Kpmg Anti Money Laundering Survey 2004

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Survey on 2004 state of the art anti moneylaundering practices

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Kpmg Anti Money Laundering Survey 2004

  1. 1. Global Anti–Money Laundering Survey 2004 How Banks Are Facing Up to the Challenge A DV I S O RY © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  2. 2. Contents Fo r ewo r d 2 E xe c u t i ve S u m m a r y 4 D e t a i l e d S u r vey Re s u l t s 7 1. Th e Ro l e o f S e n i o r M a n a g e m e n t i n A M L I s s u e s 7 2. Th e C o s t o f A M L C o m p l i a n c e 9 3. A M L Po l i c i e s a n d Pr o c e d u r e s 12 4. Fo r m a l M o n i t o r i n g o f A M L Sys t e m s a n d C o n t r o l s 14 5. R i s k - Ba s e d A p p r o a ch a n d K n ow Yo u r C u s t o m e r Ac t i v i t y 16 6. Re t r o s p e c t i ve Re m e d i a t i o n 19 7. Tr a n s a c t i o n M o n i t o r i n g 22 8. S u s p i c i o n Re p o r t i n g 25 9. Tr a i n i n g 27 10. A tt i tu d e s t owa r d Re g u l a t i o n 29 Conclusion 33 A p p e n d i x I : D e t a i l s o f Re s p o n d e n t s 34 A p p e n d i x I I : Ad d i t i o n a l D e t a i l e d Re s u l t s by Re g i o n 35 A p p e n d i x I I I : I n t e r n a t i o n a l Le g i s l a t i ve Re s p o n s e s t o M o n ey L a u n d e r i n g 44 A p p e n d i x I V: S e l e c t e d A M L C h r o n o l o g y 46 A p p e n d i x V: G l o s s a r y 48 Endnotes 51 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  3. 3. 2 | GLOBAL ANTI–MONEY LAUNDERING SURVEY 2004 Foreword Recent estimates suggest that US$500 billion to $1 trillion is laundered worldwide annually by drug dealers, arms traffickers, and other criminals.1 Banks act as gatekeepers for the legitimate financial system and it is only through their vigilance that the system can be protected from providing organized criminals or terrorists with a mechanism for concealing the proceeds of illicit and corrupt activity. As such, they play a crucial role in the prevention, detection, and reporting of money laundering. We commissioned this Global Anti–Money Laundering (AML) Survey to determine whether the increasing globalization of banking groups and of international regulatory cooperation has resulted in increased consistency in the approach to AML. We also sought to draw out the key questions that we believe bank senior management must consider if they are to help ensure that their banks address the key issues arising from both the results of KPMG’s Global AML Survey 2004 and respondents’ comments and issues. Anti–money laundering did not historically represent a high priority for either “…money launderers subvert legitimate governments or the banking industry and was in the past perceived largely as a local financial mechanisms and banking issue. Appropriate legal and regulatory requirements have been enacted only relatively relationships by using them as recently in many countries, and new laws and regulations have not always been protective covering for the movement actively or effectively enforced after introduction. of criminal proceeds and the financing of crime and terrorism, and, by so Recent years, however, have seen a fundamental change in the legal and regulatory environment. Driven by a growing political determination to strike against drug doing, can …undermine the integrity traffickers, participants in organized crime, and terrorists, there have been a series of of United States financial institutions concerted national and international AML initiatives: and of the global financial and trading systems upon which prosperity and • Ongoing reform in many countries has been prompted by the inter-governmental growth depend…” Financial Action Task Force (FATF) in promulgating recommendations and blacklisting countries with serious deficiencies in AML regulations. USA PATRIOT Act, Section 302(3) • The International Monetary Fund and the World Bank have now become actively involved in AML issues, and they have incorporated AML issues into their country assessments. They are also now providing technical assistance to help strengthen the AML and anti-terrorist framework in member countries. • The Basel Committee on Banking Supervision2 (the Basel Committee) has published best practice base standards for customer identification, know your customer (KYC) activity, and corporate governance. • The European Union (EU) Second Money Laundering Directive provided a specific focus and set minimum standards for European banks; a proposed Third Directive was published earlier this year. • Regulators in the developed economies have generally become more active in taking enforcement action for system and control breaches, even where no money laundering has been proven. • A series of high profile cases of corrupt politicians misappropriating public funds and laundering them through developed country banks has led to greater focus on private banking activities, particularly the level of due diligence carried out, how transactions are monitored, and how suspicions are reported. © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  4. 