The AML/CFT Programme

 Significance of AML/CFT  Programmes

As ML/TF activities may be committed by anyone including the employees, customers, other stakeholders, general public etc. therefore, the criminal activities need to be identified, such as the exploitation of insider information or the acquisition of another person’s property by way of committing fraud etc. There may also be financial crimes that do not involve the dishonest taking of a benefit, but that protect a benefit that has already been obtained or to facilitate the taking of such benefit. The anti-financial crime policies ensure consistent implementation of minimum requirements and a robust and effective management of financial crime risk. 

The estimated amount of money laundered globally in one year is 2% to 5% of global GDP, or US$800 billion to US$2 trillion – and that’s a low estimate. Money laundering often accompanies activities like smuggling, illegal arms sales, embezzlement, insider trading, bribery and computer fraud schemes. It’s also common with organized crime including human, arms or drug trafficking, and prostitution rings.

Anti-money laundering is closely related to counter-financing of terrorism (CFT), which financial institutions use to combat terrorist financing. AML regulations combine money laundering (source of funds) with terrorism financing (destination of funds).

Beyond the moral imperative to fight money laundering and terrorist financing, financial institutions also use AML tactics for:

·         Compliance with regulations that require them to monitor customers and transactions and report suspicious activity.

·         Protection of their brand reputation and shareholder value.

·         Avoidance of consent orders as well as civil and criminal penalties that could be levied because of noncompliance or negligence. 

·         Reduction of costs related to fines, employee and IT costs, and capital reserved for risk exposure.

The AML Programme

An Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) program specify how the RE comply with AML/CTF legislation. The program must be a written document showing how it  identify, mitigate and manage the risk of its products or services being used for money laundering or terrorism financing, and must be appropriate to the level of risk the business or organisation may reasonably face.

AML/CTF programs are vital in identifying, disrupting and preventing money laundering and terrorism financing. This protects the  business or organisation, its  community and the nation from criminal activity.

Anti-Money Laundering Program should include:

• Written internal policies, procedures and controls
• A designated AML compliance officer
• On-going employee training
• Independent review to test the program

The RE’s AML/CFT program must be risk-based. This means it must take into account the likely level of risk of your business or organisation being used for money laundering and terrorism financing, based on its size, nature and complexity, taking into account:

• Who its customers are
• The services it provides
• How it deliver those services
• The foreign jurisdictions with which it deals.

A risk-based approach does not stop the RE from providing higher risk products or services; nor from establishing business relationships with higher risk customers or conducting certain transactions or activities. Rather, a risk-based approach requires you to identify and understand the circumstances in which your risks are higher. The RE  should then apply most of the  AML/CFT resource to these situations. For low-risk customers or situations, the application of the  AML/CFT resource can be less extensive. 

There are two parts to an AML/CTF program. Part A must include processes and procedures to help the RE to  identify, mitigate and manage the money laundering and terrorism financing risks that you may reasonably face. Part B is focused on the procedures for identifying customers and Beneficial Owners  including those that are Politically Exposed Persons(PEPs), and verifying their identity.

There is no ‘one-size-fits-all’ AML/CTF program. Each reporting entity is different and has its own unique set of money laundering/terrorism financing risks. the RE  must develop a program that is tailored to meet its specific needs, risks and characteristics. This gives the RE the flexibility to decide how to meet its obligations and to develop stronger and/or additional controls when necessary. 

BIS on AML/CFT Programme

The Basel Committee on Banking Supervision issued on 02 July 2020, the updated version of its guidelines on Sound management of risks related to money laundering and financing of terrorism, with guides on the interaction and cooperation between prudential and anti-money laundering and combatting the financing of terrorism (AML/CFT) supervisors.

According to BIS, there are three lines of defense against ML/FT risks. As part of the first line of defence, policies and procedures should be clearly specified in writing, and communicated to all personnel. They should contain a clear description for employees of their obligations and instructions as well as guidance on how to keep the activity of the bank in compliance with regulations. There should be internal procedures for detecting and reporting suspicious transactions

 As part of the second line of defence, the chief officer in charge of AML/CFT should have the responsibility for ongoing monitoring of the fulfilment of all AML/CFT duties by the bank. This implies sample testing of compliance and review of exception reports to alert senior management or the board of directors if it is believed management is failing to address AML/CFT procedures in a responsible manner. The chief AML/CFT officer should be the contact point regarding all AML/CFT issues for internal and external authorities, including supervisory authorities or financial intelligence units (FIUs).

 The chief AML/CFT officer may also perform the function of the chief risk officer or the chief compliance officer or equivalent. He/she should have a direct reporting line to senior management or the board. In case of a separation of duties the relationship between the aforementioned chief officers and their respective roles must be clearly defined and understood.

The chief AML/CFT officer should also have the responsibility for reporting suspicious transactions. He/she should be provided with sufficient resources to execute all responsibilities effectively and play a central and proactive role in the bank’s AML/CFT regime. In order to do so, he/she must be fully conversant with the bank’s AML/CFT regime, its statutory and regulatory requirements and the ML/FT risks arising from the business.

Internal audit, the third line of defence, plays an important role in independently evaluating the risk management and controls, and discharges its responsibility to the audit committee of the board of directors or a similar oversight body through periodic evaluations of the effectiveness of compliance with AML/CFT policies and procedures. A bank should establish policies for conducting audits of 

(i) the adequacy of the bank’s AML/CFT policies and procedures in addressing identified risks,

(ii) the effectiveness of bank staff in implementing the bank’s policies and procedures; 

(iii) the effectiveness of compliance oversight and quality control including parameters of criteria for automatic alerts; and 

(iv) the effectiveness of the bank’s training of relevant personnel.

  

And therefore the AML/CFT programme needs to be created around these three pillars.

Types of AML/CFT programs

There are three types of AML/CFT programs.

1. A ‘Standard Program’ for individual reporting entities as defined in the PMLA 2002.
2. A ‘Joint Program’ for members of a Business Group as defined by Sec 286 (9)(e) of Income Tax Act 1961. Each nation may have their .definitions in a similar way.  

   A group-wide programme is a holistic AML/CFT risk assessment and management across a group or structure. These requirements are set out in R. 18 and its Interpretative Note(FATF) and may include group-wide policies and procedures, group risk assessment, the appointment of a group compliance officer and group audit functions.

3. A ‘Special Program’  like that  of  holders of an Australian Financial Services Licence (AFSL), such as financial planners, who arrange designated services from other reporting entities for their clients. Special programs only need to include Part B of an AML/CFT program. 

The categorisation mostly depends on the regulatory system of the country.

RBI, India requires banks to follow, the most stringent regulations when they have branches/subsidiaries operate outside the country. 

The effective application of AML/CFT preventative measures is a prerequisite for addressing and mitigating the money laundering and terrorist financing risks associated with implementing any type of voluntary tax compliance programme. 

Happy Reading,

Those who read this, also read:

1. The Know Your Customer (KYC)Policy