Sometimes it can feel like AML compliance procedures and regulation are getting more complex by the day. Just trying to keep up with the alphabet soup of AML terms and acronyms, not to mention the assortment of relevant regulatory bodies and organizations, is a dizzying endeavor.

So if you are confused by all the AML jargon, we have created a glossary of the most common acronyms in the world of AML/CFT compliance. This list is primarily for financial institutions and MSBs in the U.S. and Canada. However, we’ll also, give a brief rundown of some of the major regulatory bodies both within North America and abroad.

AML Terms and Abbreviations

A

Adverse Media Screening- Adverse Media screening, also known as Negative News Screening, is a process to detect and prevent sanction and reputation risk of dealing with persons or entities with associations with financial crime or other relevant negative news. It is conducted via smart tools built on AI and NLP to scan through thousands of global news sources.

AML- Anti-Money Laundering

AML/CTF compliance program- Anti-Money Laundering/Counter-Terrorism Financing compliance program.

A system designed to assist financial institutions, securities dealers and money services businesses in their fight against money laundering, terrorist financing, and other financial crimes. This system generally includes:

• Written internal policies, procedures and controls
• A designated AML compliance officer or team
• Third-party audits
• Comprehensive employee training

AML Compliance Officer- Responsible for the implementation and maintenance of an organization’s AML/CFT compliance program.

AMLA- Anti-Money Laundering Act of 2020

AMLID- Anti-Money Laundering International Database

A compendium of analyses of anti-money laundering laws and regulations, including both domestic laws and international cooperation and information on national contacts and authorities.

ARS- Alternative Remittance System

Any system used for transferring money from one location to another while operating outside of traditional banking channels.

As Soon as Practicable (Canada)- The expected time within which a suspicious transaction report (STR) can be submitted to FINTRAC taking into account the facts and circumstances of the situation.

ASTR (Canada)- Attempted Suspicious Transaction Report

A report that is filed when an individual initiates and then abandons a financial transaction in a way that looks suspicious.

AST- Automated Screening Tool

A sanctions, PEP, and adverse media screening tool powered by AI, natural language processing and machine learning with automated search functionality. ASTs, like our very own SmartScan, offers intelligent search and a scoring engine that works to minimize manual intervention while significantly reducing False Positives.

ATF- Anti-Terrorist Financing

The same thing as Counter Terrorist Financing (CFT) and is often used interchangeably

B

Batch Processing- A type of data processing where related transactions or entries are grouped together and transmitted for structuring and analysis.

Batch Screening- The process of screening an institution’s customer base and other associated entities on a periodic basis. Batch processing, along with API based screening are necessary requirements for modern sanction and PEP screening tools for AML compliance.

Beneficiary- The individual or entity who will ultimately benefit from a transaction and be the final recipient of the funds.

BO- Beneficial Ownership

Beneficial ownership is a term in commercial law which refers to the natural person or persons “who ultimately own or control a legal entity or arrangement, such as a company, a trust, or a foundation”.

BSA- The Bank Secrecy Act

U.S. legislation aimed toward preventing criminals from using financial institutions to hide or launder money. The law requires financial institutions to provide documentation to regulators whenever their clients deal with suspicious cash transactions involving sums over $10,000.

Business Relationship (Canada)- The connection between a reporting entity and a client to conduct financial transactions or provide services related to those transactions. This relationship can be account-based, where the client holds an account with the reporting institution, or non-account-based, but recurring.

C

CAMLO (Canada)- Chief Anti-Money Laundering Officer

Responsible for maintaining and managing records of high risk customers and reporting suspicious activities to the authorities as well as organizing inspections and audits from third-party entities.

CAMS- Certified Anti-Money Laundering Specialist Certification designation from ACAMS.

Cash-Intensive Business- Any business in which customers usually pay with cash for the products or services provided, such as food delivery services and coin-operated machines.

CDD- Customer Due Diligence

The process of assessing customers’ background to determine their identity and the level of risk they possess.

CFT- Counter-Terrorism Financing

CFCS- Certified Financial Crime Specialist designation from ACFCS.

Check Kiting- A form of check fraud that involves taking advantage of the float to make use of non-existent funds in a checking or other bank account. In this way, instead of being used as a negotiable instrument, checks are misused as a form of unauthorized credit.