4. HOW BANKS ARE FACING UP TO THE CHALLENGE | 3 • The events of September 11, 2001, heightened concerns about how terrorists fund operations through the legitimate banking system, and stimulated further strengthening of U.S. AML requirements through the enactment of the USA PATRIOT Act. Despite debate about the characteristics of terrorist financing, there Ensuring that the banking is no doubt that the continuing “war on terror” has maintained the focus on KYC system cannot be used for efforts and transaction monitoring in particular. • A number of international banks have been active on their own initiative in money laundering purposes establishing and implementing new agreed standards, such as the Wolfsberg is a key imperative for Principles for international private banking activities. • These developments have been accompanied by a stronger global emphasis on policymakers and lawmakers corporate governance, risk management, and the role of senior management in across the globe. exercising oversight of a wide range of their businesses’ activities. Ensuring that the banking system cannot be used for money laundering purposes is a key imperative for policymakers and lawmakers across the globe. Achieving this goal will not be possible without the active assistance of the banking industry, and it can only work if the banks play their full part. Encouragingly, KPMG’s Global AML Survey 2004 shows that the vast majority of respondents believe that the current AML burden is acceptable, and they want to work with regulators and law enforcement to make the system work more effectively. It is also apparent, however, that the cost of meeting these requirements has increased significantly and will continue to do so. We believe that the survey results will be illuminating to senior executives of banks and AML professionals as well as to regulators, law enforcement agencies, and governments around the world. For banks, there is much of interest by way of future trends, peer comparison, and opportunities. For the law enforcement community and policymakers, the survey gives a snapshot of how the increase in AML regulation has been received by the industry, and should provide food for thought regarding future policy direction. Our thanks go to the 209 banks and their senior executives who participated in the survey. Brendan Nelson Adam Bates Global Chairman Global Chairman KPMG Financial Services KPMG ForensicSM © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  5. 5. 4 | GLOBAL ANTI–MONEY LAUNDERING SURVEY 2004 Executive Summary KPMG’s Global AML Survey 2004 explored the range of challenges that banking institutions face in complying with enhanced AML requirements and how they are responding to the changed environment. The survey covered the following topics: 1. The Role of Senior Management in AML Issues 2. The Cost of AML Compliance 3. AML Policies and Procedures 4. Formal Monitoring of AML Systems and Controls 5. Risk-Based Approach and KYC Activity 6. Retrospective Remediation 7 Transaction Monitoring . 8. Suspicion Reporting 9. Training 10. Attitudes toward Regulation KPMG commissioned Consensus Research, an independent research agency based in the United Kingdom, to conduct a telephone survey of banks across the major sectors (retail, corporate/business, private, investment, and wholesale). These banks were drawn from the top 1,000 global banks, supplemented by key local banks from seven regions (see chart at left). Fieldwork was carried out between March 1 and March 26, 2004, and responses were obtained from 209 banks based in 41 countries. The caliber of survey respondents was high, with job titles ranging from Group Money Laundering Risk Officer (MLRO) (36% of the total sample) and Head of Compliance (33%) to Head of Legal and Head of Risk. Analysis of Respondents by Region Many of those surveyed operate across several market sectors and in a number of countries around the world. 37% 40 Approximately a quarter have operations in more than four 35 countries; nearly half, however, operate in a single 30 jurisdiction. For the purpose of the survey, we have % of Responses 24% grouped the banks into various regions. Details of which 25 countries are included in each region, and how many banks 20 16% responded from each country, are set out in Appendix I: 15 Details of Respondents.3 10 7% 7% 5% 4% 5 AML is now a high-priority issue within banks. 0 Respondents reported a significant and increasing focus on Western ASPAC North Latin Russia Africa Middle Europe America America East AML issues at the senior management level. We have summarized the major developments in AML law and Source: KPMG LLP in the United Kingdom, 2004 regulation worldwide over the last 60 years in Appendix IV: Selected AML Chronology. As this summary shows, the last 20 years, and most particularly the last five, have seen unprecedented activity by governments, regulators, and supra-national bodies in the AML sphere. As a result of this rapid development, AML has become a key issue for senior management because the possibility of an AML-related failure now poses significant potential reputational risk, both domestically and for banks’ international operations. © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  6. 6. HOW BANKS ARE FACING UP TO THE CHALLENGE | 5 The cost of AML compliance is increasing sharply. The cost of AML compliance has risen significantly over the past three years, with the average reported increase being 61%. None of our respondents reported a decrease in investment. Most also envisage a continuing increase in expenditure over the coming three years, at a lower, but still substantial, rate. Enhanced transaction monitoring is the main area of increased AML spending. Transaction monitoring activity has been the main cause of increased AML spending over the past three years; respondents anticipate that it will also be the main area of AML expenditure over the next three years. The challenge all banks now face is to build on and enhance existing systems. In doing so, banks need to continue to use a risk-based approach, assessing the relative risks that they face from individual products, relationships, and jurisdictions. Respondents anticipate that Training continues to be of vital importance, with face-to-face training strongly transaction monitoring will preferred. The second biggest