AML/CFT Compliance Culture as a Strategic Tool in the Fight Against ML/TF
Money laundering (ML) is the legitimisation of ill-gotten gains. Terrorism financing (TF) is the act of providing financial assistance to those persons who undertake terrorist activities. The UAE government strives to regulate those entities that are vulnerable to being used as a conduit for ML and TF through its anti-money laundering / combating the financing of terrorism (AML/CFT) regulatory regime. This blog discusses the importance of establishing an AML/CFT compliance culture in businesses to counter the risks of ML and TF.
This blog also attempts to shed light on the meaning, components and importance of AML/CFT compliance culture. It also provides guidance on how to create a robust culture of AML/CFT compliance.
What is AML/CFT Compliance Culture?
An AML/CFT compliance culture is the shared beliefs, values and ethical standards regarding adherence to the duties and obligations under a country’s AML/CFT regulatory regime. Such culture flows throughout the entire organisational structure of the entity. It becomes inseparable from the entity’s identity and is reflected in the entity’s decisions, services, practices and conduct. It shapes the behaviour of each individual associated with the entity, from the board of directors to entry-level employees.
An AML/CFT compliance culture helps the entity stay on the right side of the law. It increases the reputation of the entity and creates a positive brand image. Therefore, the importance of adopting an AML/CFT compliance culture is immense and should not be understated.
Components of AML/CFT Compliance Culture
An AML/CFT Compliance culture can be understood comprehensively through its various components. These components are discussed below.
Leadership and Management Commitment
The culture of an organisation flows from its leadership; in simple words, it sets the tone from the top. An entity’s AML/CFT compliance will not be effective unless the board of directors or top management lays a strong foundation for the AML/CFT compliance program. Low or inadequate support by the top brass would mean that the AML/CFT policy remains just a paper document and is not reflected in the entity’s culture. Employees’ motivation to promote the entity’s AML/CFT compliance culture depends on encouragement from the leadership.
The role played by the top management in promoting an AML/CFT compliance culture includes the following:
- Overseeing the timely formulation and approving the Enterprise-Wide Risk Assessment (EWRA).
- Ensuring assessment of the AML/CFT risks faced by the entity through a risk-based approach and approving the risk appetite of the entity based on its size, business and customer base.
- Approving the AML/CFT Policies and Procedures.
- Reporting on new ML/TF Red flags and Typologies.
- Ensuring regular independent audits of AML/CFT Compliance Framework.
Ethical Standards and Values
An AML/CFT compliance culture is characterised by values and ethical standards such as integrity, accountability, transparency, trust and collaboration. Through these values, entities are able to embody the ‘spirit of the law’ rather than just adhering to its letter or simply having a tick-box box approach towards compliance. These standards help entities make ethical decisions when they encounter circumstances not provided for in AML/CFT laws and regulations.
AML/CFT Policies and Procedures
Compliance obligations include not only legally mandated requirements but also the entity’s own internal AML/CFT policies, procedures and controls. Robust internal policies help entities meet their AML/CFT regulatory requirements successfully without any lapses. Set policies and procedures also ensure that everyone involved in the compliance process is aware of their individual roles and responsibilities. This helps coordinate and speed up the resolution of any issues.
Training and Education
When employees are made knowledgeable about the meaning, mode of operation, and red flags of ML and TF, as well as their role in the organisation, they are able to detect and deter AML/TF threats effectively and promptly. Such awareness allows the staff to make informed decisions regarding corrective actions to be taken when they face an ML or TF threat. Thus, AML/CFT training and education are important components of a strong AML/CFT compliance culture.
Importance of AML/CFT Compliance Culture
After discussing the meaning and components of robust AML/CFT compliance culture, it’s time to move the discussion towards the question of why it is imperative for entities to build a strong AML compliance culture.
