, such as KYC technology which is highly integrated with on-boarding technology. Keep in mind that rules-driven and process-driven AML technology did not even exist when these regulations were first written.
Ross Delston, a Washington, DC attorney, AML expert and former banking regulator at the FDIC. A major gap in the U.S. [Bank Secrecy Act]/AML framework is that a number of businesses and professions are not required to adopt an AML program or to file suspicious activity reports. These include hedge funds, private equity funds, investment advisers, fund administrators, lawyers and accountants when engaged in commercial transactions for customers, and real estate agents. Under the [Financial Action Task Force 40] recommendations, the international standards that apply to all countries, all of these businesses and professions are required to be full participants in every country’s AML framework.
David Kwan, senior director, AML Solutions, NICE Actimize. First and foremost, expanded coordination among U.S. regulators would help make money laundering investigations more efficient. Recent cases have demonstrated the continued importance of coordination among the responsible agencies. Second, financial regulators in different countries communicate informally and at professional forums, but making this communication more widespread and more of a norm would inevitably ease cross-border investigations and likely also detect incidents which remain unknown in some cases.
Finally, financial institutions should share best practices among themselves. Too often, new innovation in money laundering prevention is kept within the confines of a single financial institution rather than shared broadly among peers. While competitive pressures perhaps obviate complete transparency and sharing among financial institutions, there are processes and approaches which are not known by all financial institutions that can and should be shared in closed-door meetings.
Pekka Dare, director of International Compliance Training. The key challenge for regulators and firms is clarifying what effective Customer Due Diligence (CDD) means. Too many firms fail to gather meaningful CDD about their customers’ source of wealth or fail to understand who the ultimate beneficial owners are. Regulators and firms must provide greater clarity and consistency in terms of best practice for these issues. To achieve this we must re-examine regulation and guidance and provide effective training to staff in respect of what good looks like.
Until all the stakeholders in AML address the poor practices around CDD, the unwrapping of corporate structures and identification of ultimate beneficial ownership we will continue to see scandals involving money laundering and corruption in regulated firms.
Carol Beaumier, executive vice president of global industry programs at Protiviti. I think, from the industry’s perspective, the issue may be less about the rules or intent of the rules per se (though the industry certainly wants to believe that what it does has value) than about the implementation of the rules, e.g., concerns that leading practices are broadly imposed even when they may be unnecessary/unworkable in certain institutions or that examiners may have pre-determined views of risk (different from the institution’s own view of risk), which lead to criticisms of an institution’s program.