How to Prepare Your Company for Annual AML Exams

When AML compliance exams come up in conversation among financial institutions, the most common word we hear is “inconsistent.” Financial leaders would like more certainty among the various regulatory bodies, including on their interpretation and enforcement of AML laws.

While we have seen a lessening of AML enforcement actions, there is a clear increase in formal agency criticism. Across the board, regulatory bodies are strengthening exam enforcement in which deficiencies result in the need for more funding and resources to correct problems.

Adding to these compliance challenges is the fear that fraudsters are becoming more sophisticated at what they do – including identifying the weak links in FI’s AML processes, so they can hide the true source of their funds.

As always, today’s FIs need to stay on top of AML to ensure they are in compliance, but they also need to be equipped to help stop financial crimes from occurring. The best way to achieve both objectives is to be well-prepared for annual AML exams. Adequate preparation delivers several benefits, helping FIs streamline the exam process, stay in compliance, reduce the risk of regulatory fines and criticism, and prevent future financial crimes.

To elevate your organization’s AML exam readiness, focus on two key objectives: assessing your current compliance risks, and establishing best practices to create a controlled environment that minimizes your risk of both non-compliance and criminal activity. Here are some ideas on how your organization can achieve both goals:

Step 1: Identify your compliance risks

Is your organization at risk for criminal activity and, therefore, AML-related non-compliance? You should evaluate these four primary areas to assess your risk levels.

Customers

Certain customers pose a higher risk of financial crimes than others. Clues include the nature of their businesses, their occupations, the duration of their relationships with your FI, and the number of accounts they’ve opened. To pass compliance exams, you must have documented processes for identifying high-risk customers. While many financial institutions can manage high-risk customers, proving that ability to your regulator is a major issue.

Products and services

Some products and services pose a higher risk of criminal activity than others, such as prepaid cards, remotely-created checks, and cross-border wire transfers. To pass compliance exams, you must have documented processes for monitoring your high-risk products and services. Another best practice is to make sure that the compliance department is part of any and all product plans at your institution.

Transaction activity

Transactional behavior and patterns can be an indication of criminal activity, such as a high volume of transactions and complex money flows. To pass compliance exams, you must have documented processes for monitoring high-risk activities.

Geographic presence

Law enforcement agencies have identified the criteria and countries at greater risk for fostering money laundering, including those subject to OFAC sanctions, offshore financial centers, and high-intensity drug trafficking areas. To pass compliance exams, you must have documented processes for monitoring these high-risk regions. Many AML professionals will tell you though that you should never solely view geography when calculating risk.

Step 2: Best practices to control your environment

The best way to mitigate AML risks and prepare for compliance exams is to control your environment by setting up best practices in these seven areas.

Know Your Customer (KYC) practices

Start by clearly defining and aligning the following to customer attributes and risks: customer identification programs, customer due diligence, enhanced due diligence, and special circumstances due diligence. It’s also important to assess these areas for their compliance strength (either strong, adequate, or weak): exceptions or waivers, completeness of customer information, reliance on other business units or third parties, periodic risk-based renewals or rolling reviews to look for changes in information, and customer name screening.

Potentially suspicious and/or unusual activity

A controlled financial environment must include well-defined and effective processes for effectively evaluating customer activity. This includes promptly detecting, escalating, investigating, and filing suspicious activity reports (SARs). Suspicious activity includes a wide range of activities, such as large cash transactions, a large number of transactions, and spikes in activity or amounts, to name a few. However, not all of these activities necessitate a SAR filing.

Office of Foreign Assets Control (OFAC) Sanctions

To be compliant with OFAC-governed sanctions regulations, entities must ensure they are not: engaging in trade or transaction activities that violate the regulations behind OFAC’s country-based sanctions programs, or engaging in trade or transaction activities with sanctions targets named on OFAC’s list of Specially Designated Nationals and Blocked Persons. To meet compliance standards, FIs’ policies and procedures should address all aspects of OFAC compliance and controls, including everything from customer onboarding and screening to specialized training.

Employee AML expertise and coverage

Inadequate AML staffing is often a root cause for compliance failures. To prevent staff-related issues, AML functions and responsibilities should encompass an adequate number of resources, a sufficient level of aggregate AML expertise, and an appropriate allocation of time to AML tasks.

Management and oversight

The challenge of managing and overseeing a broad range of AML activities and functions requires careful attention to the strength and design of the FI’s AML infrastructure, framework, and related practices. For example, one person should be designated to own the system and ensure that processes are followed and updated, reports are filed, training is robust, and that the entire system is running effectively. Of course, the AML Officer needs a strong team to carry out these duties and authority to implement any and all processes and policies.

Policies, procedures, and processes

All AML policies and procedures should be documented, comprehensive, and consistent with best practices, approved by stakeholders, and regularly updated.

Operations and technology

Routine and standard AML operations and functions should address regulatory requirements and align to the FI’s enterprise-wide AML policy. This includes deploying the right technologies to improve existing processes.

AML compliance is not a “nice to have,” nor is it a necessary evil— it’s a fundamental requirement to ensure your organization is meeting every regulatory body’s compliance requirements and leading the fight against criminal activity. In some cases, an independent AML consultant or team can help ensure you’re FI’s regulatory activities are backed by expertise in every area of AML regulatory compliance.

We’d love to talk to you about how you can strengthen your organization’s compliance readiness. Contact us today for a consultation.

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Edward Ellis

Edward Ellis

Mr. Ellis serves as Director of Business Development and Marketing of AML RightSource. He has over 15 years of experience in business development, marketing, and professional consulting within the healthcare and financial services industries. Mr. Ellis earned his undergraduate degree from Bowling Green State University and obtained his juris doctor from Cleveland State University – Cleveland-Marshall College of Law.

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