By Derek Smith Jr
Since The Wolfsberg Group’s original issuance of its Anti-Money Laundering (AML) Principles for Private Banking in October 2000, its subsequent statements over the past decades and more recently its statement of effectiveness in December 2019, many jurisdictions have taken steps to enact more effective anti-money laundering/combatting terrorist financing (AML/CTF) regimes. Over the same period, financial institutions (FI) were confronted with growing numbers of complex compliance requirements while simultaneously juggling the customer’s expectation for a better user experience. FIs have had to develop and attempt to perfect a wide variety of complex, yet crucial, capabilities to remain compliant with jurisdictional and international requirements.
The Wolfsberg Group, in its June 30, 2021 statement on demonstrating effectiveness, noted: “The group believes designing, assessing and measuring AML/CTF programs based on performance against these defined outcomes would not only enable FIs to detect and deter criminal activity better, but also improve the effectiveness of the system to combat money laundering and terrorist financing overall.”
Therefore, it is in this context that I would encourage you to ask: “How effective are our institution’s risk management regimes and how effective are regimes worldwide?”
This article will consider alternative views on current AML/CTF regimes and provide non-exhaustive suggestions on how to demonstrate an effective regime.
Arguments against AML/CTF regime effectiveness
Louis de Koker published in the Journal of Money Laundering Control (17:3) that the Financial Action Task Force (FATF) identification guidelines and practices have resulted in a “largely bureaucratic” process that does not guarantee that identity fraud will be prevented effectively. Additionally, Academic Ronald R Pol postulated through his research paper published in 2020 via the Journal of Financial Crime that the money laundering/terrorist financing (ML/TF) regime is virtually non-effective in disrupting illicit finances and serious crime. These positions promote that AML/CTF regimes are process-driven with little profit or results.
Regime prescriptiveness vs regime agility
The current enterprise-wide risk assessment is too prescriptive and less agile than is required in the current business environment. Wait, I am not asserting that the current enterprise-wide risk assessment should be abolished. I am suggesting that compliance and risk professionals must ensure that their regimes are “living creatures” and are accurately reflecting their organization’s real threats instead of employing rigid, out-of-the-box regimes.
Expectations vs law
A very intricate balance must be achieved between expectations and the parameters of the applicable laws and regulations. It is crucial that risk and compliance professionals must seek clarity from their designated regulator on laws and circumstances where guidelines must be understood as binding. This is something difficult as our formal training and international groups such as Wolfsberg appear to be of the view that guidance is non-binding. This circumstance is even more exacerbated when there are multiple regulators of one entity.
Regulatory compliance and interaction
Surprise — the regulator should be your friend and not your perceived foe. Relationship building via open and fruitful communications provides all stakeholders with the required information needed to make the best-informed decisions. FIs’ control frameworks are enhanced or improved because of this approach.
Throughout my experience, reading and compliance roundtables, it was made clear that there is always room for regime improvement and a rethinking and reengineering of processes. For an AML/CTF program to be effective, it should conform to applicable AML/CTF laws and regulations and establish reasonable and risk-based controls to mitigate identified risks. The reputation and marketability of our financial services offering depend on our ability to demonstrate effectiveness.
Derek Smith Jr is a Top 40 Under 40 leader; the compliance officer at Higgs & Johnson, a leading law firm in The Bahamas; and the former assistant vice president, Compliance & Money Laundering Reporting Officer (MLRO), at an international private bank. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and an executive member of the Bahamas Association of Compliance Officers.