area of increased AML past and future spend is the provision of training to staff. Although almost two thirds of respondents use computer- be the main area of AML based training, only 22% believe that it is the most effective method. Respondents expenditure over the next strongly believe that face-to-face training is the most effective method; in practice, they have to balance the difficulty and cost of rolling out face-to-face training with the three years. wider reach and lower expense of computer-based training. Establishing a global policy is a major challenge. Nearly two thirds of respondents have a global AML policy, although in half these cases detailed implementation is undertaken at a local level. While this approach does allow local issues to be addressed, it leaves organizations facing the risk of inconsistent application as well as the risk of potentially inappropriate customers having access to other parts of the bank. Increasingly, KPMG is finding that organizations require that local bank operations meet the higher of global AML standards and local legislative/regulatory requirements, waived only with dispensation from the global head office. Banks increasingly understand the importance of AML compliance for existing as well as new customers. Nearly three quarters of respondents had programs in place to remediate information gaps on their existing customers, who may have been taken on before the introduction or strengthening of KYC or account-opening laws and guidance. Such exercises are often viewed solely in terms of cost, but KPMG’s experience is that they can often provide significant benefits to banks both in terms of improved customer relationship management and more accurate management information. Testing and monitoring of AML procedures needs to be independent and coordinated. Most respondents have a formal program of independent testing of AML systems and controls, carried out by a range of internal or external resources. Senior management needs to help ensure that the monitoring process is independent of the areas of the business responsible for operation of the procedures and is coordinated such that the results provide a coherent and holistic view of the AML systems and controls and their implementation in practice. © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  7. 7. 6 | GLOBAL ANTI–MONEY LAUNDERING SURVEY 2004 Banks are adopting a risk-based approach. Increasingly, institutions are taking a risk-based approach to AML efforts, with most respondents requiring stricter KYC requirements for new customers depending on the risks that they pose. Nonetheless, a relatively low proportion of banks take account of whether their customers are politically exposed persons (PEPs). Key Questions for Senior Management on AML Issues The volume of suspicious activity reporting is rising • Does our board and senior management consider AML around the world. Two thirds of banks indicate that they have to be a high priority and do they actively demonstrate generated a greater number of suspicious activity reports their commitment to the bank’s AML effort? (SARs) over the last three years. This can be attributed in part • Has the senior management team signed off the AML to increased use of electronic monitoring systems, suggesting policy, and does it apply on a global basis? that the marked investment in these tools has proved beneficial; it also confirms the benefits accruing from the • How does senior management help ensure that the increased investment in training confirmed by the survey. overarching bank AML policies are implemented effectively and in all jurisdictions? The regulatory burden is generally regarded as acceptable, • Have we adopted a risk-based approach to the but a significant number of banks believe that AML identification of new customers, and is it sufficiently requirements could be more effective in combating money rigorous in identifying the relevant risks? laundering. Encouragingly, a vast majority of respondents (84%) believe the burden of AML requirements to be • Do we have a formal remediation program in place for acceptable, which illustrates the high degree of commitment our long-standing customers, and if not, how within the industry to supporting the global AML effort. More comfortable are we with the potential AML risk of our existing customer base? than half, however, considered the requirements could be made more effective. A number of themes emerged such as a call for • Have we reviewed our transaction monitoring capability better feedback from governments and Financial Intelligence and approach, and is it appropriate for our business and Units (FIUs) as well as for better coordination of AML policy at a customer base? global level. While a significant number of respondents called for more prescription in AML requirements, global opinion is • Are our procedures for identifying and reporting suspicions suitable, rigorous, and understood by all the clearly divided on the subject as many others sought a more relevant staff? flexible, risk based approach. Respondents in Americas, Africa, and the Middle East tended to hold the former view, while • Have we helped ensure that our AML training is Western European respondents tended to hold the latter. appropriate and sufficient for our staff? Looking ahead. It is clear that respondents have increasingly • Have we identified the potential opportunities and embedded AML policies and procedures into their standard benefits from our AML activity for the rest of the business (e.g., credit card and fraud prevention)? business operations. They are now seeking to enhance their existing AML systems and controls, whether these are fully • Do we as an organization have good active relationships automated or rely more on manual processes. The challenge is with law enforcement, policymakers, and the relevant to help ensure that policies are rolled out consistently across regulators? banks, and that management can obtain comfort that this is being done effectively. KPMG’s experience is that such enhancements will allow banks greater leverage and benefits from their AML investment in improving their understanding of their individual customers and in their customer relationship management processes. There are also opportunities for operational savings through linking the AML process with fraud prevention and credit control. © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  8. 