Combating Money Laundering: Approach for Banks — Part 2
2. Methodology
The literature review comprises of a methodical review of 22-Peer-reviewed articles (that is, journals and magazines newspapers) to analyse the various aspects of combating money laundering.
Keywords Used: anti-money laundering (AML), anti-money laundering systems, Money- Laundering (in Banks), anti-money laundering program
3. Literature Review
Money laundering is a ploy of criminals, where the earnings through unlawful activities are legalised in such a manner to ensure the actual source of funds cannot be traced as explained by FATF (2016).
Money Laundering is different from terrorist financing as explained by Sinha (2013). Post the carnage of 9/11, “Terrorist Financing” has been brought under “Money-Laundering” compliance regime. The author explains the key differences as illustrated below in Figure 1. For this paper, we will focus only on why banks should be combating money laundering.
Banks, through four distinct but inter-relating procedures, can combat money laundering. Section 3.1 focuses on Anti-Money Laundering (AML) Program; Section 3.2 focuses on Know-Your-Customer (KYC) framework, Section 3.3 focuses on AML systems, and the final Section 3.4 focuses on Emerging Threats.
3.1 AML Program
The bank’s internal compliance regime will assist banks to combat ML. A successful compliance program proposed by Beaumier (2008) must address all of the following key aspects, all of which are inter-dependent;
1. Involvement of executive management;
2. Line of business involvement to assess’ potential exposures to risk;
3. Profiling of clientele during onboarding and on an ongoing basis based on regulatory
and banks policy;
4. Identifying, analysing, reporting and maintaining of customer records as per local laws;
5. Educating all employees on AML processes and procedures;
6. Understanding and compliance with laws and regulation; and
7. Third party audit/assessment of all systems & processes
The collaborations must take place before a product or service is made available to the bank’s clientele, and such collaboration has to be an ongoing activity to ensure the bank has all stakeholders involved to address any deficiencies identified. The collaboration is also to review the risks arising from changes in regulatory policies which would impact its business.
Byrne (2011) concurs with Beaumier (2008). The AML compliance model depicted (Figure 2) is similar to the compliance program described above.
According to Byrne (2011), the “AML Compliance Program” clearly involves all functions of the bank working along with the compliance team. It concurs with Beaumier’s (2008) proposal on what constitutes a successful AML program in a bank. The compliance program would assist the bank to mitigate its risk when money laundering is concerned. Bryne (2011) additionally emphasises that if an “AML Program” has to be successful, then, there has to be continuous collaboration in auditing the AML Program and the IT systems & team of the bank. When banks use AML systems, banks ensures that the (i) right data has been captured, populated and analysed; (ii) audit conducted covers all aspects from KYC to case
management; (iii) Both internal and external auditors possess AML knowledge (system & local regulatory) and report any deficiencies to the senior management of the bank to ensure that corrective actions are taken before any potential threat unfolds; and finally (iv) the bank must report any suspicious activity to the regulator in a timely manner.
Simwayi and Guohua (2011) also examine how regulators have enabled banks in South Africa to put in place a comprehensive AML program by mandating;
1. Written “Policies and procedures” for AML compliance within the bank,
2. Appointment of “AML Compliance Officer” who would be part of the management,
3. Independent compliance function to overview all aspect of banks AML compliance,
4. Ensure employees are trained appropriately to enable a regime of AML compliance, and
5. Auditing by independent external auditors to assess bank’s AML compliance.
Simwayi and Guohua (2011) further discuss, unless the regulators are also actively engaged with the banks, there will be a lack of understanding of the compliance regime leading to ineffective AML policies and procedures implemented by the banks. Regulators need to take on the role of assessing each bank at a macro and a granular level to adequately identify and address deficiencies in the bank’s AML program to meet regulatory requirements.
