Anti-money laundering can never be a tick-box exercise

Sumit Kumar Sharma, enterprise architect at In2IT Technologies

The estimated amount of money laundered globally in a single year is between 2% and 5% of global GDP, or $800bn to $2trn, making it one of the most serious financial crimes worldwide. It is, therefore, vital that financial institutions that work on financial data to combat money laundering implement AML compliance programmes and comply with international regulations.

While South Africa has, in recent years, bulked up its AML regulations and legislation, the country is still losing between $10bn and $25bn a year to this illegal activity. This means that banks, credit bureaus and other financial institutions have to strengthen their AML efforts and take compliance seriously.

Organisations that treat AML compliance as nothing more than a tick-box exercise and do not have the proper intent to do it will not be able to successfully detect genuine cases of money laundering. This can potentially create loopholes for criminals to target such organisations for purposes of money laundering, resulting in exposure to severe penalties and reputational damage.

It makes sense to comply

Non-compliant institutions can face fines that run into tens of millions of rands, loss of operating licences and even the imprisonment of directors. So, it makes sense to comply, both from a business and legal perspective.

It is right thing to do

Today we have freedom to move money fluidly across the international borders, with comfort of our homes, thanks to very complex global financial structures. However, some financial structures are also exploited to move illegal money. This money can be used by smugglers, corrupt entities, and terrorist. If a financial institution complies to AML regulations, they will save economies, reduce corruption, reduce crime (like smuggling) and above all can save many human lives.

On the face of it, AML measures such as Know Your Customer (KYC) seem simple to implement, as any financial institution should know who their clients are, where their money comes from and where it is being sent.

However, illicit money can flow through a complex financial network that involves people hiding behind shell companies and high-volume transactions, or dividing large sums of money between multiple headcounts, making it extremely difficult to monitor. This is made even more difficult considering the massive volumes of clients and transactions that banks deal with on a daily basis.

AML regulations are changing across the globe from rule based to risk based. South Africa is increasingly moving towards implementing risk-based AML regulations that force institutions to know their customers and perform stringent customer due diligence. At the same time, financial organisations are trying hard to comply with regulations, but there is still a lot of scope to improve.

To successfully drive AML compliance, organisations should institute executive oversight of all compliance processes, thus ensuring executive-level buy-in and intent. Secondly, adopting the right technology is also key to combating money laundering and ensuring regulatory compliance.

Data analytics

AML starts with data analytics, where organisations check transactional data to identify patterns or violations that indicate suspicious activity. When a transaction is flagged as suspicious, machine learning technologies are used to teach the system to automatically identify probable instances of money laundering.

Simple analytical algorithms, which are continuously finetuned, whittle down the flagged transactions to a number of probable money laundering cases that should be investigated. This system reduces the workload tremendously and gives a more accurate picture to investigators.

The probable cases then pass through a third layer of technology, which is case management. At this point, an investigation can be conducted and cases where money laundering has been identified can be reported to the appropriate regulatory bodies.

While many organisations invest heavily in AML technologies, money laundering threats and regulations constantly evolve. Therefore, it is crucial to find the right technology partner that keeps up to date with these changes and actively brings new technology components and insights to the customer.

These technology providers continuously update their software and provide new solutions to new threats across the globe. The more global the vendor, the more experience they bring from various geographies.

We need to be more vigilant and South African organisations must pay attention to the global impact that money laundering can have. If we allow suspicious transactions through our financial system, they may end up financing terrorism elsewhere in the world. The bottom line is that money laundering cannot be seen just as a financial crime. It can destroy economies and is threat to human life and wellbeing. Fighting money laundering is important legally and ethically, morally. AML certainly deserves attention of our regulatory and financial institutions