CIP- Customer Identification Program

Where financial institutions need to verify the identity of individuals wishing to conduct financial transactions with them and is a provision of the USA Patriot Act.

Clarification Request (Canada)- A method used to communicate with money services businesses when FINTRAC needs more information about their registration form. This request is usually sent by email.

Compliance Program (Canada)- All elements a reporting entity is legally required to have under the PCMLTFA and associated regulations, to ensure that the organization meets all reporting, record keeping, client identification, and know-your-client requirements.

CRO- Chief Risk Officer

An executive in charge of managing risks to the company that can be categorized into three groups: technical, regulatory, and competitive.

CRS- Common Reporting Standard

The global standard for the automatic exchange of financial account information

CTR- Currency Transaction Reporting

A bank form used in the US to help prevent instances of money laundering. This is a report that U.S. financial institutions are required to file with FinCEN for each deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to the financial institution which involves a transaction in currency of more than $10,000.

Currency Smuggling- The illicit movement of large quantities of cash across borders, often into countries without strict banking secrecy, poor exchange controls or poor anti-money laundering legislation.

CVC- Convertible Virtual Currencies

An unregulated digital currency that can be used as a substitute for real and legally recognized currency as defined by the US regulator FinCen in a guidance release May 9, 2020

D

Delisting- When a sanctions target is removed from a sanctions list after the restrictions imposed on them have been lifted

Designated Categories of Offense- Crimes the FATF considers to be money-laundering predicate offenses.

DNFBP- Designated Non-Financial Businesses & Professions

Non-financial businesses and professions designated by the FATF that require extra vigilance, including: casinos, real estate agents, dealers in precious metals, dealers in precious stones, lawyers, notaries, other independent legal professionals and accountants, trusts and company service providers.

DPL- Denied Persons List

A list, published by the Bureau of Industry and Security (BIS), of individuals, entities, or companies that have been denied export privileges, generally due to Export Administration Act violations.

E

EAR- Export Administration Regulations

A set of regulations administered and enforced by the Bureau of Industry and Security, that specifically apply to physical goods or commodities subject to export controls.

EDD- Enhanced Due Diligence

A KYC process that involves the enhanced review of high-risk individuals or companies.

Effectiveness Review- An evaluation conducted at a minimum of every 24 months to test the effectiveness of an organization’s AML compliance program: policies and procedures, risk assessment and ongoing training program. KYC2020 AML Compliance Toolkit can help you manage your Effectiveness Review for FREE.

EIDV- Electronic Identification and Verification

The verification of a person’s identity remotely through digital means

Electronic Funds Transfer Report (Canada)- A report submitted to FINTRAC upon a transmission of instructions for the transfer of CAD 10,000 or more out of or into Canada in a single transaction or in two or more transactions totaling CAD 10,000 or more made within 24 consecutive hours by or on behalf of the same individual or entity.

Embezzlement- The act of taking or misappropriating funds entrusted by an employer or organization for illegal personal use.

Event-Triggered Monitoring- An internal control used to mitigate sanctions risks. Whenever relevant information about an existing customer changes, an interim review of information is conducted prior to a full scheduled review.

Exclusions List- A list of names or entries that are to be excluded from the sanctions screening process.

F

F2R- A secure application accessed over the internet that lets reporting entities manually enter and correct reports, such as STRs and LCTRs, individually (Canada)

False Negative- A hit that is flagged during the screening process as a possible alert, but is subsequently dismissed, yet there is actually a missed match on a sanctions list, or screening activity that is inappropriately calibrated in such a way that the suspicious activity itself is missed.  AI based decision systems can help eliminate false positives and speed up customer onboarding and ongoing monitoring.

False Positive- A hit flagged during the screening process as a possible alert, but upon review is found to not be a match to a target named on a sanctions list.

FATCA- The Foreign Account Tax Compliance Act

Passed as part of the HIRE Act, generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to payment withholding.

FBAR- Foreign Bank and Financial Accounts

Under the Bank Secrecy Act, foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, must be reported to the Treasury Department and reporting institutions must keep certain records of those accounts.

FCCR- Financial Crime Country Risk

FFI- Foreign Financial Institution

A Foreign Financial Institution that has registered and agreed to adhere to the requirements set forth by FATCA.