Enhancing Organizational Integrity
Rules and regulations seek to deter the crimes of ML and TF. However, laws are ultimately just words on paper. A strong AML/CFT compliance culture inculcates integrity into the organisation and helps ensure that these laws are properly implemented and adhered to. By embedding a culture of integrity, entities not only comply with legal requirements but ethically deal with all situations not dealt with by the law.
Building Trust with Stakeholders
When an entity practices and portrays a strong culture of proper AML/CFT compliance, it generates trust and a positive reputation among its customers, investors, associates and regulatory authorities. The employees working for the entity have faith in it, which boosts employee morale. This creates a positive feedback loop, which results in the further strengthening of the entity’s compliance culture.
Ensuring Regulatory Compliance
ML and TF are threats that continuously evolve to avoid detection. To curb them. AML/CFT laws are dynamic and continuously developing to deal with the new tactics of money launderers and terrorist financers. When entities have a strong AML/CFT compliance culture, they are able to regularly update themselves and evolve new ways to comply effectively with the AML/CFT regulatory obligations.
The Role of AML/CFT Compliance Culture in Combating ML/TF
Preventive Measures
Robust AML/CFT Policy and Procedures
AML/CFT rules and regulations mandate regulated entities to draft and implement their own AML/CFT policies and procedures. To be effective, the AML/CFT policies and procedures must include the following:
- Roles and responsibilities for all employees involved in AML/CFT compliance.
- Proactive senior management oversight and appointment of AML/CFT Compliance Officer.
- Adoption of a risk-based approach to counter ML/TF.
- Continuous training and awareness programs for the staff involved in AML/CFT compliance.
- Customer Due Diligence (CDD), including Know Your Customer (KYC), customer risk assessment and profiling.
- Sanctions Screening and Adverse Media Screening
- Reporting Procedures for Suspicious Activities or Transactions (SAR/STR)
- Ongoing monitoring of customers and transactions Record keeping procedures
When these components are clearly defined, there is better oversight and coordination within the entity. Compliance responsibilities should not be ‘siloed’, i.e., restricted to specific departments with no internal communication. This ensures that all red flags encountered during the AML/CFT compliance process are swiftly identified and dealt with promptly. This prevents ML or TF risks from arising.
Comprehensive Due Diligence
Customer Due Diligence (CDD) is a process that must be undertaken by entities to check the authenticity of their customer’s identity. It helps them assess the risks posed by a customer through risk assessment, sanctions screening and adverse media screening. Through CDD, entities are able to form an informed decision of whether to onboard customers based on their risk appetite. A rigorous CDD process prevents entities from onboarding clients exposed to ML or TF and thus reduces risk exposure of the entities.
Transaction Monitoring
Transactions monitoring involves continuously observing transactions to detect any anomalies or red flags that may indicate ML or TF. Suspicious activities and transactions are identified through red flags such as transactions involving large amounts of funds, unusual behaviour by customers, inconsistency of the transaction with the customer’s economic profile or past behaviour, multiple transactions within a short period of time, transactions from, to or through a high-risk jurisdiction, etc. Thus, transaction monitoring helps prevent ML and TF before they occur or are in the early stages of occurrence by detecting and dealing with suspicious activities. Timely and rigorous transaction monitoring is an important constituent of an effective AML/CFT compliance culture.
Detective Measures
Data Analytics
Data analytics helps entities analyse large amounts of information to detect ML and TF threats. Big Data enables entities to streamline their AML/CFT compliance obligations through real-time updates in customer risk scoring and profiling, automatic transactions monitoring, prompt sanctions screening and adverse media screening, recognising anomalies in customer behaviour, etc. Data analytics thus eases the process of compliance by digitising processes that would otherwise be done manually. Thus, data analytics has made the detection of ML and TF simple and swift.
