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How is the global fight against money laundering going?
The result of the drive was that almost all major banks and other financial institutions saw a sharp fall in laundered money.
But, how is the fight against money laundering going after 10 years?
KPMG International, a Swiss-based consulting company, commissioned RS Consulting, an independent research agency based in the United Kingdom, to conduct a telephone survey of banks across the major sectors (retail banking, corporate and business banking, private banking, investment banking and wholesale banking) during late 2010.
These banks were drawn from the top 1,000 global banks according to the July 2010 edition of The Banker Magazine.
The quality of respondents was high, with job titles ranging from Group Money Laundering Reporting Officer to Head of Compliance, Head of Legal and Head of Risk.
Here are the results of the survey.
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How is the global fight against money laundering going?
Interest
Priority for senior management: Sixty-one per cent of respondent in 2004 believed AML was a high-profile issue for their senior management.
Stronger senior management engagement: Seventy-one per cent of respondents in 2007 stated that their board took an active interest in AML.
Senior management interest has declined: Sixty-two per cent of respondents in 2011 cited AML as a high-profile issue.
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How is the global fight against money laundering going?
Cost of compliance
The cost of AML compliance increased sharply in 2004. The average increase over the previous three years was 61 per cent, with no respondents reporting a decrease in investment.
AML costs grew beyond expectation in 2007. Average costs grew 58 per cent in the previous three years, compared to a prediction of 43 per cent growth in 2004.
Costs continue to rise, at an average compliance rate of 45 per cent in 2011, against a prediction of 'over 40 per cent' in 2007.
The extent of cost rises is underestimated by many.
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How is the global fight against money laundering going?
Establishing a global policy was a major challenge in 2004. Nearly two-thirds of respondents had a global AML policy in place; however half of these undertook implementation at a local level.
Banks took a more global approach to managing AML risk in 2007. Eighty-five per cent of internationally active banks had a global AML policy in place.
There remains much variation in approach in 2011. Two-thirds of banks have a global policy in place, however almost three quarters implement their procedures locally.
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How is the global fight against money laundering going?
Politically exposed persons
PEPs were not a key area of focus in 2004, with only 45 per cent respondents performing enhanced due diligence on PEPs at account opening stage.
There was more focus on PEPs in 2007. Eighty-one per cent of respondents performed enhanced due diligence on PEPs at account opening stage.
PEPs are now an area of focus for almost all respondents in 2011, with 96 per cent using PEP status as a risk factor and 88 percent monitoring PEPs on an ongoing basis.
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How is the global fight against money laundering going?
Sanctions compliance
Not covered in the survey in 2004.
Sanctions compliance is now a major challenge and source of AML investment due to increased regulatory focus in 2004.
However, 20 per cent of banks did not have any procedures in place to update principal information for the purposes of sanctions compliance.
Sanctions compliance remains a challenge in 2011, with client screening seen as the most difficult area. Seventy-four per cent of respondents identify all directors and controllers.
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How is the global fight against money laundering going?
Transaction monitoring
Enhanced transaction monitoring systems was the main area of increased AML spending in 2004, but not universally. Sixty-one percent of banks use internally developed systems, with 45 percent using those developed externally.
However, 22 per cent used neither.
People are still the first line of defence in the fight against money laundering in 2007, despite it being the greatest area of AML investment.
Ninety-seven per cent of respondents still relied primarily on their people to spot suspicious activity. Satisfaction with systems is 'neutral', at an average of 3.7 out of 5.
Questions are starting to be raised about transaction monitoring in 2011. Overall, respondents' satisfaction with transaction monitoring remains neutral, at an average score of 3.6 out of 5, but many regions are less satisfied than in 2007.
It remains the greatest area of AML spending.
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How is the global fight against money laundering going?
Risk-based approach
Banks were adopting a risk-based approach in 2004. Eighty-one per cent of respondents adopted a risk-based approach at account opening stage.
There was a broader acceptance of a risk-based approach in 2007. Eighty-six per cent of respondents used a risk-based approach to know-your-customer activity.
Taking a risk-based approach to KYC requirements is now almost universal in 2011.
Ninety-one per cent do so at account opening.
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How is the global fight against money laundering going?
Know Your Customer
Banks increasingly understood the importance of AML compliance for existing and new customers in 2004. Seventy-four per cent of respondents remediated information gaps for existing customers, even if taken on before new KYC rules or guidance.
Banks continue to use remediation programmes to 'backfill' customer data in 2007. There was a slight but not significant increase in the number of banks engaged in a remediation programme, with 77 per cent of banks having a remedial plan in place.
KYC information is refreshed by almost all institutions in 2011, but not consistently across regions. Ninety-three per cent of respondents have a programme in place to remediate information gaps, but the approach varies greatly.
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How is the global fight against money laundering going?