FMSB- Foreign money services business (Canada)

A money services business, that operates outside of Canada, that does not operate a physical location in Canada, yet directs MSB services to persons or entities in Canada.

G

GRC- Governance, Risk & Compliance

An organization’s approach across these three practices: governance, risk management, and compliance

Gatekeepers- Professionals such as lawyers, notaries, accountants, investment advisors, and trust and company service providers who assist in transactions involving the movement of money, and are deemed to have a particular role in identifying, preventing and reporting money laundering.

Greylist- A list of entities that present a higher risk for causing a negative impact to an organization.

H

HIO (Canada)- Head of an International Organization

HNWI- High-net-worth individual

A person with more than US$1 million in liquid assets

I

IBC- International Business Company

An offshore company that is registered in a tax neutral setting

ID&V- Identification & Verification

Inherent Risk- The level of sanctions risks along four categories: customers, products and services, countries, and delivery channels. Inherent risk examines the likelihood and impact of noncompliance prior to considering any controls within the risk management processes.

Internal Evasion- When an organization’s employee commit or facilitate a sanctions violation.

IVTS- Informal Value Transfer System

Any system, mechanism, or network of individuals that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location.

K

KYC- Know Your Customer

AML policies and procedures a financial services institution or MSB must act on to verify the identity, suitability, and risks involved with maintaining a business relationship with a particular customer.

KYE- Know Your Employee

AML policies and procedures for acquiring a better knowledge and understanding of an organization’s employees for the purpose of detecting conflicts of interests, money laundering, past criminal activity and suspicious activity.

KYM- Know Your Member

Common in the Credit Union space where customers are members of the Credit Union

L

LCT- Large Cash Transaction (Canada)

Any cash transactions valued at CAD 10,000 or more (or the equivalent in a foreign currency) that take place within the same 24 hour period for the same customer.

LCTR- Large Cash Transaction Report (Canada)

A report that is filed with FINTRAC when a large cash transaction has taken place.

Listed Person (Canada)- Anyone on a list published in the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism issued under the United Nations Act. You can consult that list of names via the Office of the Superintendent of Financial Institutions.

A listed person includes an individual, a corporation, a trust, a partnership or fund or an unincorporated association or organization that is believed to:

• have carried out, attempted to carry out, participated in or facilitated a terrorist activity; or
• be controlled directly or indirectly by, be acting on behalf of, at the direction of, or in association with any individual or entity conducting any of the above activities.

M

Mandatory Sanctions Lists- International sanctions lists, such as those including targets designated by the United Nations Security Council Resolutions (UNSCR), which must be screened against.

Ministerial Directives (Canada)- The authority to issue directives that require reporting entities to apply measures (which this document calls “countermeasures”) to transactions originating from or destined to designated foreign jurisdictions and entities; and the authority to recommend that the Governor-in-Council issue regulations limiting or prohibiting reporting entities from entering into a financial transaction originating from or destined to designated foreign jurisdictions and entities.

MLRO- Money Laundering Reporting Officer (Canada)

The individual who manages an organization’s AML systems and acts as a focal point for related inquiries.

ML- Money Laundering

The process of taking money obtained by committing a crime and disguising the source to make it appear legitimate

Money Mule- A person who transfers money acquired illegally on behalf of others.

MSB- Money Service Business

A business that transmits or converts money, foreign exchange, remittance and/or that issues or redeems monetary instruments

N

Name Screening- The process of matching an internal record or batch of records against sanctioned list records, either manually or through an automated screening tool.

O

OFC- An offshore Financial Center

A country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy

Ongoing Monitoring- An AML control process that involves monitoring high-risk customers on a periodic basis based on their risk profile.

Operational Risk– The risk of direct or indirect loss of operations due to inadequate or failed internal processes, people or systems, or as a result of external events.

P

Partial Match- When an entity being screened is similar to a sanctioned entity and potentially shares identifying factors, such as date of birth. Partial matches require further human intervention to determine whether the match is a true match.

PEP- Politically Exposed Person

An individual who, through their prominent position or influence, is more susceptible to bribery or corruption and thus presents a higher risk as a customer

PEDP- Politically Exposed Domestic Person (Canada)

PEFP- Politically Exposed Foreign Person (Canada)

PIN- Purpose and Intended Nature [of a Business Relationship] (Canada)

A record that documents the purpose and intended nature of a business relationship, and includes information that would help an organization anticipate the types of transactions and activities the client may conduct.

