Fixing the Laundering Cycle
Paul Grainger – Chairman, Complyport Limited.
The COVID-19 Pandemic demonstrated two things. First, we humans are relatively good at adapting to changed circumstances and trying to carry on as best we can. Second, criminals will find opportunity even in adversity and will exploit it mercilessly. Nowhere is this better demonstrated than in the field of money laundering. The problem is now so great that we may need to think about new approaches to tackling it.
How big is the problem?
In December 2020, HM Treasury and the Home Office published the National Risk Assessment of Money Laundering and Terrorist Financing for the UK. On 12 April 2021 Europol published its Serious and Organised Crime Threat Assessment for the European Union (EU). Both documents quote data from the United Nations estimating that the amount of money laundered each year is between 2% and 5% of global GDP. At current exchange rates, this translates to an eye watering sum of between £614 billion and £1.6 trillion!
The UK is for reasons of geography, time zone and economic history is a major centre for global banking and is the major foreign exchange market. This makes it a vital part of the transaction chain for major money launderers. Whilst there is no hard data (after all criminals are not going to file returns), the UK National Crime Agency (NCA) estimates that the scale of money laundering impacting the UK annually runs into hundreds of billions of pounds.
The Treasury states that money laundering by Serious and Organised Crime (SOC) gangs costs the UK economy £37 billion per year. It states that the threat from SOC continues to have more impact on UK citizens than any other national security threat and that the threat is growing.
The traditional approach to AML and CTF
The traditional approach to combatting money laundering relies on front line staff in financial and professional services or in firms in other sectors that fall within the scope of the Money Laundering Regulations. Frontline staff may be given a degree of training in Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) policies and procedures, but they are not specialists. They are usually carrying out AML vigilance as part of wider and demanding customer focuses roles.
The processes and procedures to combat AML and CTF activity depend upon a combination of adequately establishing a customer’s identity, adequately verifying the source and destination of money in a transaction and monitoring the continued status and pattern of activity for a customer going forward.
Should frontline staff identify a concern, they are able to escalate it in many firms to a specialist. However, at this stage the more specialist staff will take a view as to whether upon further investigation the issue is not of concern or whether to make a Suspicious Activity Report (SAR) or a Suspicious Transaction Report (STR) to the National Crime Agency.
Our experience in the market
When advising firms whether in the financial services sector or in other professional or commercial firms that fall within scope of the Money Laundering Regulations, we very often find firms are accepting of the need for AML and CTF activity, but equally it is often implemented or operated by staff in a way that can result in it being bureaucratic, not responsive to customer needs and circumstances and frustrating for staff and customers concerned.
On probing deeper, we often encounter four key areas that can be improved:
- AML and CTF Risk Assessment;
- AML and CTF Training;
- Identification and monitoring of clients;
- Timely and accurate records of AML and CTF activity.
Very often risk assessment is poor, procedures are not updated in a timely fashion, there is poor use of labour-saving technology and training is repetitive and often not related to the firm’s specific risks or procedures.
Improving these issues can have a significant impact upon the effectiveness of AML and CTF procedures as well as on customer experience.
What should firms be doing instead?
The challenge for firms is ensuring the right approach. This starts with Risk Assessment. By identifying where the firm is exposed to potential AML and CTF risks, it can focus and refine its procedures to be more responsive to the threats it faces whilst simultaneously identifying issues that may need to be addressed sensibly and sensitively in customer relationships.
Technology can play a major role in helping to refine AML and CTF procedures without being either too intrusive or too bureaucratic when taking on new customers or managing existing customer relationships. There are now several technology applications that can be used to verify the identity and status of a prospective customer (whether a natural person or corporate entity). Similarly, such applications can be used to carry out regular status screening, check for changes and assist in transaction monitoring.
Similarly, technology can also be used to provide rapid access to frontline staff to be able to access policies and procedures should they need guidance or need to refer or escalate an issue to another colleague. The technology will often capture these actions and thus preserve an audit trail. Furthermore, it provides useful data that can help inform the next annual AML and CTF Risk Assessment.
Training that is focused and relevant to the firm, its risks and its procedures will then help to inform, refresh and reinvigorate implementation of AML and CTF procedures by both frontline staff and specialists within the firm.
Complyport is well-placed to help firms to review and improve AML and CTF risk assessment, policies and procedures. Our skill is to make them more effective (and thus satisfy regulators/supervisors) but also to improve the customer experience. Based on our extensive experience, we can assist and guide firms, identifying where technology can be utilised cost-effectively and where needed, facilitating relevant bespoke training to bring processes and procedures to life and make them customer friendly.
The problem of money laundering may have increased, but it is now time for firms to consider how to re-set the cycle and take back the initiative.
Complyport is a regulatory governance, risk and compliance consulting firm supporting the UK financial services industry for over 20 years.
We specialise in providing Governance, Risk and Compliance services to firms. Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. We help firms change, grow, and excel through expertise, insight and innovation.
Complyport offers full support across the regulatory landscape including advisory, assurance, financial reporting, capital adequacy assessments and compliance training as well as a suite of online RegTech and fully electronic KYC solutions to enable continued compliance with regulatory obligations.