AML Compliance program can be customised to meet the bank’s needs. Axelrod and Ross (2012) states the threat faced by the banks is based on the size of each bank’s operations, its product/service offerings. The approach to mitigate the threats faced by banks should be based on its size of operations. This is achieved by answering if a single department would be responsible for assessing the level of compliance if it is a smaller bank. If it is a larger bank, then multiple business units’ compliance staff must collaborate with the central compliance team in the decision-making process. The “AML program” explained by Axelrod and Ross (2012) additionally identifies a dedicated compliance manager to head the “Compliance Team” which has also been discussed by Simwayi and Guohua (2011) in their findings.
Hence, there are similarities between the authors on what are the key attributes of a successful “Compliance Program”. The authors also discuss what banks additionally need to
Consider having a “comprehensive and successful AML compliance program”. This is to ensure all banks are using all attributes in their compliance program irrespective of their size of operations/threat faced.
3.2 Know-Your-Customer (KYC) framework
What is KYC and is it key for banks? KYC is a standardised process undertaken to verify the identity of the client. It is to ensure clients do not pose any quantifiable risk to the banks and are individuals who are not involved in money laundering. Byrne (2011) explains that “The KYC system ensures that an appropriate risk profile is maintained for every customer and is updated according to the required schedule governed by the risk rating of the customer” (p.66). When Byrne (2011) says “appropriate risk profile,” it is Customer Due Diligence (CDD). It is globally accepted that CDD must be done by the banks to safeguard itself from money laundering (Mugarura, 2014). According to Mugarura (2014), the notion that the global policies surrounding CDD are uniformly applied across all jurisdictions is a myth. This varying degree of CDD enforcement enables money launderers to flout KYC policies by using loopholes in the law.
One of the ways that KYC prevent ML is assisting the bank in identifying its customers. The bank’s customer has managed to launder the proceeds of crime successfully if the true source of income is hidden (Demetriades, 2016). Money launderers are aided when banks do not identify their customers under the “KYC” policies established by the regulator. Banks must independently assess the documents submitted during the onboarding process and on an on-going basis for existing customers. Banks must take a proactive approach and not limit themselves to the policies of the regulator concerning KYC/CDD (Demetriades, 2016).
Loopholes in policies and regulations must be addressed to combat ML. It should not be used to assist clients to transfer illicit money through the bank’s financial network. If the bank’s employees are suspicious of any customer profiles/activities, then, such suspicious customer profiles/activities should be reported to compliance team (Axlerod & Ross, 2012). KYC assessment is a collaborative effort and must be strongly ingrained into the employee through the “AML Program” of the bank and will assist the bank to achieve regulatory compliance (Axlerod & Ross, 2012).
An anomaly in the KYC framework is hindering access to banking systems. One of the anomalies identified by Loughlin (2012) is, close to half the world’s population do not have proper access to banking systems. Most of them belong to emerging economies. “Unbanked” or “Underbanked” as they are known as are unable to establish a banking relationship with the bank due to lack of proper identification documents Loughlin (2012). The lack of proper identification documents directly impacts the KYC process mandated by the regulator and also the bank’s AML program. Loughlin (2012) states that this anomaly has to be addressed properly by the regulator and the bank’s AML program. Specific countries have started formulating policies to serve the “unbanked” or “underbanked”.
The case of India, Philippines, Malaysia who is formulating suitable means to identify the “unbanked” or “underbanked” (Loughlin, 2012). These countries have regulations and policies in place to allow “village headmen” to issue a certificate, introduce clientele to the banks based on their position in society amongst other ways. It is to ensure that due to stringent AML laws the “unbanked” or “underbanked” who do not pose any threat under AML obligations are not excluded from the banking system. Loughlin (2012) mentions through a “Risk-Based Approach,” the accounts can be classified as low/no risk, apply limits on “deposits/withdrawal”, and establish a threshold for balances. Loughlin (2012) further cites “India”, who are successfully integrating such people through the “financial inclusion” scheme. The inclusion of such people helps strengthen the AML regime of the country by ensuring all money is channelled through the formal banking system. The forward-looking approach of emerging economies should be a guiding stone for other nations and regulators.
Hence, it has been showcased by various authors why KYC is an essential component in combating money laundering and how individual countries have formulated policies to ensure a majority of their citizens have access to the banking system.
**All citations mentioned in the sections above will be expanded and provided in the last part of this series