R

Reasonable Measures (Canada)- Steps organizations must take to collect certain information but it is not mandatory, such as, asking the client, conducting open source searches, or consulting commercially available information.

Red Flag- A warning signal that should bring attention to a potentially suspicious situation, transaction or activity.

Reputational Risk- The potential that adverse publicity involving a financial institution’s business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution.

Risk Appetite- The amount of risk that an organization is comfortable accepting in the pursuit of value or opportunity

Risk Assessment- A tool that allows an organization to identify and assess its potential risks and vulnerabilities.  Try the KYC2020 Risk Assessment tool for FREE

RBA- Risk-Based Approach

The process of assessing of the various risks associated with different types of businesses, clients, accounts and transactions in order to maximize the effectiveness of an AML/CFT regime.

RCA- Relative or Close Associate

Sometimes referred to as “PEPs by association,” RCAs are individuals related to or who have a close connection to a PEP, such as spouses, friends and business partners.

RGS- Reasonable Grounds to Suspect (Canada)

A suspicion of corruption that is not biased or prejudiced, but is based on an assessment of facts, context, and AML/CTF indicators

Reporting Entity- Entities regulated by the PCMLTFA that must report certain transactions to the FINTRAC, such as accountants, life insurance companies, brokers and agents, MSBs, real estate brokers and securities dealers (Canada)

S

Safe Harbor-  A legal provision to reduce or eliminate legal or regulatory liability for financial institutions, and their directors, officers and employees, if they report their suspicions in good faith to the Financial Investigation Unit (FIU).

Sanctions- Restrictive measures taken by individual countries, regimes, or coalitions with the goal of provoking a change in behavior or policy. Sanctions can restrict trade, financial transactions, diplomatic relations, and movement.

Sanctions List- A document or database listing individuals, legal entities, and countries with whom it is illegal to do business.

Sanctions Screening- Sanctions screening is a process employed within financial institutions to detect, prevent and manage sanctions risk. It is conducted via automated screening tools and manual processes.

SAR- Suspicious Activity Report

A report made by a financial institution about suspicious activity.

SCO- Sanctions Compliance Officer

The individual responsible for oversight of the sanctions compliance program. The SCO conducts ongoing monitoring for sanctions compliance, including sample testing and a review of exception reports, to enable the escalation of identified noncompliance or other issues to senior management.

SCP- Sanctions Compliance Program

A system designed to assist financial institutions in their sanctions compliance and to manage their sanctions risk.

SDD- Sanctions Due Diligence

A process that focuses on the risks specific to sanctions, while taking into account governance and risk assessment

SDN List- The Specially Designated Nationals and Blocked Persons List

A United States government sanctions/embargo measure targeting U.S.-designated terrorists, officials and beneficiaries of certain authoritarian regimes, and international criminals

SIE- Special Interest Entity

SIEs are high-risk organizations that are involved in criminal activities or are suspected of being involved in criminal activities

SIP- Special Interest Person

High risk individuals similar to PEPs, who have a history of involvement or alleged involvement in crime

Shell Bank- A foreign financial institution that does not have a physical presence in a foreign country.

Smurfing- A common money laundering method involving multiple individuals and/or multiple transactions for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold

SRB or SRO- Self-Regulatory Body or Organisation (Canada)

A body that represents a profession (e.g. lawyers, notaries, other independent legal professionals or accountants), and which is made up of members from the profession and has the role of performing certain supervisory/monitoring functions of standards that are maintained by the professions.

Structuring- Illegal act of splitting cash deposits or withdrawals into smaller amounts, or purchasing monetary instruments, to stay under a currency reporting threshold.

Suspicious Activity– Unusual or questionable customer activity that may be related to a money laundering or other criminal offense, or to the financing of a terrorist activity

T

Target Match- Identification of an individual or entity as matching one named on a sanctions list, also referred to as a true match

Tax Haven- Countries that offer special tax incentives or tax avoidance to foreign investors and depositors

Terrorist Financing- The manner by which terrorists fund their operations in order to perform acts of terrorism

TMP- Transaction Monitoring and Filtering Program

A system required of financial institutions to monitor transactions after their execution for compliance with the Bank Secrecy Act and AML laws and regulations.