8. HOW BANKS ARE FACING UP TO THE CHALLENGE | 7 Detailed Survey Results 1. The Role of Senior Management in AML Issues Key Issues Industry leaders worldwide face broad new responsibilities as a result of new laws, regulations, and reporting requirements, many of which have focused on improving corporate governance—including, for example, Sarbanes-Oxley in the United States, the Combined Code in the United Kingdom, and Corporate Law Economic Reform “Effective KYC procedures embrace Program (CLERP) 9 in Australia. Recent AML legislation and regulator pronouncements routines for proper management have focused particularly on the importance of senior management’s role. oversight, systems and controls, Traditionally, compliance issues have not been a high priority for many at senior segregation of duties, training and management level; today, the risk of reputational damage, regulatory action and, in other related policies. The board some jurisdictions, personal liability for non-compliance, has placed AML near the top of directors of the bank should be of the senior management agenda. fully committed to an effective KYC program by establishing Survey Results appropriate procedures and Not surprisingly, the survey results suggest an increasing focus on AML among senior ensuring their effectiveness.” management, although there is certainly room for further progress. Sixty-one percent of respondents believe that AML is a high-profile issue within their banks, with the most Paragraph 55 of “Customer senior level of management, including board members, taking an active interest. Only Due Diligence for Banks” issued by the 5% of respondents consider it to be a low-profile issue with little senior management Basel Committee, October 2001. interest or involvement. It appears to be a very high-profile issue in Latin America (87%) and the Middle East (88%), although less so in ASPAC (49%) and Africa (50%). The 60% figure for Western Europe is somewhat surprising. Although almost all respondents from some countries (the United Kingdom, Belgium, Spain, and Switzerland) thought it high profile, those from Germany were split equally between high and moderate profile, all four from the Netherlands thought it moderate profile, and four of the seven from Austria saw it as moderate and two as low profile. This relative lack of profile may reflect the absence of major AML scandals in these countries in recent years. Profile of AML for Respondents’ Senior Management Total Western Europe North America ASPAC Latin America Russia Africa Middle East 100 88% 90 87% 80 70 67% 61% 60% 60% 60 % of Responses 50% 49% 49% 50 40% 40% 40 34% 31% 30% 30 20 13% 12% 10% 9% 10 5% 3% 2% 0% 0% 0% 0 High Profile Moderate Profile Low Profile Source: KPMG LLP in the United Kingdom, 2004 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  9. 9. 8 | GLOBAL ANTI–MONEY LAUNDERING SURVEY 2004 Implications and Opportunities Senior Management: In Senior management set the tone and focus of banks’ AML compliance arrangements the Line of Fire for AML in three key areas, which together provide the overarching control framework: Compliance Failures? Switzerland – Senior management 1. Setting the bank’s policies and procedures has specific responsibilities to guarantee the “fit and proper” 2. Delegating responsibilities through a clear and logical structure requirement, which includes 3. Formal monitoring of the operation of processes and controls, and ensuring that personal responsibility for senior management receives appropriate management information on the business approving accounts related to and controls “politically exposed persons. ” The ultimate sanction for failure is withdrawal of a banking license. Meeting the Challenges—A Model Approach The diagram below provides an example AML governance framework. Australia – The Australian Commonwealth Criminal Code A Model Anti–Money Laundering Framework Act of 1995 addresses the concept of corporate culture and responsibility, which includes intention, knowledge S en i o r Man agemen t or recklessness at board or “high-managerial” level. Reporting Policies Legal and AML Regulatory Compliance I n tern al Au d i t R evi ew s Kenya – Guidelines issued by Requirements Officer R i s k As s es s men t the Central Bank place a burden Procedures Monitoring on senior management to adhere to KYC principles and report Monitoring External Internal Verify Client for Suspicious Reporting to suspicious transactions to the Reporting Identity Information Activity Authorities Central Bank. However, Kenya has yet to enact AML legislation (expected late 2004), which currently inhibits the enforcement Domestic and Training and International of such guidelines. Awareness Pronouncements United States – The Department of Justice guidelines entitled R ec o rd -Keep i n g Federal Prosecutions of Business Organizations, published in 2003, Source: KPMG LLP in the United Kingdom, 2004 emphasize that an effective compliance program will be seen Most banks are capable of developing both high-level policy and