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Anti-Money Laundering is Still Work in Progress

Karen Briggs

KPMG

26 January 2005

Recent estimates suggest that US$500 billion to $1 trillion is laundered worldwide annually by drug dealers, arms traffickers, and other criminals. Banks act as gatekeepers for the legitimate financial system and it is only through their vigilance that the system can be protected from providing organized criminals or terrorists with a mechanism for concealing the proceeds of illicit and corrupt activity. As such, they play a crucial role in the prevention, detection, and reporting of money laundering. KPMG commissioned the Global Anti–Money Laundering (AML) Survey 2004 to determine whether the increasing globalization of banking groups and of international regulatory cooperation has resulted in increased consistency in the approach to AML. We also sought to draw out the key questions that we believe bank senior management must consider if they are to help ensure that their banks address the key issues arising from both the results of KPMG’s Global AML Survey 2004 and respondents’ comments and issues. Anti–money laundering did not historically represent a high priority for either governments or the banking industry, and was in the past perceived largely as a local issue. Appropriate legal and regulatory requirements have been enacted only relatively recently in many countries, and new laws and regulations have not always been actively or effectively enforced after introduction. Recent years, however, have seen a fundamental change in the legal and regulatory environment. Driven by a growing political determination to strike against drug traffickers, participants in organized crime, and terrorists, there have been a series of concerted national and international AML initiatives: • Ongoing reform in many countries has been prompted by the inter-governmental Financial Action Task Force (FATF) in promulgating recommendations and blacklisting countries with serious deficiencies in AML regulations. • The International Monetary Fund and the World Bank have now become actively involved in AML issues, and they have incorporated AML issues into their country assessments. They are also now providing technical assistance to help strengthen the AML and anti-terrorist framework in member countries. • The Basel Committee on Banking Supervision (the Basel Committee) has published best practice base standards for customer identification, know your customer (KYC) activity, and corporate governance. • The European Union (EU) Second Money Laundering Directive provided a specific focus and set minimum standards for European banks; a proposed Third Directive was published earlier in 2004. • Regulators in the developed economies have generally become more active in taking enforcement action for system and control breaches, even where no money laundering has been proven. • A series of high profile cases of corrupt politicians misappropriating public funds and laundering them through developed country banks has led to greater focus on private banking activities, particularly the level of due diligence carried out, how transactions are monitored, and how suspicions are reported. • A number of international banks have been active on their own initiative in establishing and implementing new agreed standards, such as the Wolfsberg Principles for international private banking activities. The events of September 11, 2001, also heightened concerns about how terrorists fund operations through the legitimate banking system, and stimulated further strengthening of U.S. AML requirements through the enactment of the USA Patriot Act. Despite debate about the characteristics of terrorist financing, there is no doubt that the continuing “war on terror” has maintained the focus on KYC efforts and transaction monitoring in particular. These developments have been accompanied by a stronger global emphasis on corporate governance, risk management, and the role of senior management in exercising oversight of a wide range of their businesses’ activities. Ensuring that the banking system cannot be used for money laundering purposes is a key imperative for policymakers and lawmakers across the globe. Achieving this goal will not be possible without the active assistance of the banking industry, and it can only work if the banks play their full part. The key findings of KPMG’s research were that Banks across the world are pumping more money into anti-money laundering (AML) systems and compliance than ever before. Of the 209 financial services institutions interviewed across 41 countries about their spending over the last three years, 83 per cent said they have invested more in combating AML, on average by 61 per cent . The trend is set to continue with most banks expecting spending to increase by over 40 per cent over the next three years, demonstrating that much remains to be done to enhance anti-money laundering systems and controls. The main driver behind the past and projected increase in spend is transaction monitoring. Banks are steadily increasing the sophistication of their monitoring technology with over 40 per cent of respondents having already implemented externally developed automated monitoring software. While many banks continue to rely solely on staff vigilance and exception reports, many of these are planning to implement more sophisticated systems. Nearly two thirds of senior compliance officer respondents said their bank had a global AML policy in place and that they are seeing greater scrutiny applied to their customer base, particularly when accepting new customers and monitoring accounts for suspicious activity more closely. Over 80 per cent of banks said that they vary the amount of information they obtain from customers at account acceptance depending on the risk profile of the customer, but surprisingly only about half of these considered whether a customer was “politically exposed”. Two thirds of respondents indicated that they have generated a greater number of suspicious activity reports (SARs) over the last three years, due in large part to better systems for detection and reporting, as well as increased staff vigilance. But it’s not all good news. Monitoring account transactions across territories was found by the report to be poorly joined up, with 46 per cent of those operating in six to ten countries unable to monitor a single customer’s transaction or account status across several different countries. A quarter of those operating in more than 10 countries could not do so. The survey also showed that implementation of AML procedures is undertaken by many global banks at a local level, leaving organisations open to the risks of disparate standards of application, either through lack of expertise or appropriate oversight. “Criminal Customers” can end up being taken on in a jurisdiction where standards are less robust than elsewhere, thereby gaining access to a global bank “by the back door”. The conclusion from KPMG’s research is that Anti-Money Laundering is still very much “work in progress” within the banking industry, with plenty of work left to be done. It is nonetheless clear that banks are committed to playing their role in the war against money laundering and international terror, and that they also want their role to be effective. The challenge for policy makers and law enforcement is to engage more effectively with the industry, and give banks positive evidence that their efforts are leading to improved rates of detection and prevention of criminal and terrorist activity. It is important to not lose sight of the fact that anti-money laundering is about fighting criminality, not about box-ticking. The Report itself is at: http://www.kpmg.co.uk/services/f/rs/index.cfm#