Regulatory approach
The regulatory AML burden was acceptable but the requirements could be more effective in 2004.
Eighty-four per cent of respondents believed the burden to be acceptable, but 54 per cent felt that it could be more effective.
There was broad support for regulatory AML efforts, but also more to do in 2007.
Ninety-three per cent of respondents thought the regulatory burden was either acceptable or should be increased, however 51 per cent said it could be better focused.
Regulators are active, but banks want more collaboration and information in 2011.
Eighty-five per cent of banks feel that the overall level of regulatory burden is acceptable, but many wanted more guidance and a collaborative approach.
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How is the global fight against money laundering going?
Key points of interest
The importance of anti-money laundering to European senior management is falling faster than the other regions, with only 55 per cent of respondents stating that AML was a high-profile issue in which the main board of directors took an active interest (down from 70 per cent in 2007).
It is interesting to note that 96 per cent of respondents working in the Central and South America and the Caribbean region cited AML as being a high-profile issue in which senior management took an active interest.
Conversely, only 50 per cent of the financial institutions surveyed in the Asia Pacific stated that AML was a high-profile issue.
This may be due to regulators being less active than those in other regions, with consequently lower levels of regulatory enforcement.
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How is the global fight against money laundering going?
Key points of costs
Costs of AML compliance have risen by an average of 45 per cent in the past three years, with more than 80 per cent of respondents reporting a cost increase over that time.
This rise in costs was reported across all regions, other than North America where only 64 per cent of respondents reported an increase.
In the Asia Pacific, regulatory enforcement actions have centered on identified deficiencies in the reporting of suspicious activity, which may have led to a greater focus on this area.
Only 10 per cent of respondents have outsourced or offshored AML functions, while almost 80 per cent say they have not even considered doing so.
This is interesting given that financial institutions anticipate the cost of AML compliance to continue rising over the next three years.
It could be that there is a perception that any cost savings obtained through moving certain AML functions to a lower cost location will be negated by greater levels of due diligence being required to ensure that high standards of compliance are maintained.
However, the primary reason for not off-shoring/outsourcing AML functions is concern over sending confidential customer data overseas.
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How is the global fight against money laundering going?
Key points of politically exposed persons
The focus on PEPs has intensified with recent events in the Middle East and North Africa; financial institutions find themselves in a key role regarding international financial crime initiatives.
Of those financial institutions that have adopted a risk-based approach to KYC, 96 per cent use PEP status as a risk factor (up from 81 per cent in 2007).
Across all respondents, irrespective of whether they have adopted a risk-based approach to KYC, 88 per cent said they had specific procedures for identifying and monitoring PEPs on an ongoing basis.
This represents a continuing upward trend from about 71 per cent in 2007 and only 45 per cent in 2004.
Given the risks associated with PEPs, and indeed bribery and corruption as a whole, it is interesting that Asia Pacific lags behind other regions, with only 73 per cent of respondents identifying and monitoring PEPs.
This is significantly higher, however, than the 42 per cent reported in 2007.
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How is the global fight against money laundering going?
Key points of sanctions compliance
Sanctions compliance has attained a high profile in recent years as governments' attempts to focus their efforts on preventing terrorist financing and Weapons of Mass Destruction proliferation have led to a number of high-profile cases.
More than 70 per cent of respondents find client screening and the handling of filter hits either challenging or very challenging.
This is consistent with KPMG's experience and the nature of work they have undertaken within the past three years.
As sanction screening is undertaken in 'real time', with transactions held until potential 'hits' are investigated, financial institutions are confronted with a number of difficulties.
The underlying issue regarding sanction screening lies with the quality of customer data maintained by financial institutions.
Poor or incomplete data may result in more 'hits' being generated, as well as difficulties in eliminating false positives.
Furthermore, customer data is often held on several systems, all of which may need to be screened.
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How is the global fight against money laundering going?
Key points of transaction monitoring
A key aspect to tackling money laundering and terrorist financing is to undertake 'ongoing monitoring' of the business relationship with each customer.
This means not only the monitoring of all transactions involving the customer to ensure that they fall within expectations, but also ensuring that all KYC documentation is accurate, complete and up-to-date.
North American financial institutions are the least satisfied with their monitoring systems and controls.
The fall in North American respondents' satisfaction from a score of 3.9 to 3.2 out of 5 is consistent with KPMG's experience, particularly with respect to securities firms and financial institutions that carry on non-retail business.
Less than one-third of respondents are able to monitor a single customer's transaction and account status across several countries.
Although low, this represents an increase from just over one-fifth in 2007.
The Central, South America and the Caribbean region leads the way in cross-border monitoring, with 57 per cent of respondents being able to monitor a single customer's transactions and account across multiple countries.
This contrasts with only nine per cent of Asia Pacific respondents.