detailed procedures. as a mitigating factor when prosecuting corporate misconduct, The formal and informal infrastructure connecting the policy and procedures is more which includes AML breaches. In difficult to get right. Management’s role is crucial in pulling the pieces together and assessing effectiveness, one of ensuring there is no gap between intention and reality. the factors taken into account is whether specific high-ranking members of senior management Key Questions: The Role of Senior Management in AML Issues actively oversee compliance with standards and procedures. • Have we embedded a clear AML culture within our organization? United Kingdom – The Financial • Does senior management set a positive tone at the top of the bank for Services Authority’s approach AML activities? under its new rule book has focused on senior management • Does senior management actively oversee its AML compliance program? responsibilities for all systems and controls matters; its Statement of • Do we have a constructive and ongoing dialogue with our regulatory Principles for Approved Persons authorities, law enforcement, and the relevant policymakers? specifically includes responsibility for AML activity. © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  10. 10. HOW BANKS ARE FACING UP TO THE CHALLENGE | 9 2. The Cost of AML Compliance Key Issues Senior executives’ corporate governance responsibilities are prompting them to focus on a variety of compliance issues. Evolving “best practice, supported by regulatory ” and financial reporting obligations, is that compliance should no longer be isolated in one department but should be embedded in day-to-day processes enterprise-wide—as are its costs. Internal audit, regulatory compliance, and numerous other departments are typically involved in AML compliance efforts, with direct and indirect costs spread across departments and budgets. Moreover, some of these costs may be attributed to customer relationship management, rather than AML efforts. The true cost of AML compliance is therefore difficult to quantify consistently. Survey Results The reputational and regulatory risk faced by financial institutions for non-compliance with AML requirements has substantially increased. It is therefore not surprising that the cost of AML compliance that respondents are aware of and can measure has already risen significantly. Eighty-three percent of all respondents (and 94% of North Americans) report that costs have risen over the past three years; no respondent reported a decrease in investment. The average increase over the period was 61%. Respondents’ Estimates of % Increase in AML Investment Over the Last Three Years Compared with the Next Three Years The trend is set to continue, with 81% of Past Spending Future Spending respondents expecting AML costs to continue to 50 rise. The expectation across all regions is for a The average estimated increase in past spending is 61%, and 43% for future spending substantial but lower level of increase in the future, 40 with the overall average being 43%.4 34% % of Responses 27% 30 Significantly, in terms of the size of the increased 22% 22% 22% investment, 29% of respondents in North America 20 reported a rise of more than 100% over the past 14% 11% 11% three years. This result reflects the impact of 10% 9% 9% 9% 10 recent legislative and regulatory changes in the United States since 2001, most notably the USA 0 PATRIOT Act, and the fact that some institutions 10–20% 21–50% 51–100% More Than Don’t Less than 100% Know 10% needed to “raise their game” substantially to Increase in Costs meet the strengthened requirements. Source: KPMG LLP in the United Kingdom, 2004 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  11. 11. 10 | GLOBAL ANTI-MONEY LAUNDERING SURVEY 2004 Respondents’ Estimates of Average % Increase in AML Investment (Over the Last Three Years) and % Increase in Future Spending (Over the Next Three Years) % Increase - Past Spending % Increase - Future Spending 100 80 73% 72% 66% 66% 64% 63% 61% 55% % of Responses 60 54% 53% 48% 46% 43% 36% 40 26% 22% 20 0 Western North ASPAC Latin Russia Africa Middle Total Europe America America East Source: KPMG LLP in the United Kingdom, 2004 Respondents were asked to name the areas where AML spending had increased over the past three years. Transaction monitoring was chosen as the main driver of increased spending. Other areas, including the provision of training and remediation, also scored strongly. When asked to name the areas where they expected AML spending to increase over the next three years, perhaps unsurprisingly respondents again indicated transaction monitoring followed by the provision of training. Other areas were all expected to lead to additional spending, reflecting and confirming that work continues to be required on a broad range of issues. Respondents’ Estimates of Areas of Greatest Additional AML Spending Over the Last Three Years and Over the Next Three Years Past Spending Future Spending 4.18 Transaction Monitoring 3.81 3.66 Provision of Training 3.21 Remediation of KYC Documentation 3.55 for Existing Customers 3.04 3.57 External Reporting Requirements 3.02 3.14 Account-Opening Procedures 2.8 3.22 Internal Reporting Requirements 2.73 3.09 Introduction of Global Procedures 2.7 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Scale of 1 (no investment needed at all) to 5 (greatest investment needed) Source: KPMG LLP in the United Kingdom, 2004 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  12. 