Cleaning up

Rupert de Ruig of Dow Jones tells FST that strong anti money laundering practices are the best way for financial institutions to avoid more regulation.

FST. What are the potential implications for those that take inadequate steps to protect against money laundering and financial crime?
Rupert de Ruig. Massive fines are simply the tip of the iceberg. Reputational damage and the huge costs of managing the remediation process decreed by a dogmatic and unreasonable regulator, is often the real story behind the headline. However, organisations that take the correct steps to put in place basic systems and processes will dramatically decrease the risk of falling foul of the authorities.

Inadequate implementation of AML systems can have catastrophic consequences for institutions, exposing them to dealing with someone that represents a legal or reputational risk. The global trend is therefore moving away from simply having an AML system in place to comply with regulation towards ensuring that these systems are both robust and cost efficient.

FST. Though AML programs are growing in popularity, research shows that many institutions are still unsure of how to respond to the challenges of AML. Why is this topic such a difficult one for financial institutions to get right?
RdR. Putting an AML program in place can seem a monumental and daunting task. Client screening is an essential component, and I believe one of the key issues lies here. Regulated institutions are required to screen their customers for Politically Exposed Persons (PEPs), but as yet, there is no globally recognised definition as to exactly who should fall into this category. The Third EU Money Laundering Directive requires that institutions screen for senior PEPs, but many organisations are still unsure about where to draw the line in terms of seniority. Institutions need to fully understand their PEP exposure by conducting a comprehensive risk assessment, and tailor their client screening programs accordingly.

FST. With the third AML Directive now in place within European markets, what effect is this having on the market? What are the long-term effects of this directive likely to be?
RdR. Whilst the directive has been in place for some time, Belgium, Ireland, Spain and Sweden have yet to transpose it into the national laws. The transposition process is also an opportunity for some countries to revise and clarify some of the text in the directive. At time of going to press it appears that Spain is considering adding additional PEP job role categories to their definition. Some of the job proposed categories such as local councillors would add thousands of additional records to commercial databases. Due to the fact a name is an imperfect identifier, the more names in a database the more hits and false positives financial institutions will get. In the long term the regulation will make it harder for corrupt PEPs to enjoy their ill-gotten gains, however until regulated firms also have to monitor domestic as well as foreign PEPs, there will always be suspicious activity going unreported.

FST. Finally, how important is it for financial institutions to be able to carry out the kind of due diligence that is necessary to prevent illegal transactions? What tools are available to enable these requirements?
RdR. Financial institutions without effective due diligence procedures in place risk becoming a haven for illegal activity. If banks fail to implement appropriate procedures, the burden of preventing illegal transactions will fall on regulators. The consequences of this would be increased scrutiny of a financial institution’s business dealings, leading to friction and a non-cooperative approach been regulated institutions and regulators.

Financial institutions seeking to put in place effective due diligence procedures should screen clients against a good quality commercial watch list and conduct ongoing due diligence of high risk customers. They must also understand the true background of an individual or entity through effective research and analysis, put in place technology to monitor transactions across the entire business and leverage crime typologies and other suspicious activity alerting tools to be able to recognise these high level illegal transactions.

Rupert de Ruig is Managing Director, Dow Jones Risk & Compliance. He has over 13 years of experience in the information industry, working with large global financial institutions on data management, market intelligence, and Anti-Money Laundering projects. He has written numerous articles for international publications and worked with global regulators and financial institutions to tackle the Politically Exposed Person definition challenge.