Regulatory culture shock – AML considerations for multinational banks

Posted: 23rd August 2018

Whilst many banks are attracted to the UK’s stable financial markets, cross-border banking presents some unique challenges, namely balancing the anti-money laundering (AML) regulatory obligations of the firm’s home jurisdiction with the host country’s expectations and requirements.

UK regulatory focus

Many global banks are well established in London, a city regarded as a global finance capital. Approximately 450 foreign banks operate in the UK capital.

These foreign banks have recently been placed under regulatory scrutiny, with the FCA’s Anti-money laundering annual report 2017 / 18 highlighting continued AML control deficiencies within some smaller foreign banks. Some of the most common deficiencies include:

• Ineffective application of enhanced due diligence procedures, resulting in poor identification and monitoring of high-risk customers
• Weaknesses in the design of AML processes, including the allocation of responsibilities to staff
• A lack of practical training for customer-facing staff in assessing the money laundering risks posed by customers
• Internal audit shortcomings. Firms struggle to assess the effectiveness of AML controls over high-risk business and ensure remedial work is conducted and tested on identified weaknesses

According to the FCA AML report, across the entirety of the UK financial services industry, there are 75 firms and individuals under investigation for AML issues. It is therefore imperative for all banks to understand UK AML requirements and ensure systems and controls are fit for purpose, particularly as AML and financial crime prevention will continue to be two of the FCA’s key priorities going forward.

Global compliance challenges

The inter-governmental body known as the Financial Action Task Force provides a set of recommendations to assist jurisdictions in combatting the global issue of money laundering and to help align international compliance standards. These recommendations cover, however, only the minimum standards for a given country’s circumstances and legal frameworks.

Ensuring the compliance of a bank’s products and services, at an operational level, can be complex; especially when you take into account the wide variety of products and diverse customer bases of foreign banks.

Our experience in evaluating the AML frameworks of foreign banks within the UK has highlighted the following common shared challenges:

1.    Head office AML policy and procedures alignment

The policies and procedures in place within foreign banks are often based on the legal and regulatory requirements of the home country and not necessarily fine-tuned towards UK requirements, exposing the foreign bank to non-compliance action. Some firms also rely too heavily on head office processes, failing to assess the expectations of the UK regulator regarding certain high-risk products or transactions. Often there is a lack of independence and an inability to make key decisions from within the UK-based operations of multinational banks.

Systems and processes that surround transaction monitoring also tend to be held by head office and not necessarily ported or adapted to meet UK expectations. A generic or unchanged process that is tailored for another jurisdiction may not be fit for purpose in the UK, so designing an AML framework, or adapting an existing one, to align with UK obligations will be critical.

2.   Scalability and costs of the UK team structure

The significant costs of compliance and investment—for example, in new technologies—can lead many firms to only budget in-line with business operational costs and size of their market. This can result in head office providing limited resources to UK operations in an effort to maintain business viability here and in the home country. Such an approach can hamper a firm’s ability to fully understand AML risks, including those associated with international trade, specific transactions, sanctions and terrorist financing.

3.   Understanding of high-risk products

Foreign banks are commonly involved in facilitating trade finance transactions, thus engaging in correspondent banking relationships. Too often, foreign firms rely too heavily on group compliance processes without understanding or assessing risks exposure from a UK perspective, thus creating the possibility of inadvertently breaching AML regulation.  

Trade-based money laundering is a high risk for many firms as the volume of international trade results in a complicated web of transactions, often proving difficult to investigate. This provides the opportunity for criminals to launder vast sums through schemes such as ‘under-invoicing’, ‘over-invoicing’ or ‘multiple-invoicing’ to misrepresent the value of goods. Criminals may also use ‘over shipping’ (as its name suggests, the shipping of more goods than were invoiced for) and ‘phantom shipping’ (in which goods are never actually shipped, despite being invoiced for) to transfer international capital and evade authorities.

Banks remain an essential barrier to trade-based money laundering, though they need to remain continually vigilant across multiple jurisdictions—and comply with the AML regime of each—if they are to help stamp out illicit activity.

4.       Inadequate customer and firm-wide risk assessment

Foreign banks have been known to be higher risk for a number of reasons, including geographical reach, their customer base, nature of trade, relationships and preferred remittance channels. These risks are amplified by the occasional misalignment in the regulatory approach of home and host country as UK regulation is based on a risk-based approach whilst other countries may operate under a rules-based approach. A risk-based approach offers more flexibility but is also open to interpretation, leaving firms to struggle with a certain level of unfamiliar ambiguity.

As a regulatory requirement, foreign banks in the UK need to perform institution-wide risk assessments to ensure that controls are adequate to address the risks posed.

5.   Ethics and cultural compliance

Corruption tolerance levels vary across jurisdictions. Bribery is a common challenge for many firms as, unfortunately, facilitation payments are still considered normal business practice in some areas of the world. Ensuring that a thorough anti-corruption framework is in place (for example, the introduction of policies covering gifts and hospitality) remains essential for any firm.

A robust governance structure will not only help to ensure that a firm is operating ethically, but will also demonstrate a commitment to compliance. Additionally, staff should be adequately trained to fully understand regulatory requirements in order to help improve their firm’s compliance culture.

Keeping ahead of UK regulation

Firms should ensure that they have an effective AML framework in place that is tailored to mitigating UK-specific money laundering risks and methodologies. A common thread that runs through all AML regulatory obligations, however, is understanding and knowing your customer and continuously refreshing their customer data to ensure that any changes are addressed as soon as possible.

Combining your current processes with those of AML specialists can help you do just that, as well as identify and bridge gaps between the firm’s home AML processes and UK requirements. Fine-tuning the right solution for your business demonstrates a commitment to a culture of compliance to the regulator and will allow you to focus on delivering exceptional customer experiences