Lessons Not Well Learned: 2020 AML Fines Cross 2019 Total

If research is to be believed, institutions across the globe have not done enough in the anti-money laundering (AML) compliance area. Data from consultancy Duff & Phelps revealed that AML fines in the first six months of 2020 reached US$706 million, compared to US$444 million in the entire 2019. The fact that the penalties were imposed on the same shortcomings as that of the previous years is more worrying than the sudden increase in fines. According to the consultancy, customer due diligence, AML management, suspicious activity monitoring and compliance monitoring and oversight are the areas where firms are going wrong repeatedly.

Key Takeaways from Research

• A total of 16 fines totaling US$ 706 million related to money laundering in 2020 till June, compared to 45 fines totaling US$444 million in 2019.
• There were 2 fines totaling US$26 million related to sanctions in 2020, compared to 13 and US$3.3 billion in 2029.
• The number of AML fines fell 14%, and fine values 86%, between 2018 and 2019 but rose again in the first half of 2020 following two substantial fines imposed in Europe.
• The share of the US in the total AML fines decline to 12% in 2020 (till June), compared to 45% in 2019. It indicates that other regulators around the globe have become more active with their AML oversight.
• There were 115 customer due diligence cases reported since 2015, compared to 109 AML management cases, 82 suspicious activity monitoring cases and 62 compliance monitoring and oversight cases.

How AML Fines Impact Financial Institutions

Financial institutions face stricter regulatory scrutiny than other firms as they were used more frequently by money launderers. They need to comply with AML norms that often undergo continuous updates. Non-compliance can lead to hefty fines, criminal proceedings and sanctions.

AML fines can impact profitability. In 2019, a tier-one Swiss bank received a hefty US$5.1 billion fine for AML, KYC and sanctions violations by the French Criminal Court, exceeding the bank’s 2018 net profit of $4.9 billion. AML scandals can impact share prices as well. In March, Sweden fined its oldest retail bank, Swedbank, US$386 million for shortcomings in AML compliance. The bank’s share prices fell by a third, ever since the scandal was reported by the media.

The loss of reputation due to scandals is more harmful to a financial institution’s business than the financial losses. It impacts a financial institution’s credibility and future performance. As a punitive measure, some financial institutions are sanctioned for AML compliance breaches. Sanctions can be even more damaging as these businesses will not be able to perform cross-border transactions, forcing their international customers to look for someone else.

Why There are AML Compliance Lapses?

Here are some of the widely cited reasons for compliance lapses and increasing AML fines.

• Regulatory uncertainties: Complex and frequently changing regulations are making it tougher for compliance departments to complete their tasks on time. There are certain areas where AML regulations are still evolving in many countries. For example, cryptocurrencies.
• Lack of skilled staff: It is very difficult to attract and retain staff in the AML compliance area. The number of resources with adequate experience, knowledge and skill are very less in the market and compliance departments are finding it difficult to fill the gap to address growing challenges related to money laundering.
• Inefficient allocation of staff: Proper allocation of resources is important to complete regulatory obligations on time, however, most compliance teams do not have a mechanism to address this.
• Complex money laundering methods: Criminals have become well aware of transaction thresholds and KYC rules and they are creating sophisticated methods to dodge rules.
• Outdated systems: Legacy rules-based systems are neither effective nor efficient. Their focus is narrow or unidimensional. Money launderers are aware of the rules and adjust their transactions accordingly to stay outside the radar. Manual tuning of rules to adapt to changes is often expensive and time-consuming. In short, these systems are not sustainable.

The Way Forward

With modern technologies such as artificial intelligence and machine learning at the forefront, compliance departments can address many of these issues effectively. With proper implementation, these technologies can bring in a paradigm shift in the way financial institutions approach financial crimes and compliance risk at large.

This is an area where machine learning-powered platforms like Tookitaki can add value. Our end-to-end AML/CFT analytics solution, the Anti-Money Laundering Suite (AMLS), can create next-generation compliance programs, encompassing key processes such as transaction monitoring, screening and customer risk scoring on a single platform. We enhance process efficiency and augment compliance risk cover with industry-first approaches: Typology Repository Management and Automated Model Management. Some of the benefits of our solution, which can take away much of the burden from the compliance staff, are listed below:

• Improved risk coverage by detecting complex money laundering cases, including new-age methods such as money mule accounts, cryptocurrencies and e-wallets.
• Enhanced process efficiency with accurate triaging of alerts into three different buckets – L1, L2 and L3 – with L3 being the high-risk bucket.
• Faster alerts disposition with explainable, defensible, and transparent machine learning models.
• Faster business decision with around 70% reduction in manual work.
• Auto creation of machine learning models and evolving them through Champion Challenger process thereby minimizing building and maintenance process.
• Role-based dashboards providing complete business intelligence and actionable insights

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