The Face-Lift in the Culture of Anti-Money Laundering Reporting Officer Vs Compliance
The landscape of money laundering has undergone a process of evolution where culprits have shifted from conducting face to face cash or wire transactions to a more digital age.
Money Laundering consists of three basic steps: Placement, Layering, and Integration. These were the foundational concepts were taught and certified like many others who began their careers as Money Laundering Reporting Officer or AML Officer 15 years ago.
When a person or entity attempts to launder cash, it is normally very simple for the financial institutions AML alerting systems to detect it. Individuals or entities that make deposits or withdraw more than $10,000.00 in cash are required to complete a Currency Transaction Report (CTR), which is subsequently filed with FinCen by the financial institution under the BSA (1), while in the Middle East a Currency Transaction Report (CTS) falls under different reporting level and does not neccessitate reprting to the concerned FIU unless a red flags are raised when an individual or entity conducts activity in a manner in which it appears to be an attempt to evade CTS filing requirements. At that point, an alert is sent to the AML team and a formal investigation is initiated to determine if there is potential money laundering activity being conducted to decide whether to file a Suspicious Transaction Report (STR) to the concerned Financial Intelligence Unit (FIU).
Traditional Banks Are Falling Behind
Traditionally, larger financial institutions view Anti-Money Laundering (AML) from an Operations standpoint. Mirroring the model of an assembly line, the focal point is centered upon production where metrics such as daily completion rate and error ratio are key components used in determining the success of an AML analyst in their investigations.
This archaic system ultimately penalizes an analyst that rolls up their sleeves to conduct a deep dive analysis on a customer’s transaction activity because that analyst would be forced to rush through their subsequent alerts in order to reach their productivity goals. When analysts cut corners during their investigations, they may expose the financial institution to regulatory fines by potentially overlooking signs of money laundering activity.
While old-fashioned, the system does make sense from an operational standpoint. AML Compliance is a department that costs a financial institution hundreds of millions of dollars annually and generates little to no revenue so the mindset is to get the most out of their spending.
The Organizational Structure of the Traditional Bank
If you were to look into the organizational structure of many of the larger financial institutions, the AML Compliance department is typically nestled under the umbrella of Operations.
The problem with this organizational placement is that upper management staffs their management teams with individuals that have operational backgrounds, such as branch managers or fraud department managers because upper management tends to have limited hands-on experience in the field of Anti-Money Laundering.
With an AML management team comprised of operational gurus, productivity and process improvement ride shotgun in the chariot of AML Compliance while the overall quality of AML reviews gets relegated to the back seat.
A management team with limited AML knowledge can create friction within a department comprised of seasoned AML analysts for three reasons:
- A new management regime is more likely to increase productivity metrics in an effort to impress upper management.
- Since Operations-minded managers have little to no front-line transaction monitoring experience, they base their productivity metrics on the average number of cases completed by the department as a whole and increasing that overall number by a certain percentage.
- Increasing caseloads open the door for cursory AML transactional reviews resulting in corners being cut in the analysis of information and documentation.
- The residual effect of increasing caseloads is that it becomes a burden to the quality assurance staff who takes on the additional duty of becoming copy editors, combined with their normal duties.
- Seasoned AML analysts have limited options for assistance with complex AML matters.
- While an inexperienced AML manager may be able to identify cash transactions that give the appearance of structuring, their limitation of AML knowledge may prevent them from detecting activity more intricate, such as terrorist financing.
- Seasoned analysts lose confidence in their management team because they have a greater degree of knowledge than their leadership.
- Operations-Minded management teams tend to make hiring decisions based on cost savings.
- Managers roll the dice by hiring from within (other departments) in order to staff their AML team.
- Although it saves the department money (in terms of salary), the learning curve can be significant for someone unfamiliar with AML to learn the craft
- In the long run, large-scale cost-cutting measures of this nature devalue the actual AML position and create angst among the staff. The seasoned analysts on the AML staff (who have a significantly higher salary than their AML neophyte counterparts) develop a sense that they may be expendable.
Now that the paradigm has shifted and currency is now being exchanged with electronic payment transmitters such as Venmo, PayPal, Google wallet, etc., it is becoming increasingly difficult to detect money laundering. And a very tedious task to trace the source of funds, when it can now be sent to multiple countries in a matter minutes via electronic money transmitters.
In prior years, requirements were much more stringent when it came to conducting same day domestic and international money transfers (wires/swifts). Prior to the abundance of electronic money transmitters, an individual would have to go to their bank or a Money Services Business (MSB), such as Western Union, to complete a wire. In order to transfer the money, the individual would then need to provide documentary identification (ID, Passport, etc.) as well as state the purpose of the transfer (wire). If there were suspicious actions by the individual, a Suspicious Activity Report (SAR) would be submitted immediately to begin an investigation on that individual or entity’s banking activity.