TBML- Trade-Based Money Laundering

A financial crime that involves hiding the proceeds of a crime by moving the funds to a specific destination via trade transactions

Third-Party Database- A database made up of data collected by an entity that does not have a direct relationship with the user. Examples of third-party databases include rating agencies, stock exchanges, and legal databases.

U

UBO- Ultimate Beneficial Owner

The person or entity that is the ultimate beneficiary when an institution initiates a transaction.

USA PATRIOT Act- The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. The historic legislation brought about significant changes to the field of AML, including more than 50 amendments to the Bank Secrecy Act.

UTR- Unusual Transaction Report (Canada)

An internal form that is used to record the details of any transactions (attempted or completed) that is suspected of being related to money laundering or terrorist financing.

V

VIR- Voluntary Information Report

A report that is filed, by non-reporting entities, when there is suspicion of money laundering or terrorist financing.

W

Whitelist- A list of individuals and entities that trigger an alert by an AST, but who are later cleared as not to being a match.

Willful Blindness- A legal principle defined as the deliberate avoidance of knowledge of the facts or purposeful indifference to a money laundering transaction.

AML Organizations, Associations and Regulatory Bodies

ACAMS- Association of Certified Anti-Money Laundering Specialists

The largest international membership organization dedicated to advancing the professional knowledge, skills and experience of those dedicated to the detection and prevention of money laundering around the world, and to promote the development and implementation of sound anti-money laundering policies and procedures

ACFCS- Association of Certified Financial Crime Specialists

A leading association and provider of practical tools and knowledge to help professionals improve results in financial crime detection and prevention.

BCBS- Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.

BIS- The Bureau of Industry and Security

An agency of the United States Department of Commerce that deals with issues involving national security and high technology

CAFC- Canadian Anti-Fraud Centre

The Canadian Anti-Fraud Centre collects information on fraud and identity theft. They provide information on past and current scams affecting Canadians.

EGFIU- Egmont Group of Financial Intelligence Units

An international organization that facilitates cooperation and intelligence sharing between national financial intelligence units to investigate and prevent money laundering and terrorist financing.

FATF- The Financial Action Task Force on Money Laundering

An intergovernmental organization founded on the initiative of the G7 to develop policies to combat money laundering.

FinCEN- The Financial Crimes Enforcement Network

A bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes

FIRA- Financial Industry Regulatory Authority

Dedicated to protecting investors and safeguarding market integrity in a manner that facilitates vibrant capital markets.

FIU- Financial Intelligence Unit

A central agency that is responsible for receiving, analyzing, and transmitting disclosures on suspicious transactions to the relevant authorities.

FINTRAC- Financial Transactions and Reports Analysis Centre of Canada

Canada’s financial intelligence unit and regulator for AML and CTF

IIROC- Investment Industry Regulatory Organization of Canada

A non-profit, national self-regulatory organization. Established through the merger of the Investment Dealers Association of Canada and Market Regulation Services Inc. on June 1, 2008, IIROC oversees all investment dealers and trading activity on debt and equity markets in Canada.

OFAC- Office of Foreign Asset Control

Part of the U.S. Department of the Treasury, OFAC administers and enforces economic and trade sanctions based on US foreign policy and national security goals.

OSFI- Office of the Superintendent of Financial Institutions

The primary agency regulating financial institutions in Canada

Wolfsberg Group- An association of thirteen global financial institutions that have worked to develop global anti-money laundering guidelines for international private banks

This glossary of AML terms and acronyms as well as regulatory bodies and organizations, like the field of AML/CTF, will evolve over the coming months and years, so be sure to check back for updates.

Alternatively, if you are looking for an even more comprehensive glossary of AML acronyms, definitions and industry jargon, head over here.

In the previous article of the KYC 2020 Guide to PEP Screening, we learned that engaging with PEPs and RCAs who are involved in financial crime can be damaging to your financial institution’s reputation. Although you may already recognize the risk and have tried to address it with legacy screening systems, your current program may not provide enough protection and oversight.

AML/CFT systems and procedures need to protect your financial institution against corrupt PEPs and RCAs. However, these days they must do so while accurately verifying legitimate transactional activity and creating a positive customer experience.

