I have a unique perspective. I am a due diligence expert, an international financial fraud investigator, and I teach classes on AML and AML compliance. I have spent a lot of time working with Financial Institutions (FIs) to get AML right.
The Anti-Money Laws have two origins, one to remove the profit from crime and the other to button up economies so they can be taxed. The first steps came from Nixon’s war on drugs, and the second waves were, and continue to be, taxation from the FATF. Either way, the world’s governments have shifted a considerable amount of law enforcement responsibility to business and financial institutions.
By our nature and construction, the private sector is ill-suited for these tasks. We lack the power, mindset, and ability to spend nearly any amount of money to achieve a task. Private businesses do not have the power nor the treasury of a government body. So we do what we can. Expensive, repetitive tasks we try to automate. We also tamp down on the cost of labor, especially for any non-revenue function.
However, FIs are held accountable by regulators both for their activities and their inactivity. There is no reward for success other than to be left alone, just a lot of misery if you get it wrong. Mind you, some financial institutions got what they deserved for knowingly laundering money, but most just did not know.
Here are some proven steps to keep on the right side of AML compliance.
In your AML Manual, if you say you will do something, do it. One FI wanted to look tough on reporting so all SARs would be filed in 4 days, not what the law required of 5. Half of the SARs were filed in 4 days and the other half in 5 days. 100% compliant with the law, but the AML manual said four days. Another FI required 20 hours per year of training on AML for all AML executives. For 3 years running, the FI averaged 5 hours of training. All resulted in fines.
Training and communication are uber important. One bank did not let their fraud, AML, or operations teams speak to one another. Once this prohibition was removed, and communication encouraged, the bank found an enormous waste of time to address the same issues by all three departments. Working together, they were able to address some internal systemic problems, dump troublesome clients, and, along the way, the change produced an 80% reduction in fraud losses.
One well-selected and trained professional can do the work of five to seven commodity hires. I was presented with a depositor who had issued a good check for $42,000. I was told it was money laundering. Research showed the depositor had just retired and bought a retirement SUV. The AML researcher assumed it was money laundering because they had never seen a check in such a large amount. I can also assure you from years of experience that 80% to 90% of AML executives could not spot a money flow tied to criminal activity. This is not a slam. They cannot spot these flows because they do not think or act like criminals. This is also probably a good thing. It takes years of life experience and training to see what is trying to be concealed.
Automated “Red Flags” are a time, talent, and treasure requirement. We all understand we need pattern matching and beta fortuity to help us. However, Red Flags must all be examined before any automatic action is taken. A 60-year-old charity and 20-year client of a bank has one fundraiser a year. The annual carnival will gross around $3 million in three days. The carnival starts at 4 pm on a Friday. The bank’s AML system detected a surge of charges that was unusual and shut down the credit and debit card purchases Friday at 6:30 pm. It was not solved until noon on Saturday. The charity estimated the losses at $730,000. A company launched a private placement and began selling its shares to raise money. The bank was notified in advance that this was going to occur and was given copies of the $5 million prospectus. The company’s account was frozen after the first $125,000 was deposited. Checks written against those deposits were bounced. In both cases, the banks knew in advance of the activity and had long and close relations with their former customers. A human has to throw the switch, not the automated system.
Lots of cash does not mean it is money laundering. A banker asked me; I have a client that deposits between $700,000 and $1.2 million weekly. Everyone tells me that only drug dealers have that amount of cash, and it has to be tied to a crime. I did not think so, as there was no attempt at concealment. We looked into the problem. The client was a wholesale tobacco broker. The state required all tobacco brokers to pay the taxes on goods sold before 3 pm that day to be paid by 5 pm that evening. That was 67% of each dollar he collected was tax. He could not wait for a check to clear in two to three days, nor could he take the risk of a bounced check. The state’s tax requirements required him to take cash. The banker was sharp; she recognized the risks and opportunities. She became the banker to the tobacco brokers of the state and got many of them to set up near-instant ACH transfers for most of their customers and a cash-in-transit service for the cash still being collected.
In summary, if you say you are going to do something, do it. Well-trained AML staff is a must. Fewer high-quality professionals are more efficacious than masses of poorly trained clerks. Automation is important but not the answer, just a tool. Good customer due diligence, yes KYC, on the front end will lower overall cost and frustration of compliance. Discount AML is a bit like discounted plastic surgery, unwise both short and long term.
L.Burke Files CACM DDP President
Financial Examinations & Evaluations, Inc.