Money laundering, like other financial crimes, is an ongoing threat to financial institutions. The danger of doing business with criminals, drug smugglers, corrupt government officials, and terrorist organizations is always present. To reduce risk, financial institutions must develop and implement a comprehensive anti-money laundering (AML) policy.

Implementing a comprehensive AML policy can be a daunting task. There are many elements you have to consider to build a comprehensive policy that's meant to keep your business compliant and compliant with applicable regulations — and this can often be pricey. This is why many firms defer policy development until it's too late, or they develop a rushed version that may fall short of some requirements.

To combat financial crime, AML and Combating the Financing of Terrorism (CFT) policies and legislation have been established and implemented on many levels, from local to global. However, it is the responsibility of financial institutions to translate complex AML and KYC (Know Your Customer) requirements and implement them into practice in their day-to-day operations. They need to understand the complex AML/CFT requirements and develop a comprehensive AML policy.

What is an AML policy?

An AML policy is a set of well-designed measures used by financial institutions to combat money laundering, which is obtained through illegal criminal activity, preventing it from being reintroduced into the mainstream financial system. All financial institutions need to establish and implement such policies, which are supervised by regulatory bodies.

What makes a comprehensive AML policy?

Working together with regulators is a great way to ensure you're meeting minimum compliance demands, and if you can showcase procedures that better protect the global financial system from financial crime, then you're more likely to gain positive feedback from the regulator. The implementation of AML policies is frequently subject to and/or overseen by regulatory authorities and is a requirement to achieve compliance with AML regulations. This policy is essential to the running of your company and is a significant line of defense in preventing damage to the company's reputation and exposure to regulatory fines.

The regulatory body in charge of directly overseeing transactions and deals is determined by the physical location of a business. For instance, the Financial Crimes Enforcement Network (FinCEN) in the US, the Financial Conduct Authority (FCA) in the UK, and the Monetary Authority of Singapore in Singapore. Within Europe, the EU Anti-Money Laundering Directives, which in turn are influenced by the Financial Action Task Force (FATF) 40 Recommendations, define the standards for AML policy in Europe, which is frequently a combination of rules and recommendations outlined in local laws.

Although these guidelines and standards frequently express the policy's ultimate objective, they rarely offer practical advice or recommendations for how businesses might implement it. Bridging the gap between practicality and policy is where your AML policy can demonstrate its effectiveness to the regulator.

How to build a comprehensive AML policy

Building an AML policy should therefore be a priority for financial institutions as well as fintechs that collaborate with banks to provide financial services.

Flagright specializes in transaction monitoring and AML compliance, and we understand what it takes to adhere to ever-increasing AML regulations. Building a comprehensive AML policy is one of the best ways to do this and ensure that your company's AML policy is always in peak shape.

Below are some actionable strategies that compliance officers can take to accomplish this.

1. Define the policy's purpose

It is important that financial institutions define the purpose of their AML policy. This includes the following:

  • Defining what money laundering, terrorist financing, or trafficking means
  • Defining the purpose of the policy and establishing the need for it
  • Defining the process for conducting regular reviews

2. Appoint a relevant person or team

The risk of compliance issues being undetected is minimized by appointing a dedicated compliance officer or compliance team. This provides you the assurance that you have the required expertise in place to protect against the risks of financial crime.

3. Consider your company’s AML risk

Consider the risks of money laundering to which your company is vulnerable. What industry do you work in and what effect does it have? What red flags are present? What's your tolerance for risk? These factors can help shape your AML policy.

4. Take regulatory requirements into account

Depending on the jurisdiction in which you operate, different laws and AML policy requirements may apply. When building an AML policy, it's important to take these factors into consideration; otherwise, your company could be in violation of the law and face regulatory action.

5. Define measures for due diligence

Financial institutions are required to carry out thorough customer due diligence, including identification verification, risk assessment, and transaction monitoring. AML policy needs to include the following:

  • What information is gathered
  • How this information is validated
  • Steps to take if false information is discovered
  • Procedures to follow if a client cannot be identified
  • Whether or not due diligence is outsourced

6. Establish record-keeping procedures

In addition to the above, it's important to outline and define the steps to take to keep track of all AML-related information, procedures, and documents, as well as how long records are retained. This is simple to achieve with the aid of an automated audit trail.

7. Implement transaction monitoring

Transaction monitoring is an important procedure for financial institutions in combating money laundering. Every transaction should be channeled through an AML monitoring system. Any threshold violations or suspicious transactions should be thoroughly investigated.

8. Gather suspicious activity reports

The core of AML is suspicious activity reports (SARs). By submitting them to your jurisdiction's Financial Intelligence Unit (FIU), they serve as a means for notifying law enforcement and regulatory agencies of potential money laundering or financing of terrorism. Systems that automate sections of your SAR filing policy can be useful in building a more effective compliance program. Your procedure for drafting and filing these is a crucial part of your AML policy, especially given that this process can be tedious.

9. Develop communication procedures

Communication procedures provide employees at all levels with helpful advice on who to approach with various concerns and how to proceed with particular tasks. Additionally, there needs to be clear guidance on when incidents should be escalated to senior compliance personnel and the company's Money Laundering Reporting Officer (MLRO).

Along with the escalation instructions, these procedures should address the protocols for sharing information and data with other financial institutions as well as reporting to FIUs.

10. Establish a procedure for staff training

All employees with functions that fall under the policy's scope, i.e., those who engage with clients and/or transactions, must be informed of the policy and undergo proper training.

This training should provide employees with an understanding of what AML is and what AML regulations are. It should also train employees to recognize money-laundering methods, determine when money laundering is occurring, and take appropriate action, such as filing SARs.

Compliance with AML policies is a continuous procedure

AML is a constantly evolving field. AML compliance is a continuous effort because new developments emerge every day. It is essential that all financial institutions have a comprehensive AML policy in place, even though it is not the sole component of your compliance activities.

In addition to being an important source of reference for your employees, it's frequently a prerequisite for meeting initial licensing requirements. Without one, your company could face substantial fines.

Fintech compliance specialists need to regularly review and reevaluate your AML policy in light of the crucial role it plays in order to keep it in line with the most recent legislative changes and developments.

In conclusion

The effective implementation and operation of an AML policy can be aided by technological solutions.

Flagright’s solutions like real-time transaction monitoring, dynamic risk assessments, crypto and sanctions screening, customer risk profiling, KYC/KYB orchestration, can all be combined and customized to respond to evolving fraudulent techniques, improve the efficiency of the AML compliance team, and better mitigate compliance risk.

In present times when financial institutions deal with thousands of customers and millions of transactions, Flagright's solutions can significantly contribute to reducing errors and improving operational efficiency.

Contact us here to schedule a free demo.