White Paper: The Development of the AML Regulatory Environment and the Future of Money Laundering Risk Management

Transcription

1 0 White Paper: The Development of the AML Regulatory Environment and the Future of Money Laundering Risk Management

2 1 Overview Over the past several decades, money laundering has emerged as a significant concern for financial institutions, law enforcement agencies and national governments. Most of the world s national governments have now implemented, and continue to refine, their antimoney laundering (AML) regulatory environments and law enforcement capabilities. Early rules-based regulatory efforts, such as the U.S. s Bank Secrecy Act (BSA), have been found to be effective only within the limited scope of controlling specific types of financial activity, such as large cash deposits. Most stakeholders in the successful prevention of money laundering activity now agree that allowing financial institutions and their regulators to adopt a risk-based approach to money laundering risk management is prudent, because it accounts for the wide range of permutations of customers, business activities and financial activities confronting different financial institutions. In this context, effective money laundering risk management requires a deep and thorough understanding of the financial services landscape and its money laundering vulnerabilities. Training that explores the financial services landscape and its associated risks is one necessary element of an effective money laundering risk management framework. Immersive scenario-based training which explores the money laundering risk analysis process using simulated financial services business contexts is also critical in developing an effective risk management framework. This white paper shows how the current AML regulatory environment developed, why it developed the way it did, and why training that offers both thorough coverage of the financial services business context and robust business simulations that explore the money laundering risk analysis process is a vital element of money laundering risk management efforts now, and will remain so over the decades to come. ProCert Training LLC, an IACET-accredited provider of continuing education units (CEUs), offers a wide range of online money laundering risk management courses designed to help individuals and institutions meet these training needs. This white paper therefore concludes with links to a diverse range of ProCert Training LLC money laundering risk management courses.

3 2 Introduction Money laundering is the movement of money designed to make the proceeds of criminal activity appear to have been earned through legitimate means. Money laundering regulations are quite a new innovation, but they have had a profound impact on the way the financial services industry and other industries conduct their business. In order to manage money laundering risks effectively, you need to understand them. In your quest to develop robust money laundering risk management skills, however, you can also benefit from knowing how money laundering regulations work, how they developed, and where the regulatory environment is likely headed. This white paper is therefore primarily designed to help you understand: Why money laundering regulations exist How they developed What they will likely look like in the future Deep History As a matter of statute and regulation, money laundering is a relatively new concept, dating back only as far as the early 1970s. Communities, governments and the banking industry have, however, been managing the risks associated with handling the proceeds of criminal activity for millennia. In the pre-modern era, an individual arriving in a new community with a significant amount of money would be asked many of the same questions that apply to a modern banking business: How did you come by this money? Are you a thief? A pirate? An influential merchant? A successful rabbit farmer? Before we admit you to our community, you must prove that you came by this wealth through lawful means.

4 3 Context While disguising the origins of money is quite an old game, the rules of the game have changed dramatically over the past forty years. This white paper will show you how and why money laundering regulations have developed, the imperatives that led to their development, and how these historical trends have resulted in the current shape of the global financial services regulatory landscape. This historical context will further your understanding of how and why the financial services industry analyses and manages money launderingrelated risks, and where the money laundering regulatory environment appears to be headed. Converging Forces In order to understand the current state of money laundering regulations, it is necessary to consider the relationship between a number of related topics: the development of civil society and the rule of law the concept of the nation the nature of democracy the multilateral trade system the expanding universe of criminal statutes the rapid development of the financial services industry Presenting these relationships adequately could easily occupy an entire library, so what follows is necessarily a simplistic sketch.