Fast forwarding to current day, per PayPal.com an individual can send up to $10,000.00 in any one transaction. The site notes that limitations may be imposed on the customer’s account in order to verify information about the customer or their transactions.
Per Venmo.com, an individual may send up to $2,999.99 on a rolling weekly basis ($155,999.48 per year) once their identity is verified.
For most electronic payment sites, the information required to set up an account was an email, name, date of birth, SSN, and address or zip; which is fairly simple information to produce and can be found via open source searches.
Here lies the problem. The way most financial institutions train their staff, AML officers and analysts consists of instructing them to file an internal SAR/STR for cash and swift activity that appears suspicious in nature, with little to no further guidance to the AML team. In a perfect world this would be an excellent approach; however, in the AML world, it is the furthest thing from it. Unlike careers like accounting, teaching, or engineering you don’t typically choose AML as a career, it chooses you. If you ask most AML professionals how they began their career you will usually hear a response down the lines of, “I stumbled across my first job as an AML officer or analyst and found it to be a rewarding career, so I stuck with it.”
Recent studies have shown that Transaction Laundering is becoming an up and coming threat. What is Transaction Laundering? It is when a purchase appears to be legitimate, but it is not.
Example:
John Doe transfers $9,000.00 to Jane Doe via PayPal for the purchase of a car. However, no car is sold, no physical cash exchanges hand, and Jane subsequently uses the funds to purchase counterfeit goods, which will later be sold in the black market.
These type of transactions can be very elusive and easily fly below the radar of a financial institution's AML alerting system. Once a consistent pattern of activity is formed these transactions may be mistakenly viewed as normal transaction activity.
Here’s the even bigger question. In 2016, how does a financial institution combat money laundering when there is a large percentage of banks that still utilize a piecemeal AML program?
There needs to be a system implemented where financial institutions and electronic payment processors communicate real time, in regards to the source of funds and purpose of money transfers. Think of it as 314b on steroids. Without this information financial institutions and electronic payment processors are basically willingly aiding and abetting money launderers.
The ABA Journal published an article that reported that approximately $300 billion is laundered through the United States financial system annually. It is evident that money laundering is an epidemic that we must take a vigilant approach to mitigate.
If you are an Anti-Money Laundering Analyst, BSA Officer, Chief Compliance Officer, or whatever your role may be, take a moment and ask yourself how you are aiding in the war against money laundering. Are you simply going through the motions to fulfill the minimum job requirements or are you taking an innovative approach enhancing your program.
Remember, money laundering goes far deeper than evading Uncle Sam for tax purposes. Money laundering funds terrorist organizations, drug cartels, and a host of other illegal activities. The war against money laundering goes much farther than being an AML professional in a financial institution. If we do our jobs efficiently, it will make the jobs of our frontline heroes (federal and local law enforcement) somewhat easier.
Where Does the Change Begin?
The key to changing the culture of compliance lies within the top of the organizational chart. Since AML is relatively a newer profession, there are few (if any) CEOs that used Anti-Money Laundering to catapult themselves through the ranks of their financial institution. Upper management needs to take the time and educate themselves on Anti-Money Laundering (outside of the annual webinar that every bank employee has to trudge through).
One of the most common misnomers in Anti-Money Laundering is that AML and Fraud are interchangeable. Since fraud is under the umbrella of Operations, AML Compliance is placed in the same category.
Ravon Taylor III (2) recommends that Anti-Money Laundering Compliance and Operations divorce.
It appears to be a case of irreconcilable differences. Let’s face it. AML Compliance departments that are run with an Operational mindset are not built for long term success. AML Compliance departments that do not impose stringent productivity metrics actually have a more productive workforce. To be clear, productivity metrics do have value; however, they should not be the driving force behind the success of an AML analyst. From Ravon experience, AML Compliance departments where productivity metrics are not drilled into the heads of their analysts actually produce more productive teams because they actually foster team environments. Production-driven environments foster individuality and analysts tend to develop the mindset where they can finish their caseloads early and then spend the rest of their time at work being unproductive.
To facelift the culture of compliance, we need to shift from the production-driven environment that is associated with an Operational mentality to an atmosphere where each AML analyst has a vested interest in the success of the overall team.
(1) Theo Griffin - Partner at Taylor Griffin and ASssociates AML Solutions; (2) Partner at Taylor Griffin & Associates AML Solutions)