6 Steps to Building an Effective AML Compliance Program in 2024

Generally, financial institutions and businesses operating in regulated industries need to keep an eye on and comply with AML guidelines, rules, and regulations. General guidelines are laid out by the Financial Action Task Force (FATF) recommendations and other global directives like the European Union’s AML Directives for Europe and the Bank Secrecy and Patriot Acts in the US. It is down to individual countries/states to adopt these recommendations in their respective jurisdictions and put regulations in place that compel businesses to build an effective AML compliance program to adhere to it. 

Building an effective AML compliance program is key to preventing money laundering and complying with regulations today. The process could be quite elaborate as it requires extensive planning, execution, and cooperation from key stakeholders within the organization, being spearheaded by the risk and compliance team. Thankfully, with the right knowledge, expertise, and technology, organizations can simplify the compliance process. 

If you’re a decision maker or compliance professional looking to design a new or optimize your existing program, this guide is for you. Here, we’ll work you through the process of building a successful Anti Money Laundering (AML) compliance program for your business. 

What is an AML Compliance Program?

An AML compliance program simply refers to a set of policies, laws, and directives that establish the compliance framework for an organization. Essentially, it identifies and outlines everything a company needs to perform to prevent money laundering, terrorist financing, and other financial crimes. 

Maintaining a compliance program is a big challenge for businesses today due to the ever-evolving nature of compliance laws. At every point in time, the program must always be tailored to satisfy the organization's business needs, updated AML laws, the customers they service, and the nature of the service they offer. It generally entails: 

• Customer identification 
• Customer verification
• Ongoing monitoring
• Employee training
• Fraud detection/ prevention
• Suspicious activity reporting

An AML compliance program, when designed effectively, will be able to spot and prevent suspicious customers and transactions from entering the financial system. However, as technology improves, criminals are constantly inventing new ways to game the system and operate under the radar. It is therefore important that organizations develop AML programs that can easily adapt and handle new fraud techniques. 

Organizations should build their AML compliance program, keeping the following in mind:

• The kinds and level of risk it is exposed to as a business
• Potential loopholes and high-risk departments/individuals within
• Local and foreign AML laws to comply with and the punishment for non-compliance

Why is an Anti Money Laundering (AML) Compliance Program Important?

An AML compliance program is important because it establishes the infrastructure (i.e. procedure and guidelines), that an institution should follow to comply with AML requirements. The program outlines key information and steps for risk and compliance professionals to mitigate risks and keep their institutions compliant. 

Failure to meet these requirements can lead to penalties ranging from financial fines, imprisonment of key personnel, loss of license, and even closure of operations. This is why having a policy that employees can refer to for compliance is crucial. 

Who Needs an AML Compliance Program?

Although the exact requirements for businesses that need to establish an AML compliance program may vary, the following institutions typically need to have one: 

• Financial Institutions (Banking and nonbanking institutions)
• Real estate companies
• Asset brokers
• Money Service Businesses
• Casino and gambling companies
• Accountants and tax auditors
• Virtual asset service providers, etc.

Read more on the 5 Pillers of an Effective AML Compliance Program.

6 Steps to Building an Effective AML Compliance Program

Let’s walk you through the 5 steps to building an effective AML compliance program: 

Step 1: Appoint a Qualified AML Compliance or Money Laundering Compliance Officer

The very first step to building an effective AML compliance program is to appoint a qualified officer. This could be an AML compliance officer (AMLCO) or a Money Laundering Reporting Officer (MLRO). This individual is responsible for handling all internal compliance matters: development of guidelines, employee training programs, internal audits, compliance-related analysis, and more.

Due to their key role, the individual must possess a good number of experience in compliance and deep knowledge of global and jurisdiction-based regulations, compliance analysis tools, and regulatory data sources and bodies. 

Their responsibilities generally include: 

• Leading the organization's AML/CFT compliance activities
• Designing and overseeing risk management strategies
• Receiving, evaluating, and reporting suspicious transactions to management and regulatory authorities
• Making recommendations and decisions regarding suspicious transaction reports (STR) and suspicious activity reports (SAR)
• Bridging the communication gap between top management and the compliance department
• Acting as a liaison within their organization and externally with regulators
• Carrying out other compliance-related activities with unbias and uttermost integrity

Preferably, a compliance officer should be part of senior management.