5 4 Crime Societies decide what is criminal that is, activity subject to punishment due its harmful effects. Activities now considered criminal in many countries were not considered criminal in the past (such as narcotics use), while activities widely criminalized in the past (such as adultery) are generally not currently considered criminal offenses. What is considered criminal is therefore a reflection of current standards of social behavior, which is manifested through government policy, legislation and regulations. International Trade The development of the world s current free-market economy required the formation of multiple democratic societies founded on the rule of law. Democratic governments and their legislative and legal institutions serve as guarantors of contracts, which form the basis for trade relationships and commercial activity, and of currency, through which payment for goods and services is made. The development required of countries as they enter the arena of global commerce is therefore away from the arbitrary exercise of power by a few individuals and toward the exercise of power through government institutions with relative consistency over time. Corruption and bribery, especially at the national level, have therefore increasingly become criminal offenses as countries seek to expand their global trading presence: uncertainty impedes trade.

6 5 Modern Crime The development of modern society has been marked by an expanding universe of available goods and services (through trade and innovation), accompanied by an increasingly complex financial services sector and an increase in the range of criminal offenses. While the primary criminal offenses of earlier days related to crimes against property rights (theft, fraud etc.), the modern criminal landscape now often includes crimes related to activities that cause damage to individual wellbeing (such as narcotics use, prostitution, counterfeit goods) and crimes against public wellbeing (such as corruption). Example: Prohibition Unless criminalization produces a rapid reduction in criminal behavior, increasing the range of activities that are considered criminal necessarily produces an increase in the amount of money generated through illegal means. Taking the U.S. s experiment in prohibiting the consumption of alcohol (the Prohibition era) as an example, criminalizing alcohol consumption did not significantly alter social behavior, but did make selling alcohol a more profitable business, and a business in which the profits were concentrated into a much smaller number of coffers. Instead of thousands of bars and liquor stores making modest profits that were subject to taxation and government control, the smaller number of people controlling the illegal trade in alcohol (bootleggers, moonshiners and speakeasy operators) quickly became wealthy.

7 6 Regulatory Imperatives The recent development of money laundering regulations was largely the result of a confluence of events: The criminalization of activities (such as narcotics use and prostitution) that had previously been legal The increasing availability of illegal goods (such as narcotics and prostitutes) due to expanding trade opportunities Increasing opportunities to commit existing criminal offenses (such as theft and fraud) due to the expansion of the global financial system An increased emphasis on the importance of protecting the welfare of all citizens from government officials acting in their own interest (such as is the case with corruption and bribery) A country s development and enforcement of money laundering regulations is, above all, a policy consideration related to its desire to benefit from international commerce. Toward the Bank Secrecy Act The U.S. took an early lead in the development of regulations designed to criminalize the movement of money associated with criminal activities. During the Prohibition era, U.S. prosecutors relied on criminal statutes against tax evasion to prosecute bootleggers and other criminals. During the post- World War II era, the U.S. experienced a massive increase in illegal narcotic use, primarily heroin and cocaine, and sought a way to distinguish consumption from distribution in terms of prosecution.

8 7 As with the earlier use of tax evasion penalties, there was also an interest in using asset forfeiture as a means of forcing criminals to disgorge the profits from their crimes. The Bank Secrecy Act The U.S. passed the Bank Secrecy Act (the BSA ) in This law was an early and influential effort to align bank behavior with prosecutorial interests. The BSA placed an obligation on banks to report certain types of behavior (large cash deposits, purchases of monetary instruments with cash, and suspicious customer activity) to the U.S. government. The BSA has since been amended numerous times (such as through the USA PATRIOT Act), especially in terms of expanding the scope of reporting obligations beyond depository institutions. Other national governments have gradually followed suit, creating their own reporting requirements, often because of the downstream impact on countries that do not adopt reporting requirements: Activity (such as sizeable cash deposits) that formerly occurred in Country A will now occur in Country B if Country A has reporting requirements and Country B does not. Forty Recommendations In 1989, the G7 members of the OECD initiated the creation of the Financial Action Task Force (FATF), which is charged with aligning national money laundering statutes and regulations with a set of FATF-developed industry best practices known as the Forty Recommendations. The FATF continues to review national money laundering regulatory frameworks periodically to determine the extent of their alignment with these original recommendations, as well as with subsequent recommendations, and issues public reports of their findings.