12. HOW BANKS ARE FACING UP TO THE CHALLENGE | 11 Regionally, some differences emerge in future spending priorities. The results for North America show a somewhat different order of priorities compared with results in other regions.5 While all respondents identify transaction monitoring and the provision of training as the two largest contributors to increased investment, the third biggest increase in North America (compared with fourth globally) relates to external reporting to the regulator or external law enforcement agencies; enhanced account-opening procedures come fourth (compared with fifth globally). Again, these variances may reflect a differing regulatory focus and the impact of the USA PATRIOT Act on the AML compliance should behavior of banks in the United States. not be seen as a stand- Few respondents provided answers when asked to estimate the overall cost of AML alone activity, and compliance to their banks. Those who did provided figures that, in KPMG’s experience, seemed low, suggesting that respondents may have included only direct costs. This opportunities should be result appears to underscore the difficulty institutions face in accurately measuring the taken to use AML work to wide range of costs associated with AML compliance. support other processes Implications and Opportunities wherever possible. That AML compliance costs have increased and are increasing comes as no surprise given the radical changes in the legal and regulatory landscape in the past three to five years. The challenge for the banking industry is to spend wisely. The main objective will be to help ensure that the AML compliance program protects the bank adequately from money-laundering risk and meets the requirements of the relevant laws and regulations. However, AML compliance should not be seen as a stand-alone activity, and opportunities should be taken to use AML work to support other processes wherever possible. For example: • Customer profiles from KYC or transaction monitoring activity can be used within customer relationship programs, including in identifying opportunities for cross-selling. • Management information can be enhanced by using accurate, up-to-date statistics on current customer populations, appropriately stratified by activity and risk rating. • Opportunities for cost containment or reduction can be found through linking AML processes with other connected processes such as credit control (through, for example, avoiding duplication of effort on client acceptance) and fraud prevention (through, for example, using the output of monitoring to review for possible incidents of fraud). Key Questions: The Cost of AML Compliance • How does our previous and anticipated future change in spending on AML compare to the benchmark for our peers? • Have we sought to integrate the range of information available through our AML and customer relationship management processes? • Have we considered the financial and operational benefits of linking our AML activities with processes such as credit control and fraud prevention? © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  13. 13. 12 | GLOBAL ANTI-MONEY LAUNDERING SURVEY 2004 3. AML Policies and Procedures Key Issues “…A bank should aim to apply its Policies and procedures derive from organizational culture, represent the core values of customer acceptance policy, the organization, and require a formal framework, supported by senior management, to procedures for customer help ensure their efficient implementation and acceptance. AML policy sets the tone identification, process for for the institution’s approach to AML compliance. AML procedures document the detail monitoring higher risk accounts of the systems and controls on which institutions rely. and risk management framework on a global basis to The increasingly global environment in which financial institutions operate and the all its branches and subsidiaries increased regulatory and reputational risk that they face suggest that banking groups around the world. The bank should clearly communicate should be taking an increasingly international approach to their policies and these policies and procedures procedures. Consequently, the survey asked respondents about their approach to and ensure that they are fully AML policies and procedures. adhered to.” Survey Results Paragraph 6 of “Consolidated KYC Risk Respondents were asked to identify which of three possible alternatives most closely Management, Consultative Document ” reflected their approach to AML policy and procedure setting. issued by the Basel Committee, October 2003. Statement Best Describing Respondents’ AML Policies and Procedures Total Western Europe North America ASPAC Latin America Russia Africa Middle East 100 93% 90 80% 80 70 63% 60 53% % of Responses 50 46% 41% 41% 39% 40 36% 35% 32% 30% 29% 27% 27% 30 25% 24% 20% 20% 20% 20 12% 7% 10 0% 0% 0 AML policy is developed at a There is a global AML policy but AML policies and procedures are global level and implemented detailed procedures are set at a developed and implemented at a consistently worldwide. regional/local level. regional/local level. Source: KPMG LLP in the United Kingdom, 2004 Responses were divided almost equally among the three approaches. Thirty-five percent of respondents continued to develop and implement both policies and procedures at a local level, reflecting the fact that a number of respondents operate solely in a single country. The remaining 65% stated that they do have a global AML policy, although implementation varies. Nearly half of these (29% of total respondents) have developed policies and procedures at a global level and implemented them worldwide. The remainder (36% of the respondents) do have a global policy but allow © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  14. 