Money laundering, along with other financial crimes, poses a constant threat to financial institutions. The risk of falling into business with criminal elements, drug smugglers, corrupt government officials, and terrorist organisations is ever-present. Therefore, financial institutions must design and implement a robust anti-money laundering (AML) policy to avoid risk.
AML and Combating the Financing of Terrorism (CFT) policies and legislation have been established and applied on different levels, from local to worldwide, to combat financial crime. However, it is the duty of financial institutions to translate complex AML and KYC regulations and implement them in their day-to-day dealings. They need to understand the intricate AML/CFT rules and build their AML policy.
What is an AML Policy?
An AML policy refers to a series of well-designed measures used by financial institutions to stop “dirty” money, which is obtained through illicit activities, from being reintroduced into the mainstream financial system. The designing, drafting and implementation of such a policy are mandatory for all financial institutions and are overseen by regulatory authorities.
Who creates and regulates AML laws?
Most often, the AML policy drafted by a business is a mixture of the recommendations by international agencies such as the Financial Action Task Force (FATF) and regional/national AML laws and best practices.
The geographical location of a business determines the regulatory authority that is directly responsible for monitoring transactions and dealings. For example, the Monetary Authority of Singapore in Singapore, the Financial Crimes Enforcement Network (FinCEN) in the US and the Financial Conduct Authority (FCA) in the UK.
How to create an AML policy? (An AML policy template)
We have outlined the key steps you need to take in order to draft an AML policy for your company.
The steps mentioned below are with reference to the Bank Secrecy Act (BSA) in the US, the Anti-Money Laundering Directives in the European Union and various FATF recommendations.
Step 1: Define the Purpose of AML Policy
A financial institution must start off the AML policy drafting process by introducing and elaborating on three key statements:
- Definition of money laundering and terrorist financing
- Reasons why an AML policy is necessary for the institution
- Regular regulatory review requirements to stay within compliance demands
These are the three foundational pillars on which a company builds its AML policy.
Step 2: Appoint an AML Officer
At this point, a financial institution needs to hire an AML compliance officer. This is a company member responsible for everything concerning the business’s AML programme. State their name, qualifications, and responsibilities. They must be well-versed in financial law, AML policies, AML technologies, and all other relevant information.
Additional AML compliance staff must be hired in line with the workload of the financial institution.
Step 3: Report Progress to the Financial Intelligence Unit (FIU)/Relevant Financial Authority
A company must describe its strategy and how it will be able to comply with financial intelligence units and law enforcement requests for information on criminal activity. A company must describe its actions and procedures that will be initiated upon such a demand from the authorities, and how it shall document the situation.
Step 4: Follow Data Security Measures/Share with Authorities
All financial institutions must take an active part in the process of sharing the accumulated AML data with other financial entities to identify and prevent money laundering elsewhere. The policy must describe a completely secure and confidential process that will not allow for data leaks.
Step 5: Follow Thorough Screening Procedures
As you may be aware, “Know Your Customer” (KYC) processes play an integral role in maintaining AML compliance and preventing financial crime. But, even before going into detail, implementing a thorough screening process for all potential clients before beginning any sort of business relationship or opening an account is a must.
One should cross-check if a potential client is on any financial blacklist or sanction before continuing to conduct business. An example of this is the US Specially Designated Nationals List (SDN).
A company must also have a well-defined process in place to do this. This should be drafted, written, and given to each potential client. It must also be subject to constant updates based on changing regulatory requirements.
Step 6: Verify your Client’s Identity
This is where the KYC process kicks in. Once the first level of screening is complete, verifying the identity of your client is the central part of AML compliance. Each company must specify a list of comprehensive, measurable, and reliable factors that will help accurately verify the identities of their clients when they open accounts or register with your service.
An identity check is the central part of an AML compliance policy. Here, a company must specify a list of comprehensive and reliable measures that will help them accurately verify the identities of their clients upon opening an account or registering in their service. There are eight major points to correctly establish this part of a business AML policy:
- What personal data is gathered
- If a client submits false data or no data at all
- Information verification process
- Time limit for checklist and waitlist items
- If a client cannot be verified
- Methods of recording the AML process
- Client notification process
- Whether identity verification is outsourced or in-house
Step 7: Perform Customer Due Diligence (CDD)
This step is about the measures taken as a part of Customer Due Diligence for those identified as follows: beneficial owners, senior management, politically exposed persons (PEP), and so forth. A company should also specify the basis of its risk rating system: how it determines whether the case requires simplified due diligence, customer due diligence, or enhanced due diligence. Here, it would be necessary to add when a customer triggers adverse media or sanctions list checks, be subject to ongoing monitoring.
Step 8: Carry Out Rigorous Transaction Monitoring
Transaction Monitoring forms a key process for financial institutions such as banks in the combat against money laundering. Each and every transaction must go through an AML monitoring system. Any breach of thresholds or suspicious transactions should be flagged and further investigated.
Step 9: Fill Out Suspicious Activity Reports
Lastly, a very important part of an AML policy is to promptly respond to the detection of suspicious activity and correctly form a compliant declaration – a Suspicious Activity Report (SAR). A company must specify the necessary information that needs to be mentioned in the report alongside the deadlines. As an example, BSA gives thirty days to file a report before issuing a fine.
The Role of Technology in AML Policy
Apart from necessary human resources, banks and financial services should have technological resources to carry out their AML compliance activities and duties effectively. Technology solutions can help immensely in the better implementation and running of an AML policy. In present times when financial institutions deal with thousands of customers and millions of transactions, software solutions can play a major role in reducing errors and enhancing operational efficiency.
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