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Emmanuel Agwu
Money laundering is a global problem that affects the economies of various countries around the world. It is estimated that up to 5% of the world's global GDP is laundered yearly, which is approximately $2 trillion. This makes Anti-money Laundering (AML) compliance a priority as businesses need to be able to identify and put a stop to potential money laundering activities and other financial crimes. Achieving compliance is even more important in high-risk regions and should consist of the five pillars of AML compliance that guarantee effectiveness.
In the early stages, AML compliance was limited to mostly banks and financial institutions. However, due to rising money laundering rates and evolving criminal strategies, it has been extended to closely related industries. Institutions like casinos, crypto, investment and savings, and more are now mandated to be AML compliant. While specific guidelines may vary depending on jurisdictions, an effective AML compliance program should consist of five pillars, which we will explore in this article.
Anti-money laundering (AML) compliance refers to the process of complying with set rules and regulations to prevent money laundering and other financial crimes. Global AML guidelines are issued by the Financial Action Task Force (FATF), and are then interpreted by regulatory bodies across different jurisdictions globally. However, being of the same source, these laws usually have a lot in common. For example, the Bank Secrecy Act (BSA) guiding the US, makes it compulsory for financial institutions to create effective AML programs according to defined standards. This is then enforced by the Financial Crimes Enforcement Network (FinCEN). In Kenya, the Omnibus Anti-Money Laundering and Combating of Terrorism Financing Laws (Amendment) Act, 2023, mandates the same and is enforced by the Central Bank of Kenya for financial institutions.
Essentially, every business that operates in a regulated industry must have an AML compliance program. Examples of such businesses include:
Read more on how to build an effective AML compliance program for your business.
The five pillars of an AML compliance program are:
Let’s discuss each of the 5 pillars of AML compliance
The first step of the 5 pillars of AML compliance is to appoint a designated compliance officer, who would be responsible for the program as a whole throughout the company. The compliance officer will be in charge of developing, implementing, and enforcing compliance across the board, as well as interacting with regulators on behalf of the company. Their strategy should be in line with the guidelines laid down by regulators in the business jurisdiction.
Generally, the duties of a compliance officer include:
A compliance officer should be qualified, experienced, and have a deep understanding of the relevant compliance requirements of the company's industry. The right blend of experience and communication skills will help reduce the risk of staff seeing compliance as an operational hindrance and bypassing it whenever possible.
The next pillar is the development and implementation of internal AML policies. This is to effectively monitor suspicious customer activities, make the right decisions, and ensure customer data protection. Generally, it is recommended that these processes follow a risk-based approach and respective strategies designed based on the level of risk posed by a customer.
Business needs are unique and the policy should be designed to specifically address the business. Additionally, these policies should be reviewed and updated periodically.
Customer Due Diligence (CDD) is one of the most fundamental of the five pillars of AML compliance. Global AML laws mandate companies to identify and verify customer identities to ascertain they are who they claim to be and also continuously monitor their activities to spot and report suspicious actions to the relevant authorities.
Customer due diligence requirements generally include:
CDD should be designed with a risk-based approach where customers are treated based on the level of risks they pose. Appropriate enhanced due diligence methods should be adopted for very high-risk customers.
An organization can only be as compliant to the level at which internal staff adopts compliance procedures. Therefore, it is important that employees are periodically trained in relevant AML practices to help them understand the importance of compliance and not see it as a hindrance. They should also be trained on the tools and applications used for fraud detection and procedures to report fraud activities. These trainings should cover relevant AML laws in the jurisdiction and should be documented by the compliance department.
The final of the five pillars of AML compliance is regular audit and maintenance of the program. This is crucial because a frequent review helps the company update the program to meet the latest requirements and also addresses any loopholes found. Preferably, this audit should be carried out by a third party who would be able to better identify potential flaws in the program.
Frequent audits could also be carried out on other aspects, like finances, to spot irregularities that may indicate money laundering. Overall, the right audit helps identify weaknesses, improve existing processes, and show regulators the level of a company’s operational integrity.
The five pillars of AMl compliance are important because they help a company:
Businesses looking to strengthen their 5 pillars of AML compliance and existing compliance processes need to adopt the right technology. Smile ID solutions empower businesses to achieve AML compliance in one place. From identity verification to biometric authentication, business verification, and AML checks, organizations can seamlessly integrate and customize their onboarding process to fit their unique needs without negatively impacting customer experience.
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