As the nature and volume of money laundering schemes becomes more complex and vast, financial institutions and regulated businesses are faced with the need for increased regulatory compliance. This extends beyond the mandatory KYC at the time of customer onboarding to ongoing AML compliance and checks for relationships with PEPs and sanctioned entities. Why so? That’s because the money trails are becoming more complex, posing risks to businesses.

What happens when you don’t comply with AML/KYC regulations?

With business operations expanding globally, the risks are greater, and so are the fallouts of non-compliance with AML laws and breaches of financial sanctions. Disciplinary fines, huge penalties, legal/criminal proceedings, sanctioning, and damage to reputation and shareholder confidence are some of the grave consequences.

The financial and criminal dynamics across the world are also changing. Financial crime is becoming more sophisticated and hard to detect. In the wake of the increasing cases of laundering and scams; businesses and financial institutions are adopting a risk-based approach to avoid losses from fraud and penalties. Organisations are using KYC and AML compliance to check financial crimes before they happen. Firms are also scrutinising risk exposure to PEPs and sanctioned governments. The fear of being penalised is a strong motivating factor to maintain ongoing, robust compliance systems.

How financial institutions are exposing themselves to crime and penalties for non-compliance

Financial institutions in particular, are known for their high-risk appetite in their quest for profits. Ongoing compliance has often been compromised. Due diligence checks and sanctions have frequently been done away with or overlooked, where the transactions or customer accounts are high-value. This has led to many banks like the Danske being drawn into the web of money laundering and terror financing networks. To deter organisations from such unethical and unlawful practices, regulators are introducing measures at various levels; like more stringent SAR filing, penalties for non-compliance and very recently, sanctioning. Recognising the role of the Digital Ethics Officer and other job roles associated with implementation of compliance, regulators have begun imposing fines on compliance officials

FinCEN imposed the largest ever fine of US$250,000 against an individual, the chief compliance officer of money transfer company Money Gram, for failing to implement an effective AML program. Additionally, Thomas E. Haider faced two years of sentence.

Instances of some of the highest penalties imposed on banks

Over the past few years, we find a rise in such enforcement of multi-million-dollar fines for AML non-compliance.

Some leading instances are:

• Commonwealth Bank of Australia was issued the largest fine of AU$700 million in Australian corporate history by AUSTRAC, for breaches in AML and CFT laws.
• ING (Netherlands) paid $900 million for broad failures in its financial crime compliance controls.

Fines are now crossing into billions, as regulators come across serious breaches in compliance systems and repeat offences.

• Standard Chartered was fined $1.1 billion by FCA for AML breaches in two higher risk areas of its business. 
• Deutsche Bank, a repeat offender, has been penalised a whopping global fine of $2.5 billion by CFTC (US $800 million), the US Department of Justice (US $775 million), the New York Department of Financial Services (US $600 million) and FCA (US$600) for failure in AML controls.

These cases illustrate that actual laundering of potentially criminal money had occurred solely because the institutions had failed to implement AML compliant systems fitted to the risk exposure. Had they implemented a robust AML compliant process, the banks may neither have been used for money laundering, nor faced such huge fines.

Financial crime by categories of non-compliance

Such high-profile cases of fines indicate that financial crime is a key concern for regulators. The global figures for enforcement rank financial crime as the second highest category of crimes for which regulators took disciplinary actions. Within the financial crime category, between 2013 and 2017, the top five areas were sanctions breaches (US$10.1 billion), bribery (US$5.6 billion), tax evasion (US$5.1 billion), fraud (US$4.4 billion) and AML (US$3.5 billion). This has further reinforced regulator focus on both institutions and individuals.

Benefits of compliance

At a time when large institutions are being fined for inadequate AML measures, there are others that are focused on streamlining AML processes to avert situations of being penalised. For instance, a community bank in Atlanta (U.S.A.), the Citizen Trust Bank, has taken suspicious activity reporting seriously — and the efforts are paying off, with improved cross-channel fraud detection and suspicious behaviour alerts.

A strong culture of compliance and an effective risk based AML program in place can go a long way towards averting of fines and losses. Today, a wider range of financial services firms and individuals are being scrutinized. So businesses transacting with offshore markets need to strengthen their AML framework, taking into account the nature of enforcement regimes, like Channel Islands and Bermuda.

Steps to reap benefits of compliance

Firms need to assess, manage and mitigate the dangers of non-compliance and safeguard against deliberate staff breaches, errors, or gaps in the systems and processes. They need to consider the solutions available, and invest and upgrade existing systems to satisfy the AML and financial sanctions. The efficacy of firms to alter the actions on their own, is the ultimate benchmark of success.