As global economies come out of the pandemic, financial institutions should expect regulators to get tough on compliance departments that continue to have regulatory and internal challenges. Fines will only continue to grow in the coming years, and banks have been fined $1,972,797,500 in 2021 already, according to our “AML Fines H1 2021 Report.”
Financial institutions need to continuously monitor and improve compliance to avoid common pitfalls that may result in regulatory action. The signs are that fines won’t be slowing down anytime soon.
Reasons Why AML Fines Will Only Get Worse
Fines can result from a number of actions or inactions on the part of a regulated firm, from having insufficient Know Your Customer (KYC) approaches to actively participating in money laundering. Regulators, of course, are always out to find any wrongdoing, but here are five reasons why we believe fines will only get worse — and how financial institutions can avoid them.
A New EU AML Authority
The EU has created a new authority that will transform AML supervision in the EU, and enhance cooperation between financial intelligence units (FIUs). The new authority, termed AMLA, will coordinate national supervisors to ensure the private sector correctly and consistently applies AML rules and regulations. Furthermore, AMLA will aim to empower FIUs to improve intelligence-sharing with law enforcement agencies on deciphering criminal networks and illicit flows.
For financial institutions in the EU, this means greater scrutiny into their practices, and greater accountability for compliance and due diligence — and consequences if their KYC and AML approaches aren’t airtight.
Governance and Oversight
Banks and FIs are beginning to blur responsibilities between first line (front office) and second line of defense (compliance), making it difficult to know whose responsibility is whose. This may not just limit the ability of compliance teams to monitor and improve their AML control framework, but it could also negatively affect it as well.
A lack of governance and oversight that articulates specific roles and responsibilities when it comes to lines of defense can increase liability and accountability, especially for senior managers, and result in regulatory and/or criminal action.
Ineffectual AML Systems
AML systems themselves could continue to hinder effective KYC and AML customer due diligence, as banks using legacy technology are putting themselves at risk for failing to detect and report suspicious transactions. Having outdated systems can pose challenges ranging from high rates of false positives and missing new typologies, to not being able to differentiate a suspicious transaction from an unusual one. Additionally, banks are failing to report suspicious transactions and file suspicious activity reports (SAR) on time, which has led to numerous fines and is likely to continue into the foreseeable future.
Upgrading systems and taking a proactive, technology-forward approach to KYC and AML will not only improve operations and customer service, but may inherently keep firms off the regulators’ radar.
Customer Due Diligence and Enhanced Due Diligence
Another reason banks are being flagged by regulators is because they continue to inadequately perform customer due diligence (CDD) and enhanced due diligence (EDD). The failure to mitigate risks posed by high-risk customers and not identifying and verifying sources of wealth and funds is exposing banks to heightened financial crime risks. This can happen when banks only apply generic customer risk assessments to cover different types of risks to distinct customer relationships. Combine these failures with insufficient information on the intended nature of a customer relationship and an understanding of the inherent risks, and further scrutiny by regulators in how banks perform CDD and EDD is inevitable.
Cat and Mouse Game
In the ongoing fight against financial crime, financial institutions must try to stay one step ahead of criminals who are always looking for new ways to infiltrate the financial system. This is no easy feat by any stretch of the imagination, as criminals are becoming more sophisticated and finding new ways to avoid detection each day. It’s a cat and mouse game, but banks that are more agile in ensuring that their preventative measures are robust and effective will significantly reduce their damages and financial losses. Investment in technology and innovation in AML systems is also a critical step to keeping ahead of the evolving threat landscape.
Keep Aware to Keep Compliant
AML regulations are intended to prevent dirty money from entering the financial system, and serve as a strategic tool to detect and prevent crime. But the regulatory landscape is changing quickly. New laws and regulations enacted to fight crime are putting banks and obliged entities under increased pressure to ensure regulatory compliance.
Financial institutions who do not comply can expect to be fined or face legal and regulatory action and the fallout can result in significant financial losses, a drop in share price, senior managers facing lawsuits, and irreversible reputation damage.
Additionally, a never-ending queue of smart and tech savvy criminals is waiting to exploit these financial systems, meaning that banks must at least adopt reasonable and proportionate endeavours in customer due diligence and AML.
The good news is that with advances in technology, compliance teams have a wealth of tools at their disposal to understand, detect, and prevent financial crime risks — which means there are no more excuses to remain non-compliant. As regulations get tougher, expect to see more fines dished out against those who flout the law, and it could be you.
Author: Ian Henderson, CEO of Kyckr
Author’s bio: Mr Henderson was most recently the CEO of a leading UK-based private and commercial bank, and during his two-year tenure he drove the successful and profitable diversification of the banking business. He also covered the role of CEO at Shawbrook Bank, one of the first UK Challenger banks, where he delivered the bank’s first ever profit. Mr Henderson previously held the roles of Chief Operating Officer of Barclays Wealth Private Banking where he was responsible for risk management & control of Barclays’ core private banking business in the UK and parts of EMEA and Asia. He was CEO of RBS International from 2005 to 2010 and during his tenure, profitability doubled, and the division was named the best performing general banking division in the RBS Group. Mr Henderson spent a total of 17 years at Royal Bank of Scotland where he was responsible for business and marketing strategy for the Royal Bank of Scotland and NatWest brands, comprising 2,400 branches and 13 million customers.