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A Year of Change Ahead
As an AML professional, are you ready for the upcoming year? In this edition of Spin Cycle, we address the impact of the global credit crisis on compliance and in particular Anti-Money Laundering compliance. We suggest that while AML may not have the limelight it once did, Congress is poised to create additional regulations and increase the number of regulators that will be diving deeply into your compliance operations. All AML professionals will be affected by these changes and should be prepared for rigorous and intense reviews.
For Dominion 2009 is a year to focus on helping our clients improve the efficiency and effectiveness of AML compliance while dealing with the reality of budgets that are under pressure. Continue to turn to Dominion for insight form the front lines that will help navigate what is sure to be a year of change.
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AML Compliance 2009, Is Much Changing?
By David B. Caruso, CEO
Hopefully the financial services industry will not see anything like 2008 again. The largest bank failure ever, household names that were sure to be around for a long time are gone, more than a hundred thousand jobs lost. Much has been, and will be written about what went wrong, why and who was to blame. |
Hopefully those retrospectives will help policy makers, bankers and consumers learn from mistakes. In the meantime, however, what does 2009 and beyond hold for those in the AML field?
Its likely AML is no longer the top compliance issue facing institutions. But does this diminished focus mean AML is less important or less likely to pose regulatory compliance risk to institutions? We think not. Although AML may move down the list of top compliance issues, it remains a topic that will garner much attention from regulators, enforcement officials, the media and lawmakers. Because AML compliance is part of "risk management" and "internal controls" - two phrases that are becoming part of the Washington, D.C. lexicon - programs that weaken will increase an organization's operational risk.
Some decry the lack of regulation or the lack of enforcement of existing regulation as kindling on the financial crisis fire. And, while not directly related to the mortgage issues, the Ponzi scheme carried out by Bernard Madoff may act as a further accelerant to the fire. Washington is sure to react.
If past is in fact prologue, Washington will respond to the credit crisis and the Madoff fraud by enacting new regulation on the financial services industry and by increasing the budgets of regulatory agencies so they may hire more examiners.
There is also talk of combining agencies that regulate banking and securities companies. While this may happen and it would certainly have implications for banks and broker dealers, the main point remains in tact: there will be more examiners examining institutions.
How will these changes affect AML professionals?
The future has yet to be seen, however it seems clear to us that there will be more regulations, more regulators and more intense scrutiny of institutions. In the December 30, 2008 issue of American Banker a feature story reported even small institutions are seeing a substantial uptick in the number of exams and the number of examiners assigned to routine reviews.
The January 5, 2009 issue of the Wall Street Journal noted that in Great Britain the Financial Services Authority is moving away from its "light touch" approach and is expected to hire more staff and step up oversight of banks and broker dealers. This is interesting because it wasn't too long ago that advocates for a new approach to U.S. regulation pointed to Great Britain and the FSA's approach as a model.
With more exams, more examiners and those examiners taking a conservative approach (an approach designed to detect all risk no matter how small) it's very likely that deficiencies in an AML program, viewed as a cornerstone of compliance, will be uncovered.
Of particular interest should be the recently published views of FinCEN on the importance of understanding and addressing the nexus between fraud and BSA/AML efforts. Specifically, FinCEN's 2008 Annual Report devotes space to discuss its efforts to assist the FBI and SAR Review Teams (teams of Assistant U.S. Attorneys and law enforcement agents) in identifying and taking action on mortgage fraud and other financial crime activity.
The impact of this on AML professionals should be clear: the government looks at detection, investigation and reporting of suspicious activity differently than do many financial institutions. For instance, to a prosecutor and agent, an institution's responsibility to detect and report mortgage fraud to FinCEN is paramount to complying with SAR regulations. AML compliance professionals need to understand that SAR regulations are not only there to address money laundering and terrorist financing, but nearly all financial crime.
Regulators are also focusing more attention on the risks associated with institutions that separate Fraud and AML departments and how these departments operate and file their own SARs. As mortgage fraud and other financial fraud cases are developed by law enforcement, questions are being raised as to why certain activity was or was not discovered and reported in a SAR, thus shining an unwelcome light on an institution's "global" suspicious activity reporting program. By "global" we mean any and all departments within in a bank that files SARs (AML, retail operations, securities, fraud, information security).
Furthermore, an outcome of the Department of Justice's involvement in early AML compliance failures (Riggs and AmSouth for example) are that DOJ now works to inform an institution's regulator when DOJ has concerns about a bank's lack of attention to or detection of a potential criminal matter. DOJ does not tend to separate the detection of fraud and AML the way much of the industry does.
In an environment where compliance weakness will be treated with little leeway and stiff penalties, an AML director does not want to be in a position where the failure to file a SAR or detect suspicious activity is attempted to be excused away because detecting it was the "Fraud Group's job."
AML compliance entered a new phase in 2004/2005 with the revelation of events that transpired at Riggs, AmSouth, ABN Amro and a few other institutions. As a result the expectation among regulators, enforcement, and lawmakers is that the banking and securities industry four years hence has strong AML programs in place.
For those institutions that have a strong and sustainable program in place, an increase in the rigor and frequency of examinations should be of minimal concern. However, for those institutions where AML compliance has not been seriously tested or whose program has had past weaknesses that have gone uncorrected, 2009 could be a long year.
Those in the trenches of AML compliance know that 2009 is no time to allow programs to weaken. Budgets will be tighter and uncertainty will be distracting, but effective execution of AML compliance remains a key priority.
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