14. HOW BANKS ARE FACING UP TO THE CHALLENGE | 13 The Swiss AML Ordinance The Swiss AML Ordinance applies not only to Swiss financial institutions but also to branches and subsidiaries of such institutions located abroad (Article 3). Article 9 confirms that financial institutions are required to identify, mitigate, and monitor the legal and reputational risks associated with money laundering “There is a conflict of standards for banks. on a global basis. On the one hand, there is the requirement to gather as much information as possible Banks are required to inform the Swiss Banking Commission where local on the customer, but on the other hand regulations prevent compliance with the basic principles in the ordinance, or the law requires that some of this where they would suffer a serious competitive disadvantage by meeting the information cannot be shared with other requirements of the ordinance. parts of the group. This is an absurd conflict situation. ” The Draft EU Third Money Laundering Directive The draft text of the EU Third Money Laundering Directive includes in Article Austrian respondent 27 the requirement that banks apply the directive’s obligations on customer identification as far as possible in all branches and subsidiaries outside the EU; where local legislation does not require equivalent measures to be taken, banks are then required to notify their EU regulators. detailed procedures to be set at a regional or local level. Although 93% of Russian respondents stated that they set and implement AML policies globally, two-thirds of Russian respondents currently operate only in that country. Implications and Opportunities Leaving detailed implementation of global policies to local discretion leaves banks open to risk. A number of banks with operations in several countries have been let down by local implementation of established global standards, through a lack of either understanding or appropriate oversight. Customers may be taken on in a jurisdiction where standards are less robust than elsewhere and thereby gain access to the global bank. Members of senior management are exposed if they are not aware of, or have not agreed to, regional differences in application of the global policy to which they are committed. There is, however, a potential competitive disadvantage to implementing global procedures in local markets, as these global standards may be more onerous than those applicable to local competitor banks. Key Questions: AML Policies and Procedures • How consistent are our KYC policies globally? Are they consistent across all products and services? How well are they followed and enforced around the world? • How can we prevent group standards from putting our banks at a competitive disadvantage in certain other jurisdictions? © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  15. 15. 14 | GLOBAL ANTI–MONEY LAUNDERING SURVEY 2004 4. Formal Monitoring of AML Systems and Controls Key Issues As expectations of senior management have become more clearly identified, including a more active involvement in their bank’s AML activities and approach, so too have expectations for how banks assess the effectiveness of their systems and controls. Regulatory expectations for AML processes and procedures have developed significantly over recent years. It is no longer enough to delegate responsibility for AML or any other aspect of the business without then ensuring the effective implementation of what has been delegated. Regulators expect that new or existing procedures are tested for adequacy and appropriateness on a regular basis, and doing so is good corporate governance and business practice. Survey Results When asked whether their banks had a formal program of independent testing of AML systems and controls, the response was strongly affirmative except in Western Europe and Africa: all other regions showed 82% or more responding positively, with 91% in North America and 100% in the Middle East, compared with 59% in Western Europe and 60% in Africa. The Western Europe results conceal significant differences between countries. All respondents from four countries (the United Kingdom, Italy, Portugal, and Ireland) and 88% of those from Spain undertake formal monitoring. Against that, 11 of 14 in Germany, 5 of 7 in Belgium, the 2 Swedish respondents, the 2 Danish respondents, and 3 of the 7 Swiss respondents said they did not have a formal monitoring program. That said, Respondents with Formal Program for Testing Effectiveness of AML Systems and Controls the German regulator requires external auditors to review banks’ AML arrangements; in Belgium external auditors are required to report to the 100% 100 93% 91% Belgian regulator on a bank’s compliance with a 87% 82% number of legal and regulatory issues, including 75% 80 AML; and Swiss banks must have programs in % of Responses 60% place to monitor their compliance with AML 59% 60 requirements. It may be, therefore, that some form of monitoring is taking place at the 40 respondents’ banks, but they did not consider it to be a formal monitoring program. 20 We also asked those respondents who had 0 Western North Latin Russia Africa Middle Total ASPAC a formal program in place which function Europe America America East (or functions) within the bank carried out Source: KPMG LLP in the United Kingdom, 2004 the monitoring. Banks predominantly use internal independent control functions to test and monitor the effectiveness of AML systems and controls, with 68% of respondents using internal audit and 48% using compliance. Operations and external auditors are also used to test and monitor effectiveness of systems and controls, although in no cases as the sole provider of independent monitoring. © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  16. 