Health checks and Audits
Detecting vulnerabilities in the AML/CFT policies and procedures is an important part of the entire AML/CFT compliance process. This detection exercise is done through a health check or audit of an entity’s AML/CFT compliance program. A health check or audit involves a review of risk assessment of the entity, its policies, procedures and controls, communication channels open in the entity for coordination or grievance redressal, CDD and KYC methodologies adopted by the regulated entity, the process of suspicious activities detection and reporting by the entity, adequacy of records obtained and kept, regularity and quality of staff training and awareness, etc. The health check and audit process also includes analysis of the vulnerabilities detected, discussion about the same with top management, and adoption of remediation measures to fill the gaps identified.
Employee Vigilance and Reporting Channels
The active participation of the employees in the entity’s AML/CFT compliance program ensures efficiency in dealing with ML and TF threats. For example, frontline employees are considered the first line of defence and compliance officers, along with the compliance department, are the second line of defence under an entity’s AML/CFT program. Employee vigilance at these levels will nip ML and TF in the bud. Employee vigilance will enable early detection of ML and TF threats, prompt communication of the threat to the compliance officer, senior management, or board of directors, and subsequent reporting to the AML/CFT regulatory authority of the country in which the entity operates.
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Reporting Obligations
Investigating Suspicious Activities
Suspicious activities are to be reported mandatorily under a country’s AML/CFT laws and regulations. Suspicious activities are those that indicate the occurrence of ML or TF. For example, the following activities cause suspicion as to ML and TF:
- Customer refuses or is hesitant to provide KYC details or identity documents
- Third party gives instructions or undertakes transactions through the customer’s account
- Too many transactions in a short period of time
- Uncharacteristically large funds being transferred
- No economic rationale behind transactions or the source of funds or wealth is unexplained
When these suspicious activities are detected and reported in a timely manner, ML and TF threats are dealt with successfully.
Collaboration with Regulatory Authorities
Collaborating with AML/CFT regulatory authorities is crucial in aiding the authorities in curbing ML and TF in the country. The collaboration includes adhering to the AML/CFT obligations put on the entity, providing information promptly when required by the regulatory authorities, reporting suspicious activities and transactions as prescribed, etc. Collaborating with regulatory authorities will improve the regulator’s trust in the entity and improve the reputation of the entity in the country as law-abiding and transparent.
Implementing Corrective Actions
As discussed before, regular health checks and audits are significant features of an effective AML/CFT compliance culture. After a thorough audit, remediating the vulnerabilities identified through corrective actions is an important part of the AML/CFT Compliance process. Such corrective actions include reassessing risk exposure to ML and TF, making necessary changes to AML/CFT policy and procedures, revamping the compliance team structure, establishing new communication channels, etc.
Building a Strong AML/CFT Compliance Culture
Building a strong AML/CF compliance culture requires businesses to develop an understanding of what strong and weak AML/CFT compliance culture looks like; knowing the distinction between the two shall enable them to formulate a customised strong AML/CFT compliance culture.
After understanding the meaning, components and importance of a robust AML/CFT compliance culture, it is time to understand how such a strong culture can be built. This is discussed below.
Top Management Commitment
To build a robust AML/CFT compliance culture, top management must commit to:
- Setting the tone of integrity, transparency, morality and non-tolerance towards lapses that enable ML and TF to occur.
- Allocating adequate resources for the entity’s AML/CFT compliance.
- Overseeing the risk assessment process and drafting of internal AML/CFT policy for the entity.
- Having an open channel of communication to handle all the complaints, doubts, criticisms, and concerns regarding the entity’s AML/CFT policy and ensuring accountability.
- Duly appoint an AML/CFT Compliance Officer or Money Laundering Reporting Officer (MLRO) who is qualified for the role.
- Reviewing the AML/CFT reports and independent audits and remedying any vulnerabilities found.
- Leading by example and actively participating in AML/CFT training, encouraging employees to participate and take their role with seriousness and professionalism.
Crafting Clear and Effective AML/CFT Policies and Procedures
Preparing AML/CFT policies and procedures is a legal obligation under a country’s AML/CFT laws and regulations. It is the backbone of a strong AML/CFT compliance culture. An effective AML/CFT policy has the following characteristics:
- It is framed after gaining a thorough understanding of the country’s AML/CFT laws and regulations in which the entity operates.
