4 Keys To Building A Strong AML Compliance Program

The Importance of a Strong AML Compliance Program

In the complex landscape of financial regulations, constructing a robust Anti-Money Laundering (AML) compliance program is a crucial bulwark against financial crime. This necessity stems not only from the legal obligations imposed on financial institutions but also from the need to maintain the integrity of the global financial system. The significance of an AML compliance program goes beyond mere regulatory compliance; it serves as a fundamental component in safeguarding an institution against the reputational, operational, and legal repercussions associated with money laundering activities. The formulation of an effective program demands an acute understanding of the underlying risks, coupled with the implementation of comprehensive internal controls and procedures.

This blog provides a roadmap to build and maintain an AML compliance framework that includes:

• the essential components of an AML compliance program;
• the strategic process of developing policies and procedures tailored to mitigate risks;
• the importance of conducting thorough risk assessments, establishing sound policies and procedures, and enforcing stringent customer due diligence measures; and,
• the vital role of suspicious activity reporting in the broader context of an AML strategy.

Developing Policies and Procedures

Developing an effective Anti-Money Laundering (AML) policy is foundational for broker-dealer, RIAs and FinTech firms. This policy should be a well-designed set of measures aimed at preventing illegally obtained money from being reintroduced into the mainstream financial system. It is crucial that these policies are not only established but also meticulously implemented and supervised by regulatory bodies to ensure compliance.

A comprehensive AML policy must define what constitutes money laundering, terrorist financing, or trafficking. It should clearly outline the purpose of the policy and the necessity for its implementation. Regular reviews of the policy are essential to adapt to new threats and regulatory changes. The policy must also detail the roles and responsibilities of all employees, highlighting the importance of a dedicated compliance officer or team to oversee these efforts.

AML Program Reviews

When conducting an AML review, the first task is to review your firm’s Written Supervisory Procedures (WSPs) against the dozens of specific items that should be included in a comprehensive AML program. Having each of these items covered in the WSPs does not guarantee success, as it still comes down to whether your firm is following its WSPs.  In many cases, firms that are missing several areas tend to have weaker programs.   

Risk Assessment

Conducting Thorough Assessments

An AML risk assessment is a vital process for financial institutions to identify potential money laundering risks and fulfill regulatory demands. Identifying inherent risks, such as customer profiles, geographic locations, and types of products and services offered, allows firms to prioritize areas with higher risks of money laundering. Firms can then analyze these risks by considering the likelihood and potential impact on their operations.

AML Risk Assessment vs Independent Audits

Some firms feel that an AML Risk Assessment is not necessary, since the firm is required to conduct an independent review of their AML program.  However, firms that have a Risk Assessment tend to have a very well organized, comprehensive and detailed AML program. 

The AML Risk Assessment takes a holistic view of the firm’s AML program. The required, independent AML testing is also a thorough review, but not necessarily holistic. The testing typically involves looking at a sample of policies and procedures to determine any weaknesses within those procedures; the testing usually does not involve every AML policy in place at the Firm.

A holistic risk assessment ensures that all potential vulnerabilities are covered, and that appropriate controls are implemented to mitigate these risks. For example a financial institution might enhance customer due diligence procedures or strengthen transaction monitoring systems based on the findings of the assessment.

This approach allows your firm to build on the Risk Assessment each year. The Risk Assessment should never be thought of as a “one and done” exercise, but rather an ongoing and living process. As new customer demographics, products, or technologies are introduced, the AML Risk Assessment should be updated to reflect these new risks. The goal, of course, is to address any potential risks as your firm’s program evolves.

The combination of the AML Risk Assessment (holistic) and the independent AML testing (specific testing) creates a recipe for a very strong overall AML program. 

Customer Due Diligence

Customer Due Diligence (CDD) is a crucial component in the Anti-Money Laundering (AML) and Know Your Customer (KYC) frameworks of financial institutions. This process involves conducting background checks to verify customer identities and assess their risk profiles, ensuring compliance with regulatory requirements and safeguarding against financial crimes like money laundering and terrorist financing.

Compliance with the CDD Rule

Firms are required to establish risk-based CDD procedures that help in the continuous assessment and understanding of money laundering and terrorist financing risks associated with their customers. This ongoing process is crucial for maintaining compliance and integrity within the financial sector. The CDD Rule, amending Bank Secrecy Act regulations, mandates financial institutions to identify and verify the identities of beneficial owners of legal entity customers, enhancing financial transparency and preventing misuse of corporate structures.

The cornerstone of a robust CDD program involves the adoption and implementation of risk-based policies, procedures, and processes. These are essential for all customers, especially those presenting higher risks for money laundering and terrorist financing. Effective CDD policies enable firms to understand the nature and purpose of customer relationships, and then develop a comprehensive customer risk profile. This profile assists in ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintain and update customer information, including beneficial ownership details of legal entity customers.

Enhanced Due Diligence (EDD) for High-Risk Customers

For customers that pose higher risks, such as those involved in high-net-worth transactions or operating in high-risk jurisdictions, Enhanced Due Diligence (EDD) is required. EDD is an advanced level of due diligence that involves deeper scrutiny of potential business relationships to identify and mitigate potential financial crimes. This process includes collecting detailed customer information, defining the purpose and intended nature of the business relationship, and conducting more rigorous checks.

EDD measures are more extensive compared to standard CDD and include verifying the source of funds to ensure they are not derived from criminal activities, conducting in-depth investigations, and continuously monitoring the customer’s transactions and behavior. Financial institutions implement EDD to obtain a deeper understanding of high-risk customers, ensure that they adhere to regulatory requirements, and to maintain the integrity of financial transactions.

Both CDD and EDD are integral to the effective management of financial risks within financial institutions, ensuring compliance with AML regulations and protecting the financial system from illicit activities.

Enhanced Due Diligence

AML Program Requirements for Investment Advisers

After more than 20 years of regulatory arbitrage, FinCEN released a proposal that would require certain SEC registered investment advisers to adopt anti-money laundering programs. Many dual registered broker-dealers and RIAs have already adopted the broker-dealer AML program. 

Under this proposal, stand-alone RIAs will be required to implement an AML program.  Of particular interest is that the AML requirements are not a mirror copy of the broker-dealer requirements.  For example, in the current proposal, there is no concept of reporting beneficial ownership (CDD) as there is in the broker-dealer regulations. 

It is always better to be in front of regulations than playing catch up.  For Firm’s that are unclear on what will be expected of them, now is the time to put policies and procedures in place.

Ensuring Compliance and Reducing Financial Crime Risks

At Oyster, we’re here to help firms comply with Anti-Money Laundering (AML) regulations. With decades of experience our regulatory compliance consultants have a deep understanding of AML compliance program requirements. We’ll reduce risks and protect your firm and clients, letting you focus on your main business activities. Our AML independent review process includes reviewing your firm’s written policies and procedures, actual practices, and books and records. We’ll compare them to regulatory standards using a risk-based approach and random sampling methods.

Oyster Solutions – The AML Compliance Tool You Need

The Oyster Solutions platform was created to help firms like yours operationalize the requirements of your governance, risk and compliance programs. With Oyster Solutions you can manage and integrate policies, assess risk, enforce procedures, control user access and streamline processes. You will be able to define and quantify your risk, then match risk to your controls and monitoring process.