9 8 National money laundering regulatory frameworks are therefore assessed on a regular basis against the FATF s international standards. International Pressure Significant deviation from FATF expectations can cause severe problems for a country s financial services industry due to international political pressure, as well as reluctance on the part of financial institutions from other countries to deal with financial institutions or transactions involving a country that the FATF has found to be deficient in its money laundering control framework. This reluctance becomes particularly acute when the FATF places a country on its Noncooperative Countries and Territories (NCCT) list. Since its first issuance in 2000, fear of being placed on the NCCT list has become one of the primary means of influencing the development of strong national regulatory frameworks. While there now exist very few countries that lack a strong money laundering regulatory regime in terms of statute, the effectiveness of enforcement of these statutes varies widely between countries. The Risk-based Approach The most significant development in money laundering risk control efforts during the past forty years has been an increased recognition that a rules-based regulatory framework (such as the original BSA) cannot effectively identify or prevent money laundering activity across much of the enormous range of financial services business types, financial services activities, business activities and jurisdictions now active on the world stage. The FATF and national regulators are therefore often increasingly open to pursuing a risk-based approach, which seeks to align a financial institution s money laundering risk management framework with its specific risks, which are formed through a unique

10 9 combination of customers, business activities and scope of operations. The Wolfsberg Group s statement on the risk-based approach, issued in 2006, continues to form one of the most influential documents in this ongoing debate. The Future of Money Laundering Regulations The international trend toward managing money laundering risks through a risk-based approach continues to gain both importance and validity. While there will likely always remain some rules-based reporting requirements (for example, related to specific transaction types such as cash deposits), international standards, national regulatory frameworks and financial institution operations are increasingly founded on one of the core principles of the risk-based approach, which is that money laundering risks need to be understood thoroughly before they can be managed effectively. The emphasis is increasingly on risk analysis and risk assessment, which seek to align a financial institution s risk management framework with its specific money laundering risks, rather than simply on compliance with reporting requirements designed to capture only a fraction of the world s business and financial activity. The amlrisktraining.com / ProCert Training LLC Course Suite Our course suite has been specifically designed to help financial services industry participants, regulators and law enforcement officials analyze money laundering risks in order to manage them effectively. Other courses may offer guidance on fulfilling the mandates of earlier reporting regimes, but our course suite offers comprehensive, scenario-based training in how to analyze money laundering risks in order to manage them effectively. This money laundering risk management training has been created to develop effective money laundering risk management capabilities suitable for the next forty years and beyond. Please feel free to explore the full range of our course offerings at to learn how we can help you and your organization develop and operate an effective money laundering risk management framework.

11 10 Course Overviews We offer over a dozen different online classes, so there is likely an offering that would meet your needs based on your relationship to the financial services industry and your level of experience. Financial services professionals who need to understand the basic framework for identifying and managing money laundering risk will benefit from our 2-hour AML Core Competence course, while more experienced professionals will benefit from courses that target the money laundering risks associated with the major financial services business areas (private banking, retail financial services, commercial banking and investment management). Regardless of your experience level, you will enjoy our Advanced Tactical Training, a scenario-based course which embeds you within four different business situations where you need to exercise effective risk management skills. Law enforcement officials will benefit from this same set of courses, since these courses offer thorough training in the risk analysis skills needed to identify unusual and potentially suspicious activity in a specific financial services business context. AML Officers and regulators will benefit from any of the courses described above, but will receive the additional training they need to analyze and manage money laundering risks from a strategic (high-level) and programmatic level by taking our 20-hour AML Officer Master Class. This course incorporates many of the elements contained in our other courses, but adds thorough training in the use of the types of risk analysis frameworks required for successful operation of a financial institution s AML program. Pricing and enrollment options for all of our courses are available by consulting our course catalog. Institutional customers should contact us direct for inquiries related to wholesale pricing, course customization possibilities and course distribution options. We looking forward to meeting your training needs soon!