- It is grounded in a risk-based approach, which involves identifying the specific ML and TF risks faced by the entity and implementing tailored measures to mitigate them. This approach is customised to address the unique challenges posed by the firm’s products and services, customer base, geographical operations, and other relevant factors.
- It is framed in a clear and concise manner, with all roles and procedures defined to leave no doubt or scope for overlap of responsibilities and powers. Top of Form
- It should set clear policies on all the AML/CFT obligations of the entity such as risk assessment, CDD and KYC, sanctions screening, suspicious transactions or activities reporting, etc.
- It should be regularly reviewed and updated to ensure all vulnerabilities are filled.
Implementing AML/CFT Compliance Program
After preparing AML/CFT policies and procedures, it is important to implement them in a manner that achieves its intent and objectives. For effective implementation, the following approach should be adopted:
- Make a detailed checklist and ensure that all entries are tick-marked through completion. Here are the components of the checklist:
- Registering with the AML/CFT regulator if required. For example, in the UAE, entities have to register with FIU’s goAML portal.
- Designating a qualified AML/CFT compliance officer or MLRO with adequate authority.
- Conducting Enterprise-Wide Risk Assessment (EWRA) and defining risk mitigation measures.
- Laying down the customer onboarding process along with adequate customer due diligence and sanctions screening measures to be adopted.
- Establishing a monitoring program that tracks customers, transactions and activities on an ongoing basis
- Preparing procedures to detect and report suspicious activities and transactions
- Training the employees involved in the AML/CFT program. This step is discussed in detail below.
- Conducting an independent audit of the AML/CFT program of the entity and regularly updating it to fill any gaps
- To execute the prepared checklist in a timely manner, a comprehensive action plan should be created with deadlines. Senior management must regularly monitor the implementation process. Adequate resources should be allocated to the AML/CFT program.
Training and Awareness
Training and awareness enable employees and other stakeholders involved in the AML/CFT program to recognise and adopt corrective measures to deal with any ML or TF threats they encounter. The employees must be given regular training by qualified AML/CFT experts. The training module must include subjects such as:
- Meaning and typologies of ML and TF
- A brief overview of the international efforts to fight ML and TF and the AML/CFT laws and regulations of the country in which the entity operates
- Detailed understanding of the internal AML/CFT policies and procedures of the entity
- ML and TF risks assessed, and risk mitigation strategies adopted by the entity
- Customer onboarding protocol, including customer risk assessment, risk scoring, risk profiling, customer due diligence, KYC, sanctions screening and adverse media screening
- Detecting and reporting suspicious activities and transactions
- Records acquired during the AML/CFT process that must be kept
- Coordinating and cooperating with the AML/CFT compliance department of the entity
The training program should be a continuous process. When regulations change, or independent audits find discrepancies, employees should be retrained to perform their roles more effectively. Further, new employees must be given basic AML/CFT training when they are onboarded.
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Challenges in Combatting Money Laundering and Terrorism Financing
Building a strong AML/CFT compliance culture may not be easy at first. An entity may face the following hurdles while implementing and maintaining its compliance practices:
1. Business Goals
Entities often place profit and growth as their highest priority, ignoring business ethics in the process. There is a need to balance both ethics and profits to build an effective AML/CFT compliance culture.
AML/CFT compliance must be seen as adding to the profits and growth of a company rather than an obstacle. This is so because a reputation of being AML/CFT compliant increases trust among the customers and reduces the costs incurred due to non-compliance. Thus, having a robust AML/CFT compliance culture gives positive dividends.
2. Staff Resistance
Employees may not be aware of their role in combating ML or TF threats or may see their AML/CFT obligations as irrelevant to their overall job profile. They may resist changes when an entity first makes the decision to align their business with AML/CFT best practices. To deal with this challenge, it is necessary that positive behaviour is incentivised and encouragement is given to adhere to the entity’s AML/CFT compliance program that flows from the top leadership. When the leaders set the tone from the top, employees are bound to follow.
