KPMG, a member of the Big 5 global accounting firms, recently ran a survey of Anti Money Laundering requirements and the challenges that it imposes on banking institutions. The survey addressed the following items
1 The role of senior management in AML issues agency based in the United Kingdom,
2 The costs of AML compliance
3 AML policies and procedures
4 Formal monitoring of AML systems and controls
5 Taking a risk-based approach to ‘Know Your Customer’ activity
6 Politically Exposed Persons
7 Transaction monitoring
8 Training
9 Attitudes towards regulation
10 Sanctions compliance
While senior management were considerably more engaged in AML, the costs of AML compliance are shooting up (with greater investment in transaction monitoring and training), partially because of the fact that AML is being applied globally rather than regionally/country wise. The increased senior management attention is causing greater testing and monitoring but because of hugely increased volumes, a risk based approach is being increased applied to KYC activity. Politically Exposed Persons were even more under the microscope (See here for my previous entry on an example of Politically exposed person, corruption, AML and banking). While there is greater acceptance of the regulations but the sanctions compliance is the biggest challenge for the banks.
That said, one should expect further challenges. I already talked about how there is a challenge in the private banking side and how no amount of automation will ever stop this. As I mentioned before, insofar as terrorist or crime financing is concerned, the problems arise from the following facts
1. that a terrorist incident requires funding which is generally too low to be trapped. Let me explain. Take the latest Glasgow bombing event. The total cost of the overall operation would be less than £1000. Now that amount of money will be almost impossible to be trapped on almost any measure of AML or KYC identification dimensions. I, obviously cannot go further than this, but this is very difficult to trap for a bank, if not impossible.
2. that it is still ridiculously easy to side step official channels. Even if we wanted to have an illegal source of funds, it will be far too easy to get this via the hawala or the tourist money changer channels (let me put it in this way, the ease of which you can setup a money changer firm in some areas of the world is frighteningly easy). If you are reasonably sophisticated and wanted to go for a larger sum of money, then you wouldn't mess around with these piddly money changer or hawala channels but you will use the grand-daddy of corrupt channels, the over/under invoicing of trade and services globally. And the beauty of that is that the excess money is usually fully whitewashed and clean. And if you are a bit smarter, you can even write off your losses against tax and get some more money from that. And there are an infinite number of variants to this one. Read my previous post to get a flavour of what you can do and get away with.
3. Electronic trails with cut-outs. For those who really want to flush big sums, once you have bounced your cash through several electronic cut-outs, through some rather dubious and not so dubious locations, it is clean. If you can covert cash to capital assets (such as plant, machinery, ships, etc.), then you are in clover because of the huge possibilities of importing and exporting, but this is far too complex for the common terrorist/criminal. This kind of stuff is reserved for the white collar criminal and the big corrupt chaps (very politely termed as Politically exposed people).
The really tough conclusion is that there is unfortunately very little else a financial institution can do. Financial Institutions are already or heading rapidly towards what I call as the Israeli defence. Which, very simply described, means that every transaction is monitored electronically or automatically with various mathematical, statistical, parametric and non-parametric methods. The training of the front office and control staff is given to spot the strange chaps, the curious incidents, the funny transactions, the sweaty submission. So you have concentric rings of security which progressively increase the level of evaluation till the person or the transaction hits the banking system. This is the equivalent of the X-Ray scanners added with the conversation and eyeball on the sweat glands on every passenger on an El Al Flight.
Long way to go, my friend, long way to go.
All this to be taken with a grain of piquant salt!!!
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