Slow customer onboarding and the constant drumbeat of false positives will eat up your profitability and your competitive advantage. On the other hand, failing to identify corrupt PEPs or RCAs can lead to unwanted regulatory attention and action.

Thanks to AI and advancements in regulation technology (RegTech), screening for PEPs in global watchlists, government sources, and in adverse media is more effective, fast, and affordable than ever before.

Over the next four years, the global RegTech industry is expected to reach $16 billion. Much of this growth is driven by a wave of up-and-coming fintech innovators. These companies are harnessing advanced technologies to make AML compliance more doable and budget-friendly for smaller organizations and FinTech. In the process, they are leveling the playing field for financial innovators against their bigger, more established competitors.

Considerations Before Choosing PEP Data and Screening Solutions

One of the most important things to understand in your search for PEP data and screening solutions is that not all solutions (or vendors) are created equal. Not all solutions will be a perfect fit for your organization, either.

To give your institution a good chance of finding the most suitable tools for the identification and prevention of PEP financial corruption, keep in mind the following three considerations:

1. What are your needs?

Which kinds of PEPs or RCAs do you work with? What types of products or services does your organization offer that would be of interest to them? What is your workflow, and what AML/CFT compliance tools or technologies do you already employ?

Another important point to consider is how much direction and assistance you need to set up and run these tools. At KYC2020, for example, our CAMS and Vskills certified specialists help clients define a risk-based approach to compliance that fits their risk profile. We can also tailor our products to fit established workflows and assist with the integration.

2. What are the specifics of the PEP data and screening solution?

What is the scope of the solution? What methodologies does the vendor use? Does the AML/CFT compliance database go beyond sanction lists and other standard databases? Does the vendor also include other sources of data for PEP identification, such as negative news databases? How much of this data is truly necessary and how well is the data structured and de-duplicated? Does the vendor use advanced technologies such as AI and NLP for identity recognition and resolution? What search technologies does the software use to filter matches? How often is the data updated?

3. What kind of relationship does the vendor offer?

Who is the vendor and how do they work with their clients? Do they have experience working with your type of financial institution, credit union, Fintech company or MSB? Do they offer direct assistance and support to get started or integrate, as mentioned above?

Elements of a Good PEP and RCA Screening Tools

The most reliable, efficient, and modern data screening systems for PEPs and RCAs will include the following three core functions:

Smart Screening and Verification

Your institution is required by law to conduct reasonable procedures to identify PEPs either before a relationship is established or as part of the onboarding process. The quality of such screening, however, depends on the quality of the data you use. PEP and RCA sanctions screening always starts with traditional sanctions lists and Regulatory Authority databases. However, these watchlists are aggregated from thousands of independent sources, are highly unstructured, and are constantly changing. Simultaneously, sanctions are becoming more complex, while the number of regulatory bodies are growing.

In short, maintaining quality data is a resource-intensive challenge.

Given the nature of watchlist data, you must start with a smart watchlist database that is well structured, normalized, and regularly updated to catch true positives while minimizing false positives. This data should be coupled with an intelligent screening engine to help filter, sort and analyze search results.

In the event a firm wants to eliminate the manual effort of clearing false positives and speed up onboarding, they must move from screening to decisioning systems. These smart systems use AI to automatically clear false positives and deliver pass/fail decisions so your organization can speed up its customer onboarding.

The Ability to Conduct Enhanced Due Diligence

Once you have successfully identified a PEP or RCA and have defined the level of risk the individual brings, additional research and analysis may be appropriate. You may want to validate, for example, the individual’s source of funds and/or wealth. The bulk of this added investigation will often include non-watchlist data, such as adverse media screening.

Accounts with a PEP relationship are also subject to enhanced monitoring and periodic review. This helps to ensure that due diligence information remains current and the risk assessment and associated controls remain appropriate.

Automated Processes

Sanction screening still requires a significant amount of manual intervention that can dramatically slow down and disrupt the PEP verification and onboarding processes. False positives in particular will hold your workflow hostage. Most sanction screening systems still yield 5-7% false positives that must be cleared manually by a compliance officer.

Advanced sanction screening solutions leverage latest technologies, such as AI, machine learning, and NLP to significantly reduce such manual intervention. They also go beyond the matching, sorting, and analysis of watchlist data results. Smart solutions, like our DecisionIQ^TM, can render 95% of all verification decisions automatically in under a minute with a low decision error rate.

