Top 10 op risks: AML

The fourth of our series of top 10 op risks for 2014 looks at anti-money laundering. Preventing money-laundering is set to become just one aspect of the broader effort to clamp down on all kinds of illegal transactions

2014 will see continued growth in anti-money laundering (AML) spending by banks around the world, as regulators tighten up inspections and reporting requirements to fight money laundering – a category that now covers sanctions evasion, tax evasion and bribery as well as the traditional definition of concealing the origin of illegally obtained money.

One of the highest-profile efforts in this area is the US Foreign Account Tax Compliance Act, or Fatca. In mid-2013 the US Treasury and Internal Revenue Service announced – to widespread exasperation – that the withholding requirements it imposes on foreign financial institutions would not now come into force until July 1, 2014, rather than January 1. More implementation time isn't necessarily good news, banks have complained, since it removes – or reduces – the pressure that the end-2013 deadline had imposed on the US and other governments to come up with final compliance requirements.

Pushing towards these will be a major concern for the industry and its regulators in 2014, complicated by the uncertainty around the intergovernmental agreements that are designed to implement Fatca at a government-to-government level rather than directly between individual banks and the US Treasury.

On the bright side, draft forms of the agreements governing the compliance requirements for most non-US banks have now been released, and the first half of 2014 should see increasing clarity on the practical requirements of Fatca once it comes into force.

Fatca won't be the only concern in 2014 either. Other regulators continue to hammer the financial industry for persistent weaknesses in AML precautions. The latest was the UK Financial Conduct Authority (FCA), whose investigation of AML at UK asset management firms and fund administrators revealed widespread shortfalls.

In many cases, the regulator found, firms had some AML procedures in place but seemed to enforce them in only a half-hearted way, with senior management lax in enforcing and challenging the application of AML policies. In other cases, AML examinations were done far too rarely and (in one case) only done just before the inspectors turned up at the door.

Treating AML and anti-bribery and corruption issues as "a compliance matter rather than as part of proactive risk management" was another widespread failing, suggesting that tighter rules and tougher penalties have merely led to a tick-box mentality rather than any actual change in organisational culture and strategy.

In particular, the FCA wrote, many of the firms studied were lax on due diligence of third parties – relying on them for customer due diligence, but failing to check up on the procedures being used. This is not a problem limited to the UK: the widespread use of "introducers" has been a significant obstacle for Cypriot regulators trying to improve their industry's reputation, and convince the rest of the world that the island is more than simply a haven for Russian money wishing to avoid attracting attention.

The FCA also echoed other regulators, and AML experts, in treating AML as part of the unified topic of preventing illicit money transfers – a topic that also includes tax compliance, anti-bribery regulations, counter-terrorist financing (CTF) and sanctions compliance. Trade finance is a particular weak spot from the point of view of several of these subjects, the FCA warned in July – complex international transactions and poor precautions had let illicit transactions slip through on many occasions.

At an international level, the regulators themselves will come under closer scrutiny: in 2014, the Financial Action Task Force (FATF) will no longer simply inspect national regulations for compliance with FATF standards on money laundering. For the first time, FATF will also assess how effective the regulations are in practice, by looking at details of individual money-laundering cases detected and prosecuted. FATF president Bjorn Aamo, a former head of the Norwegian Financial Supervisory Authority, told OpRisk: "We will be asking, ‘do your banks regularly report business actions? And when you get information, what do you do with it? Have you any cases brought to the court?' Even in the cleanest of societies, if there are no reports, then that is too good to be true. So this is part of the exercise."

Going forward, closer integration of AML with other related topics looks inevitable. The FCA condemned "silo" treatment of issues like AML and anti-bribery, and, especially for large projects such as the construction of do-not-bank lists and legal entity identifiers, the advantages to a unified approach seem obvious – though even this will be a significant technical challenge, dwarfing the current project of drawing up a legal entity identifier list for swap participants.

FATF's worry list
Failure to address AML and CTF shortfalls poses a serious threat to the financial system.
Subject to countermeasures:
Iran	North Korea
Insufficient progress in addressing deficiencies, or no action plan to address them:
Algeria	Burma
Ecuador	Ethiopia
Indonesia	Kenya
Mongolia	Pakistan
Syria	Tanzania
Turkey	Yemen
Deficient, but action plan agreed:
Afghanistan	Albania
Angola	Antigua and Barbuda
Argentina	Bangladesh
Cambodia	Cuba
Iraq	Kuwait
Kyrgyzstan	Laos
Namibia	Nepal

 

Our previous Top 10 Operational Risks for 2014...

Index rigging
Board overstretch
Data theft
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