16. HOW BANKS ARE FACING UP TO THE CHALLENGE | 15 Respondents’ Functions with a Role in Testing and Monitoring Effectiveness of AML Systems and Controls 100 90 “The banking group’s internal audit and compliance functions are the principal 80 mechanism for monitoring the application 68% 70 % of Responses of the bank’s global KYC policies and procedures, including the effectiveness of 60 the procedures for sharing information 48% 50 within the group.” 43% 40 33% Paragraph 19 of “Consolidated KYC 30 Risk Management, Consultative ” 21% Document issued by the Basel 20 12% Committee, October 2003. 6% 10 0 Operations Compliance Internal External Financial External Other Audit Audit Crime Consultants /Fraud Prevention (Options are not mutually exclusive.) Source: KPMG LLP in the United Kingdom, 2004 Implications and Opportunities Banks work hard at putting in place appropriate policies and procedures to meet “It is important that there is a regulatory requirements, but this effort can give a false sense of security if the independent AML team within each bank procedures are not working in practice. Effective monitoring helps to establish whether which is at a senior level within the bank procedures are working and also helps to identify the reasons behind any failures. and reports directly to the board.” Monitoring can be performed by a range of internal or external resources. The key is to Indian respondent help ensure that the monitoring process is independent of the areas of the business responsible for operation of the procedures, and to help ensure that there is a channel of communication to report any deficiencies to senior management. It is also important that the monitoring effort has comprehensive coverage across the AML compliance program and that the results are pulled together to provide a coherent and holistic view of the overall approach and the way in which it is implemented in practice. Key Questions: Formal Monitoring of AML Systems and Controls • How do we confirm that policies and procedures are working effectively in practice? • How do we help ensure that key AML issues, including those relating to systems and controls, are reported to senior management? • How do we help ensure that actions are taken to address all identified deficiencies as well as risks that are not covered? • How do we help ensure that the lessons arising from monitoring activity are clearly identified, understood, and promulgated around the organization? © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
  17. 17. 16 | GLOBAL ANTI–MONEY LAUNDERING SURVEY 2004 5. Risk-Based Approach and Know Your Customer Activity Key Issues The increasing global focus on corporate governance has led banks to adopt risk- based approaches to focus their efforts and resources more effectively on the higher- risk aspects of their operations. This approach has been mirrored in the regulatory arena, where regulators worldwide increasingly expect institutions to consider how “KYC safeguards go beyond simple account opening and record-keeping and the specific risks inherent in their particular business and operational processes have require banks to formulate a customer been addressed in meeting a variety of objectives—from capital adequacy (Basel II) to acceptance policy and a tiered customer financial reporting (Sarbanes-Oxley). identification program that involves more extensive due diligence for higher risk The requirement to know your customer underpins global efforts to counter money accounts, and includes proactive account laundering, and it is a legal requirement in most jurisdictions. When a bank takes on a monitoring for suspicious activities. ” new customer, it provides the customer with an entry point to that bank both locally and internationally as well as to the wider financial system. It is therefore fundamental Paragraph 4 of “Customer Due Diligence that banks understand their customers’ circumstances and financial situation and know for Banks, issued by the Basel ” Committee, October 2001. with whom they are dealing. Banks that do not comply sufficiently expose themselves to reputational risk as well as the risk of formal legal or regulatory sanction, often whether or not any actual money laundering is proven to have occurred. Survey Results Evidence that institutions are taking a risk-based approach to AML at the account- opening stage, at least to some degree, is shown by the fact that 81% of respondents overall tailor their KYC requirements for new customers, depending on the level of risk initially attributed to them. Western Europe has almost the lowest proportion of banks that adopt stricter KYC requirements according to the risk posed by the customer. This figure can be attributed to three countries: 5 of 14 German banks, 3 of 8 Spanish banks, and both Irish banks surveyed do not use a risk-based approach. While Respondents That Employ a Risk-Based these different approaches may reflect local Approach at the Account-Opening Stage legislative requirements, this apparent inconsistency may well change with the proposed 100% EU Third Money Laundering Directive, which 100 requires that banks formally introduce a “risk- 88% 87% 85% 81% 80% sensitive” approach to customer identification. 78% 76% 80 % of Responses Those who do take a risk-based approach were 60 asked what factors they took into account when risk-rating a customer.6 40 In KPMG’s experience, all the risk factors are 20 relevant in assessing customer risk. The survey results show that many of these factors are 0 taken into account by respondents who adopt a Total Western North ASPAC Latin Russia Africa Middle Europe America America East risk-based approach, but that practice is by no means consistent. Source: KPMG LLP in the United Kingdom, 2004 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.

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