In the world of risk management and financial services, few topics are as important, or as regularly scrutinized in the media, as anti-money laundering (AML) compliance.
Numerous headlines involving organizations from challenger banks to major global institutions underscore the risks that can come with reactive AML strategies—when action has been taken by the bank after regulatory intervention.
In some instances, AML deficiencies have led to regulators barring financial institutions from onboarding new customers in certain regions. Being denied access to key markets, even temporarily, is of course a competitive disadvantage and a cost banks won’t want to bear.
But what does it mean to operate a proactive AML approach? And why might banks and financial institutions move beyond mere compliance to embrace a culture of ongoing vigilance?
Taking action as a response to regulatory intervention is important. Following regulatory scrutiny and investigation, if banks are found to have inadequate controls or due diligence processes, they often need to take corrective action and demonstrate that changes have been put in place. Depending on the circumstances, these actions might involve terminating a relationship with a high-risk customer, it might mean updating AML policies and practices, or it could mean re-training employees to correct deficiencies.
A reactive approach can carry significant costs. Global banks have paid hundreds of millions of dollars in fines to authorities for AML failures. There are also issues in regard to reputational harm that can come from negative news associated with AML failures. And in some instances, regulators have told institutions they can no longer onboard certain types of customers in specific regions—limiting business operations in particular countries.
Thus, the cost of identified AML failures may extend beyond fines to include:
So, what can banks do differently when it comes to AML screening? The answer could lie in taking a proactive stance.
A proactive AML approach might include continual monitoring of changing risks across a customer base—leveraging a perpetual KYC approach, which looks for relevant risk alerts and flags those to the relevant team in the bank. Or it could mean regular periodic reviews of high-risk customers, including robust re-screening or even enhanced due diligence processes.
This kind of approach to risk and compliance may help demonstrate that adequate, risk-based controls are in place to detect and prevent money laundering, as waiting to uncover risk can be a risk itself.
Other factors that could be considered as part of a proactive AML approach include:
As Nicola Passariello, Moody’s industry practice lead for compliance and third-party risk management, put it, “Never underestimate publicly exposed persons. In some countries, a member of a prominent, powerful family could be considered a politically exposed person, even though they don’t have an official role—they may still have significant influence.”
AML activity is not the sole responsibility of one department; many teams across a financial institution will play their role in creating a culture of compliance and risk-awareness.
Internal audit has a particularly important role in making sure controls are in place and that they are effective—this can mean regularly reviewing and challenging current practices. This is why internal audit is often known as the third line of defense in an AML strategy.
Audit teams may periodically review AML processes, recommend second opinions, and work with compliance teams to maintain vigilance.
The benefits of proactive AML processes and procedures are clear. By investing in robust controls, regular internal audits, and ongoing screening, institutions may be able to go some way towards avoiding the costs of regulatory enforcement actions, being denied access to markets, and reputational harm—which in turn can support business growth.
Moody’s offers advanced solutions to help financial institutions automate AML activity, including customer screening, ongoing monitoring, and risk assessment.
See how our technology could help streamline compliance workflows, reduce manual effort, and strengthen your anti-financial crime program. Get in touch with the team at Moody’s for more information.
Disclaimer: This article is intended for informational purposes only and does not constitute legal, regulatory, or compliance advice. All references to industry practices and regulatory actions are based on publicly available information.