Banking and Finance AML Compliance Perspective: Future Regulations Overview

Financial institutions worldwide are obligated to adhere to national Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) laws, such as the Bank Secrecy Act (US), Anti-Money Laundering Act (Germany), and the Payment Service Act (Singapore). However, regulatory bodies like the Financial Conduct Authority (FCA) have identified several common failings in AML compliance programs, which can lead to significant regulatory fines and reputational damage.

One of the most prevalent issues is inadequate customer due diligence and risk profiling. Financial institutions often fail to establish appropriate risk-based customer due diligence (CDD) and enhanced due diligence (EDD) measures. Customer risk profiles are frequently based on outdated or static information collected at onboarding but rarely updated, making institutions vulnerable to new or evolving threats as they lack current insights into customer behavior and risk.

Another issue is poor transaction monitoring and escalation. Many AML programs rely heavily on traditional, rule-based transaction monitoring systems that generate excessive false positives, leading to alert fatigue and overlooking meaningful suspicious activity. Moreover, monitoring systems often lack contextual awareness to differentiate between innocuous and suspicious behaviors, causing inefficiencies and missed detection opportunities.

Fragmented and siloed systems also pose a significant challenge. AML compliance suffers when information and processes are siloed between departments or geographic regions. Fragmentation prevents comprehensive detection of suspicious activities, as seen in cases like the Danske Bank scandal. Separate systems for AML and fraud can create blind spots if data is not integrated and shared effectively.

Delayed or incomplete responses to red flags is another common failure. FCA enforcement actions highlight cases where banks delayed responding to known warnings or alerts about suspicious clients or transactions, pointing to failures in governance, management oversight, and the empowerment or training of staff responsible for AML compliance.

Over-reliance on legacy AML systems is another issue. Many institutions continue to use legacy transaction monitoring platforms that cannot adapt rapidly to emerging money laundering tactics or complex schemes. Such systems struggle with explainability, regulatory reporting requirements, and fail to adequately support compliance personnel in making timely decisions.

Insufficient accountability and oversight is also a concern. There is an increasing expectation from the FCA that firms appoint dedicated officers with sufficient authority and resources, such as the Money Laundering Reporting Officer (MLRO), to proactively oversee AML compliance. However, some firms delegate these duties to individuals with limited focus on financial crime controls or rely excessively on third-party service providers without proper internal verification.

To address these issues, financial institutions need to implement integrated, dynamic, and risk-based AML frameworks with robust ongoing monitoring, appropriate resourcing, and continuous improvement to keep pace with financial crime risks. This includes developing and maintaining an effective AML compliance program that includes policies, controls, and procedures related to the prevention and reporting of money laundering and terrorist financing.

An essential part of this program is the Know Your Customer (KYC) process, an umbrella term for everything that financial institutions should know about a customer. Banks and financial institutions can consider using automated solutions that cover all AML needs of the business, rather than using a combination of different solutions.

Moreover, banks should have a process in place to identify suspicious transactions and report them to the relevant authorities. Employees should be aware of AML compliance and its importance for regulatory compliance, especially those with AML-specific responsibilities and those dealing with transactions and accounting.

In conclusion, addressing these common AML program failings requires a comprehensive approach that includes robust customer due diligence, effective transaction monitoring, integrated systems, prompt responses to red flags, modern technology, and strong governance and accountability. By doing so, financial institutions can protect themselves from the legal, operational, and reputational risks associated with non-compliance with AML regulations.

[1] FCA (2020). FCA thematic review: Anti-money laundering and counter-terrorist financing in banks. Retrieved from https://www.fca.org.uk/publications/thematic-reviews/anti-money-laundering-and-counter-terrorist-financing-banks

[3] FCA (2018). FCA thematic review: Anti-money laundering and counter-terrorist financing in high-risk sectors. Retrieved from https://www.fca.org.uk/publications/thematic-reviews/anti-money-laundering-and-counter-terrorist-financing-high-risk-sectors

[4] FCA (2017). FCA thematic review: Anti-money laundering and counter-terrorist financing in the UK's cryptoasset sector. Retrieved from https://www.fca.org.uk/publications/thematic-reviews/anti-money-laundering-and-counter-terrorist-financing-uk-s-cryptoasset-sector

[5] FCA (2016). FCA thematic review: Anti-money laundering and counter-terrorist financing in the UK's retail banking sector. Retrieved from https://www.fca.org.uk/publications/thematic-reviews/anti-money-laundering-and-counter-terrorist-financing-uk-s-retail-banking-sector