INSIGHTSUnderstanding AML                                Converting criminal income into assets that makes it             ...
INSIGHTS  Understanding AML                                  The on-going challenge                                  There...
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2012 10 bsg uk aml kyc briefing version 1


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A review of the AML compliance environment, inculding a view of potential opportunities created by working torwards compliant operations.

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2012 10 bsg uk aml kyc briefing version 1

  1. 1. INSIGHTSUnderstanding AML Converting criminal income into assets that makes it difficult to trace the underlying crime is easier if we all turn a blind eye to it. The methods are always changing but so should the remedial tactics to deal with it. Why does it matter ?How much do youreally know about Money laundering is the process of legitimising ill-gotten gains by transacting using the funds through legitimate institutions. Naturally, the easier is it to launder money, the easier it is toyour customers? profit from activities such as drug dealing, illicit arms trading, human trafficking, etc. Laundering methods are varied and can range in sophistication, but fundamentally involve passing money through legitimate transactions in the financial system. In order to combat this, financial institutions have an obligation to understand the sources of funds being funnelled through transactions, particularly those involving larger amounts of money. How does AML work? Anti-money laundering (AML) is a set of controls that exists for financial institutions and regulated markets in order to deter laundering activities using prevention, detection and reporting mechanisms. Typical examples of controls and activities include:  Understanding who your customer is (known as KYC – know your customer). At the point of account origination, institutions have to positively identify new account holders and gather appropriate identifying information (e.g. passports, identity cards. etc.). During the life of the relationship, the institution needs to monitor the customer to ensure that they (and transactional counterparties) don’t appear on any sanctions lists and that the customer transacts in accordance with expected transactional behaviour.  Understanding how your customer is likely to behave (also part of KYC). Based on aspects of customer segmentation, and monitoring the specific customer’s transactional behaviour over time, the institution can build a profile of likely customer behaviour. Any transactions outside this profile can then be investigated as potentially inappropriate.  Proactive transaction monitoring for transactions which are irregular (i.e. outside theThere are five pieces of customer’s profile of likely transactions). These could include transactions outside ofprimary legislation geographies typical of the account holder, patterns of transactions which may indicate illicit behaviour, etc.governing AMLactivities in the UK:  Running investigations in response to alerts raised as part of the transaction monitoring process. Investigations are typically manual, labour intensive and require- The Money sourcing of additional information and ultimately making a decision in respect of whether Laundering to disclose a transaction to the relevant authorities. Regulations 2007  Reporting on transactions above a certain threshold. Irrespective of expected- Terrorism Act 2000 behaviours, there are some regulators which require purely threshold based transaction- Anti-terrorism Crime reporting to a regulatory authority. The thresholds vary from country to country and and Security Act industry to industry. Relative to an intelligence driven risk based approach, this is 2001 essentially a blunt instrument.- Proceeds of Crime Act 2002- Serious Organised Crime and Police Act 2005 Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT // @bsguk This document can only be reproduced in its entirety. This document does constitute any form of advice from BSG (UK).
  2. 2. INSIGHTS Understanding AML The on-going challenge There are significant process and reporting obligations placed on financial institutions by the regulations governing anti-money laundering activities. The US PATRIOT act for example, has introduced the notion of Enhanced Due Diligence (EDD) which builds on previous KYC obligations, especially in respect of understanding provenance and reliability of information. Although the most recent piece of UK legislation was enacted in 2007, there is on-going pressure from regulators for even more controls. We have observed how challenging it can be for banks to mature and continually maintain their compliance capabilities within the following areas:  Refining KYC processes that enforce adequate Customer Due Diligence. As is the case in any criminal endeavour, there is an ongoing resource battle between the baddies and the goodies. This requires institutions to regularly consider whether the process architecture ensures optimal capability to identify and management potential money laundering. Where institutions have global presence, this is complicated by local process variations and jurisdiction-specific regulatory requirements.  Implementing effective monitoring mechanisms. By necessity, transaction monitoring is automated, based on analytics of pattern behaviour. Over time, institutions need to constantly update the algorithms identifying potential nefarious behaviour so that new ruses can be effectively curtailed.  Ensuring adequate data availability to support monitoring. Investigations are only as successful as the information available to support them. Institutions need access to internal, industry wide and publically accessible data to support informed decision making. Case management tools need to allow investigators to collate, assess and analyse information efficiently. Does it present any opportunities? Implementing, or improving upon, an AML regime takes time and money. At BSG, we like to consider whether there can be a positive business case for compliance initiatives (i.e. over- and-above simply being compliant).  Cross sell existing products/services to specific customers. By building a more complete profile of customers, an organisation is able to proactively offer extra products or services that are specifically targeted to individual customers. Ideally this enables the institution to maximise profit within the customer base and avoids the customer being offered inappropriate products.  Reposition & re-package products/services across the customer base. AML profiling technology can provide analytical insight into behavioural trends across the entire customer base. This enables an organisation to identify potential product opportunities, supporting their efforts in targeting specific customer segments.  Streamlined processes and reduced cost. Consolidating process and data for the purposes of AML profiling (and other compliance functions) often reveals duplicate and inconsistent data driven by multiple processes capturing and using the same data from different sources. This provides an opportunity to rationalise processes and reduceAt BSG we are passionate overheads.about design and delivery of  Build new inter-bank relationships with mutual reward. A well implemented andchange which makes a responsive AML regime and record can be used to demonstrate credibility and build trustdifference for our customers with new counterparty institutions. This is often observed when smaller institutions areand their customers. looking to build new relationships across different geographies. A collection of BSG (UK) BA practitioner // @bsguk insight can be found at +44 20 7390 8674 Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT