Factors for the failure of effective adoption and implementation of anti-money laundering and financing of terrorism (AML/FT) compliance solutions

Hi, everyone:

On defining the factors that in my opinion play an important role in the failure of effective adoption and implementation of AML measures in developing countries, I can take into account Clark (2019), who proposes in general, three structural causes of the ML/FT phenomenon: lack of transparency, of good governance and of strong monitoring systems.  

On their side, Bajrang et al (2012) identified in the specific context of India, four critical factors as predictors for money laundering flows, as follows: innovation, business sophistication, auditing, and ethical behavior of firms, concluding that one of the main reasons for engaging in money laundering is tax evasion, favored by lack of awareness on the issue and non-uniformity in the implementation of compliance rules among financial institutions.  

Similar findings (indicating a link between tax evasion, corruption, soliciting money through illegal systems, misuse of public or donor funds and a culture of negligence among banks) are considered in predominantly cash-based economies like Tanzania (Wario, 2013), Uganda (Bacwa, 2018), Kenya (Mwirigi, 2018), or Malaysia (Said et al, 2013). 

To strengthen AML/FT, UNODC warns to address an effective legal framework with international cooperation and technical assistance, to set and implement effective countermeasures against ML/FT, with knowledge of untraceable ML/FT methods. On the IT side, the exponential increase of non-cash transactions, and the ever-increasing complexity of financial flows around the world, have been identified as critical factors for failure in AML/FT, obliging constant redefinition of institutional compliance rules and to incur in higher cost of human capital, considering that the analysis of AML/FT is mathematically complex (McKenna, 2017).  

Poor supervision by competent authorities of financial institutions, designated non-financial businesses, and professions, and virtual asset service providers have been identified in Europe as a critical negative factor, evidenced by (i) limited powers to effectively sanction non-compliance by civil or administrative means, apart from criminal prosecution (ii) limited resources including qualified staff, processes, IT systems and tools; deficiencies in applying risk-based approach with an equilibrium between the dimension an frequency of existing risks and the size of the financial organization; (iii) poor coordination between authorities on supervision, with individual agencies focused only on their sectors; and (iv) insufficient guidance on ML/FT risks provided by supervisory bodies to reporting entities (Boguslavska, 2020).  

Researchers repeatedly find a significant difference between the level of perceived importance and the level of AM/FT compliance measures adopted, citing as reasons the lack of top management support, lack of expert staff, inadequate allocation of resources, lack of IT infrastructure and inadequate support from political leaders (Said et al, 2013). That occurs because many institutions regard AML/FT as a regulatory burden, with significant capital cost, a hindrance to their business, and loss of business opportunities, arguing that the time spent on AML compliance is an extra cost of doing business, leading to a lower return on investment. In addition, there is a common concern about significant privacy breaches (banking secrecy) as a result of AML law (Ramesh, 2006). 

 

This deep-rotten perception must be overcome, explaining that the risk of non-compliance and regulatory violations (attracting stiff penalties, monetary and legal), easily outweighs the arguments against AML/FT. Indeed, AML compliance is a difficult and costly process but is essential for mitigating an inherent risk of the banking activity (which in fact, has been dramatically increased with Internet and globalization, and concerns seriously operations and reputation, for institutions in particular, and for all the banking sector), and for preventing a general phenomenon which damages an entire nation’s financial system (Ramesh, 2006). That implies to change the perception of AML/FT as a cost, into an added value that brings a competitive advantage to the institution who successfully adopt the AML solution.  

So, what measures should be taken to address such factors and to reduce their negative impact? 

In a regulatory context, it’s essential to strengthen the legal AML/FT framework in each country. Legislators and the Executive (with the participation of other institutional stakeholders) must identify normative gaps, and address systemic deficiencies to overcome, including the adoption of civil and administrative/disciplinary actions against offenders, despite criminal prosecution (people are much more likely to launder money if the chances of escaping punishment are high, so a failure in the legal framework and compliance measures aligned with the rule of law, can promote financial crime, giving people an incentive for wrongdoing). An example of this approach is Papua New Guinea, included in the FATF grey list in 2014, and removed from it in 2016, as a result of the country's demonstrated efforts in such sense (UNODC, n.d.). 

On implementation of AML/FT solutions, financial institutions must surpass the following challenges: (I) high (but at some point, unavoidable) cost of implementation, in terms of use of time and other resources, that varies significantly between large and small institutions; (ii) integration of compliance solutions with an existing (legacy) business process (especially, IT infrastructure), keeping changes to the existing business process at a minimum; (iii) integrating successfully AML/FT compliance into the organization culture (not only to a level of a business unit or country level); because it’s obvious that when the new compliance solution is introduced, it will interfere with existing systems and disrupt employees’ working practices; (iv) recruitment, training, development, and management of the human talent component (qualified AML/FT specialist), as well as the allocation of this personnel into the institution organization at all functional areas and levels.  