3. Resource Constraints
When the AML/CFT program is seen as a cost rather than an opportunity, AML/CFT compliance suffers. Developing and maintaining an AML/CFT program can be costly because it involves investments in technology, human resources, training, and services of AML/CFT experts. However, these costs have positive returns, such as a good reputation, trust from customers, and no non-compliance costs. Further, the costs of non-compliance, i.e., government-imposed fines and penalties, are significantly more than the cost of installing compliance measures.
4. Evolving Regulatory Framework
Since ML and TF typologies are evolving with advancing technology, AML/CFT laws and regulations are continuously adapting to deal with emerging threats. This means that the AML/CFT law is dynamic, and entities need to keep up. This may seem complex to regulated entities, which are already lagging behind in terms of AML compliance. However, being up to date with the AML/CFT regulatory changes is essential to ensuring AML/CFT compliance.
The Future of AML/CFT Compliance Culture in Combating ML/TF
After building an effective AML/CFT compliance culture, the next task is sustaining and developing it in a way that such culture becomes an enduring component of the entity’s identity. As ML/TF typologies, as well as AML/CTF regulations evolve, so must the culture surrounding AML/CFT compliance. Here’s a glimpse at the future of AML/CFT compliance culture.
Impact of AI and Machine Learning on Compliance
Artificial intelligence (AI), data analytics, and machine learning have made the AML/CFT compliance process easier, quicker and cheaper. These technological advancements make the following tasks more efficient:
- Entering and keeping records of loads of customer data.
- Detecting any red flags while conducting the customer due diligence process.
- Sanctions Screening and Adverse Media screening using regularly updated databases.
- Analyzing patterns of customer transactions and behaviour and detecting anomalies.
These technologies keep on improving and thus form the future of AML/CFT compliance culture by making compliance swift, simple and accurate.
Future Regulatory Developments
As the world becomes increasingly interconnected, ML and TF threats evolve, and AML/CFT measures adapt to combat them. This means more cross-border collaborations between countries to deal with the ML/TF threats effectively. AML/CFT regulations may become more stringent and standardised. However, with a strong AML/CFT compliance culture, navigating through evolving and stricter AML/CFT laws and regulations would be easily manageable.
Importance of Evolving Compliance Practices
AML/CFT compliance culture needs to be dynamic and adapt to the emerging ML/TF threats and challenges as well as keep up with the AML/CFT regulatory developments. Entities must keep pace with technological advancements and adopt them in their AML/CFT compliance program. All vulnerabilities should be detected and reported. Periodical training on new AML/CFT typologies, technology and regulatory developments will ensure a strong and efficient AML/CFT compliance culture.
Fostering a Culture of Continuous Improvement
Continuous improvement can only be achieved through frequent health checks, open communication and swift handling of grievances and concerns. Leadership commitment to AML/CFT compliance will ensure that the entity’s objectives and practices are aligned towards constant improvement and innovation of the AML/CFT compliance program.
Conclusion
Establishing a robust AML/CFT compliance culture is imperative to comply with AML/CFT regulatory obligations. It is also an important strategic tool to combat the emerging threats of ML and TF. However, if the entities regulated under a country’s AML/CFT legal regime do not take their compliance obligations seriously, the objective of curbing ML and TF will remain a distant dream. From the macroeconomic prospects of the country to the society and the entity itself, everyone will be severely impacted. Therefore, establishing a robust AML/CFT compliance culture must involve essential components such as leadership commitment, ethical standards, comprehensive policies, and continuous training to ensure that entities build resilience against the said financial crimes such as ML/TF. By embedding AML/CFT principles deeply into their identity, entities can better detect and deter illicit activities.
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About the Author
Pathik Shah
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.
He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.