Step 2: Develop robust internal Controls, Policies and Procedures  

Regardless of how much of an expert a compliance office is, they will fail in helping the business achieve AML compliance without the right internal controls, policies, and procedures to back them up. These policies establish a strong KYC framework that governs client onboarding and monitors their activities throughout the business relationship. 

These policies also designate authority to the compliance department and officer by extension, giving core responsibilities such as corporate governance, training, risk assessment, audit responsibilities, communication (internal and external), escalation procedures, and more. A lack of these controls and the vesting of adequate authority on the compliance officer to enforce them often result in AML breaches and non-compliance. 

Failure to implement these may result in punishments in the form of fines. A good example of this is in the case of Merrill Lynch, which was fined $6 million by FINRA for AML program failures.  

Step 3: Establish a Proper Employee Training Program

An employee training program is key to satisfying AML program requirements as a company. The program should be designed by the compliance department in accordance with the most recent governing laws. A review may also be required in unusual situations like when an employee is caught being involved in money laundering. In this case, the program should be amended to address the loophole found. 

Beyond being mandatory, employees are not compliance experts unlike a compliance officer, and need to be trained to perform their duty with compliance competence. The compliance office should also be able to raise proper awareness across the company, emphasizing to staff, the need for compliance and why It should be prioritized in their daily work processes. 

Employees should be trained on: 

• Legal framework: review of relevant AML regulations
• AML penalties for noncompliance
• The general importance of AML compliance and how it benefits the business

Means of training could include: 

• Internal training by the company’s compliance officer
• Compliance e-learning platforms with evaluation tests to measure proficiency
• External training by qualified compliance bodies
• Regular meetings on the latest AML trends, issues, and recent AML guideline changes

Step 4: Customer Due Diligence and Risk Assessment

FATF guidelines recommend that financial institutions take proactive steps to identify and verify customers, and monitor their activities, and transactions to prevent money laundering. AML checks should also be conducted. It involves collecting relevant information about them and conducting investigations on their identity, source of funds, business legitimacy (if it's a business-to-business relationship), jurisdiction, and more. These investigations should also be conducted frequently after onboarding the customer. 

Read more on KYC compliance for customer due diligence here.

Step 5: Conduct Regular Independent Audits and Reviews

Developing and implementing policies internally is a great start but it often leaves the company at risk. This is because the compliance team could easily miss out on key initiatives that an external expert will pick on. As a result, getting reviewed frequently by an independent auditor is a great way to spot weaknesses in a compliance program.

External auditors should be frequently invited to crosscheck KYC due diligence procedures, reporting systems, monitoring processes, training, and other compliance policies. This is to check whether they are compliant and effective in preventing money laundering activities. Some jurisdictions also mandate companies to carry out an independent audit at specific intervals (e.g. every two years). 

Regular audits also encourage a compliance culture across the company and evaluate how employees' and management’s attitudes toward compliance. 

Step 6: Spot and Report Suspicious Activities

According to FATF recommendations, identifying and reporting suspicious customer activities and transactions is a key part of building an effective AML compliance program. Red flags such as

• Transactions above the specified AML threshold
• Unusually high transaction sums
• Accounts opened with poor quality or insufficient customer information
• Accounts opened with fake documents or data

Some things to keep in mind when creating an AML compliance Policy:

• Keep it simple
• Outline why to help unfamiliar departments understand better
• Use examples and real-life scenarios
• Outline roles and responsibilities
• Designate power to the appropriate authority
• Use a positive and encouraging tone

Achieving AML Compliance with Smile ID

Having the right AML compliance program creates a solid foundation and establishes guidelines on how operations should be conducted to stay compliant. The guide should be easily understood and accessible by anyone in the organization to further encourage compliance culture. 

Smile ID offers a suite of compliance solutions that make implementing AML policies much easier. Businesses can conduct KYC due diligence, AML checks, and compile the right data for suspicious activity reporting via APIs, SDKs, or no-code integration. This improves customer onboarding rate and makes it easier for the institution to comply with AML regulations and protect it from money laundering and other financial crimes.

Book a free demo to see how it works.