World over, regulatory bodies work to tackle the threats of money laundering (or “ML”) and terrorism financing (or “TF”), as these specific financial crimes have adverse implications on legitimate business interests.
As you may recall from our Introduction to AML and CTF Compliance Programmes, ML is the process of taking money that was made illegally and making it appear legal. Similarly, TF is another financial crime involving the collection or provision of funds for terrorist purposes. To combat it, countering the financing of terrorism (or “CTF”) methods work to prevent terrorist organisations from acquiring financing to carry out their aims.
The causes and methods of terrorism are unquestionably complex and multi-dimensional, as are the means of laundering illicitly sourced money. By identifying ML and TF Typologies and assessing global industry trends, one can structure impactful methods of countering these crimes. However, carrying this out effectively is riddled with challenges which we will discuss in the following paragraphs.
The Challenges of Effective AML and CTF Implementation
- Poorly Allocated Budgets
Although the recent past has seen an increased emphasis on AML and CTF measures, financial institutions often struggle with allocating sufficient funds to keep up with these efforts. Failing to allot funding to aspects that require specially allocated funds – such as improvement in risk-assessment finetuning and swift updating of policies – affect AML and CTF execution in the long run. In addition, experts have stated that the failure to update procedures, allot customer-onboarding procedures, and recruit professional compliance personnel have also contributed to faulty AML and CTF implementation.
- Technology and Process Solutions
Successful AML compliance calls for numerous processes and technology solutions to integrate KYC data and systems; For this to be effectively carried out, data quality must be enhanced and standardised to allow a centralised analysis of fraud and financial crimes.
- Constant Monitoring for Accurate Risk Assessment
As our Introduction to AML and CTF Compliance Programmes highlighted, modelling a compliance programme relies heavily on a thorough risk assessment. In essence, this risk level is given during onboarding and is likely to change or evolve depending on the customer's transactions and interactions. Financial institutions like banks must dynamically evaluate each of their customer's risks and adjust risk levels appropriately to avoid false positives; The challenge herein requires constant monitoring of each customer's transactions which may not be feasible for ill-equipped institutions.
- Increased Governance
Staying up to date with the latest governing and diligence methodologies and attempting to manage cross-border, multi-jurisdictional compliance standards and rising customer diligence needs have been identified as significant challenges.
- Scarcity of Skilled Professionals
Finding competent AML professionals may be difficult. High onboarding expenses and attrition are further concerns. Organisations must also keep employees informed of evolving regulatory obligations. Taking action to resolve the AML deficiencies revealed by regulatory assessments can be effectively carried out only with skilled professionals who know what to look for.
- Common Mistakes by Organisations
Experts have also highlighted that general failure to report suspicious activity and failure to train and adequately vet staff has resulted in compliance hiccups.
Observed Trends in AML/CTF Implementation
While curating the most common challenges that these organisations face on a daily basis, we also noted some recent trends that have been adopted during implementation.
- Focus on Digital Payments
With the recent advancement in digital payment systems, regulators have shifted focus from conventional liquid money laundering to reducing money laundering concerns connected with emerging payment systems, i.e. mobile wallets and e-payments. This ties into broader objectives of preventing cybercrime and reducing possible money laundering concerns associated with virtual currencies as well.
- Increased Use of Third Parties Utilities
Managed services for transaction monitoring have seen a rise, specifically with the use of third-party services. These third-party suppliers help financial institutions identify new AML risks and violations; These services specialise in KYC compliance and browser-based commercial watch lists.
- The Role of Advanced Technologies
Machine learning in recent history has taken the world by storm with its capacity to aid in building algorithms for predictive data analysis. This also holds true in the financial ecosystem, where machine learning helps financial institutions identify hidden trends and suspected money laundering operations.
At present, financial institutions face a pressing need for more dynamic risk assessment methodologies. This means that AML and CTF compliance requirements should be made a more active part of the overall business culture with incentives aligned across business units instead of risk assessments which are implemented retroactively. A more holistic approach to these deficiencies would involve an independent exercise to assess strict compliance with AML and sanctions rules and the efficiency and effectiveness of current internal processes.
The need for more skilled professionals to help with AML and CTF is an obstacle that keeps financial institutions from unlocking their full potential.
If you’re having trouble assessing your organisation’s vulnerability to ML and FT, feel free to reach out to us - we’d be happy to help! One AML is a team of specialised analysts here to guide you through your compliance obligations. Book a free 15-minute audit today!
This information is only to serve as a reference and guide for those living and doing business in Australia. It is not a substitute for the provisions or information in the “Anti-Money Laundering and Counter-Terrorism Financing Act 2006.” (AML CTF Act) or any of its allied statutes and provisions. The above information is not a substitute for independent, professional legal advice and is meant for general information only. The examples in the guidelines are merely suggestions, are not exhaustive, and are illustrative.