The article is published in Regulation Asia on 31 March 2014.
|In June 2012, ING paid US$619 million to authorities in the United States (US) to settle potential civil liability for violating multiple sanction programmes. In December 2012, Standard Chartered Bank agreed to pay US authorities US$327 million for the violation of sanctions on transactions with Iran, Burma, Libya and Sudan. In the same month, HSBC agreed to pay U.S. authorities US$1.9 billion for failings in its Anti-Money Laundering (AML) programme.
The message is clear: regulators are increasingly enforcing penalties on instances of non-compliance with AML and sanctions regulations.
It is therefore not surprising that AML issues are moving back up the agenda for senior management.
According to KPMG's Global AML Survey 2014, 88 percent of more than 300 respondents worldwide said that AML is a priority for senior management- a significant increase from just 62 percent in the same survey in 2011.
In the Asia Pacific (ASPAC) region, the same trend was also observed. Some 80 percent of ASPAC respondents indicated that board of directors take an active interest in AML, up from just 50 percent in 2011.
AML trends in ASPAC: growing board-level interest and a rapidly evolving landscape
Indeed, ASPAC board-level interest in AML looks set to continue growing as regulators in the region become more vocal about the role they expect boards to play in the oversight of AML compliance programmes.
In particular, regulators are asking the board of directors to demonstrate active management of money laundering and terrorist financing risks, to develop a robust risk culture throughout their organisations, and to ensure that their AML compliance programs are sufficiently resourced.
Another trend is the further development of ASPAC AML regulations. As it stands, AML regulations in the region have evolved quite a bit in the last two years. For instance:
- Singapore designated serious tax offences as money laundering predicate offences on 1 July 2013;
- Hong Kong implemented a new AML law in April 2012 and in December 2013, the Hong Kong Monetary Authority published a guidance paper on transaction screening, transaction monitoring and suspicious transaction reporting; and
- Australia is in the process of redrafting its AML and Counter-Terrorism Financing rules relating to customer due diligence.
Moving forward, heightened scepticism on the part of regulators will mean they are likely to demand even more.
ASPAC regulators may no longer be satisfied that a bank has a sanctions surveillance system. They may want to know how the bank satisfies itself that the system is functioning properly or the routines configured therein are working as it should be. They may also want evidence that the system will continue to be effective in future.
Similarly, they may no longer be satisfied that a bank only performs checks for adverse news on its clients during periodic reviews. The regulators may question the duration between checks or the coverage of the checks.
The impact of AML regulations in the region
With ASPAC regulators introducing and enhancing requirements over the past few years, AML professionals in the region are also growing more concerned about how regulatory changes will affect their business.
The KPMG Global AML Survey 2014 indicated that 82 percent of ASPAC respondents were concerned with the pace and impact of regulatory changes as these may pose significant challenges to operations.
Respondents in the ASPAC region noted the top three areas that regulators focus on during site visits are customer due diligence (70 percent), ongoing monitoring (56 percent), and enterprise-wide AML risk assessments (54 percent).
A significant number also mentioned politically exposed persons and sanctions compliance as areas of interest for regulators, broadly in line with other parts of the world.
This rapidly evolving regulatory climate means that financial institutions are spending more on AML compliance.
According to the KPMG survey, the cost of compliance globally rose at an average rate of 53 percent, far exceeding the predictions of over 40 percent in 2011.
For ASPAC, the top three spending areas are:
- Enhancing the transaction monitoring systems;
- Reviewing, updating and maintaining Know Your Customer (KYC) information; and
On the whole, 77 percent of ASPAC respondents expect AML spending to continue rising over the next three years.
Recruitment a key concern
However, despite investing a good part of their AML budget in transaction monitoring systems, satisfaction for these systems in the ASPAC region scored an average of only 3.40 out of 5 with regards to efficiency and effectiveness in the KPMG survey.
This may be due to the significant efforts required in the disposition of false positives. More than 50 percent of the ASPAC respondents indicated that of all the alerts generated, less than one percent actually resulted in the filing of a Suspicious Transactions Report (“STR”) even though 70 percent of the respondents regularly calibrate the thresholds of their transaction monitoring systems.
While KYC is understandably a key investment area given the regulatory focus on this area during site visits, significant investment in recruitment is also necessary as there is a lack of qualified resources in the industry.
Based on the KPMG survey, only 67 percent of ASPAC respondents have more than 3 years of experience in AML as compared to 82 percent in Western Europe and 85 percent in North America.
Effective use of strategic technology solutions
Over the next three years, awareness of AML in the ASPAC region looks set to continue growing rapidly. Regulators in the region are also likely to continue with their reviews and increase the level of scrutiny.
Their focus is also expected to broaden beyond the banking sector to include other sectors such as remittance agents, money-changers, internet-based stored value facility holders, corporate service providers and pawnbrokers.
Case in point: the Monetary Authority of Singapore has recently announced in March that it will regulate virtual currency intermediaries in Singapore to address potential money laundering and terrorist financing risks.
While strategic technology solutions are available to help overcome the challenges of AML regulations, the key really lies in how to use these solutions effectively.
This is especially important in today’s context, when experienced AML resources are scarce. We have observed in many instances how solutions deployed resulted in declining satisfaction for the systems, or a need for more headcounts to cope with the ever increasing false alerts generated by systems.
Only the effective use of these solutions to harness their true potential and capability can increase productivity, reduce false alerts and increase satisfaction for the systems deployed.
The authors are Lem Chin Kok, Partner leading the AML and Sanctions Services at KPMG in Singapore and Jason Tan, Director of AML and Sanctions Services at KPMG in Singapore. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in Singapore.