In that context, there are critical factors for a successful implementation of an AML/FT compliance solution: (I) to use an integrated (systemic / synergic) approach, which helps institutions to reduce investment, lower risks and increase returns, taking advance of the opportunity to develop a common IT framework to address all compliance issues; (ii) to treat AML/FT compliance as an cyclic and ongoing process, requiring flexible and efficient compliance solutions for existing and future requirements, with a smooth overlapping between corporate policy and regulatory requirements; (iv) to choose integrated IT solutions, with effective data collection and due diligence methods, envisioning a firm’s broader and continuously evolving compliance system; (v) to train employees, customizing the training program to the firm’s policies, standards and controls that are implemented consistently and uniformly across business units and subsidiaries, fostering a strong compliance culture among all employees, which promote good practice and values, a culture of accountability and transparency, due diligence and avoidance of corruption (Ramesh, 2006; McKenna, 2017; Pol, 2018; Clark, 2019). 

Finally, it is worth to say that effective AML/FT compliance solutions must be implemented in a systematic way, not only for financial institutions but also as well, for other personnel involved in business operations, at all levels (notaries, lawyers, legal representatives, and top management personnel in all companies, etc.).  

Until next time, 

Camilo García Sarmiento

Sources:  

(n.d.) E4J University Module Series: Organized Crime. Module 4: Infiltration of organized crime in business and government. Money-laundering. Retrieved from: https://www.unodc.org/e4j/en/organized-crime/module-4/key-issues/money-laundering.html#:~:text=Money%2Dlaundering%20is%20crucial%20to,Malm%20and%20Bichler%2C%202013). 

Bacwa (2018, October 15). Assessing the role of the anti-money laundering framework in curbing corruption of politically exposed persons. International Anti-Corruption Academy. Retrieved from: https://www.iaca.int/media/attachments/2020/01/08/timothy_bacwa_masters_thesis.pdf 

Bajrang et al (2012). Factors affecting money laundering: A lesson for developing countries. Drishtikon: A management journal. Vol. 3 Issue 2. 108 – 139. Retrieved from: http://www.publishingindia.com/GetBrochure.aspx?query=UERGQnJvY2h1cmVzfC8xMTg5LnBkZnwvMTE4OS5wZGY= 

Boguslavska, K. (2020, July 27) AML supervision and financial scandals – what the Basel AML Index and FATF data reveal. Basel Institute on Governance. Retrieved from: https://www.baselgovernance.org/blog/aml-supervision-and-financial-scandals-what-basel-aml-index-and-fatf-data-reveal 

Clark, D. (2019, August 1). What are the causes of money laundering? Engage in learning. Retrieved from: https://www.engageinlearning.com/faq/compliance/anti-money-laundering/what-are-the-causes-of-money-laundering/ 

McKenna, B. (2017, August 21). Anti-money laundering – four big factors to contribute to compliance failure. ComputerWeekly.com. Retrieved from: https://www.computerweekly.com/blog/Data-Matters/Anti-money-laundering-four-big-factors-that-contribute-to-compliance-failure 

Mwirigi, P. (2018, September) Factors influencing adoption of anti-money laundering regulations by commercial banks in Kenya. Retrieved from: http://41.89.49.13:8080/xmlui/bitstream/handle/123456789/1421/Mwirigi-Factors%20Influencing%20Adoption%20Of%20Anti%20Money%20Laundering%20Regulations%20By%20Commercial%20Banks%20In%20Kenya.pdf?sequence=1&isAllowed=y 

Pol, R. (2020, February 25) Anti-money laundering: The world’s least effective policy experiment? Together, we can fix it. Policy design and practice. Vol. 3, 2020. Issue 1. Retrieved from: https://www.tandfonline.com/doi/full/10.1080/25741292.2020.1725366 

Ramesh, V. (2006, August 29) Anti-money laundering: strategies to success. The Global Treasurer. Retrieved from: https://www.theglobaltreasurer.com/2006/08/29/anti-money-laundering-strategies-to-success/ 

Said et al. (2013, May) Money laundering prevention measures among commercial banks in Malaysia. International Journal of Business and Social Science. Vol. 4, No. 5. 227 – 235. Retrieved from: http://41.89.49.13:8080/xmlui/bitstream/handle/123456789/1421/Mwirigi-Factors%20Influencing%20Adoption%20Of%20Anti%20Money%20Laundering%20Regulations%20By%20Commercial%20Banks%20In%20Kenya.pdf?sequence=1&isAllowed=y  

Wario, A. (2013). An assessment of adherence and effectiveness of the anti-money laundering regulations among banking institutions in Tanzania. Retrieved from: https://core.ac.uk/download/pdf/33425663.pdf