Each screening decision is accompanied with a transparent ‘Proof of Decision’ that is electronically stored. The Proof of Decision can be electronically reviewed and annotated by a compliance officer. When a PEP or RCA is identified, they can be assigned to different customer lists based on the risk level. These customer lists can then be set up for scheduled or active ongoing monitoring and alerts. All this can be done via an easy to access online user interface, or via an easy to integrate API library.

Just imagine what your institution could do with all the time, money and other resources that would be freed up under such a system! Decision-making would be a lot more accurate, too.

The point is PEP data and screening solutions are evolving, just as the regulatory environment and even the world itself shifts and transforms. When you are in search of AML compliance tools of any kind, you need to partner with an AML compliance vendor that understands the winds of change. This knowledge should be worked into their collection of solutions. In the financial services sector, such partnerships are what it takes to stay in the game.

.

In the previous article of the KYC 2020 Guide to PEP Screening, we learned about the many uncertainties surrounding PEPs, including how to even define them. In this article, we are going to take a closer look at PEP risk.

The Challenge of Serving PEPs

In Ontario, Sanjay Madan, a Ministry of Education computer specialist was recently fired after an alleged fraud involving $11.6 million in COVID-19 funds. Madan is also being accused of running an elaborate kickback scheme that stole at least $30 million more from the Canadian government.

Meanwhile, in the US, Tennessee state senator Katrina Robinson was recently charged with theft and embezzlement. According to court records, Robinson stole more than $600,000 in federal funds while serving as the director of a health care company. She then used this money to pay for her wedding, a new vehicle for her daughter, entertainment and various other personal expenses.

In the US and Canada and throughout the world, there are countless high-profile examples of PEPs using financial institutions as conduits for their illegal activities.

For this reason, PEPs and their relatives and close associates (RCAs) generally present a higher level of risk to your financial institution. When people are in positions of influence and power and have access to insider information, there is a greater chance that they will abuse their privileges. PEPs can end up leveraging their status for personal gain through bribery, money laundering, and corruption instead of benefiting those they are meant to serve.

PEP corruption undermines the rule of law. If left unchecked, corrupt PEP behavior can be detrimental to the overall health of the economy. It can drain a state or a country’s assets, compromise judicial and governmental systems, hurt fair commerce, and extinguish open competition.

It also can spell the end of your financial institution. Banks, credit unions and money services businesses (MSBs) that conduct business with dishonest PEPs face substantial reputational risk, additional regulatory scrutiny, and potential regulatory action.

Mitigating PEP Risk Through Red Flags

In the context of KYC and BSA compliance, identifying a client as a PEP or RCA is not the goal in and of itself. A PEP designation also does not mean the individual is necessarily involved in corruption or other forms of criminal activity. It is merely a call for extra vigilance. PEP screening and monitoring is thus one piece of a bigger process to discover and assess client risk.

The truth is that not all PEPs present the same level of risk. This risk will vary depending on numerous factors, including: the PEP’s geographic location, industry, sector, and position as well as the level or nature of the authority invested to this individual. Other factors, such as the type of account and its purpose, the transactional activity, and the complexity of the account, can all influence the risk to your institution when servicing a particular PEP.

PEP screening is a standard part of a risk-based approach to AML compliance. Though this process is usually performed as part of KYC and on-boarding procedures, account monitoring should continue periodically throughout the customer relationship. After determining that a customer is a PEP, your institution is responsible for conducting ongoing due diligence that is specifically tied to the individual’s current PEP status.

If your organization needs to assess PEP risk, then there are several red flags and indicators you can use to detect suspicious behavior and potential financial abuse.

PEPs that exhibit the following behavior or characteristics, should be approached with caution:

• Attempting to shield identity and obscure ownership through the use of corporate vehicles, intermediaries, or family members/associates as legal owners
• Exhibiting odd or suspicious behavior, for example: showing difficulty discussing the source of funding or wealth, providing incomplete or inaccurate information, asking questions about your institution’s AML/CFT policy
• Being involved with an industry or sector that is high-risk, such as arms trade and defense, banking and finance, businesses that sell or work with the government, healthcare, and mining
• Having a position in or an involvement with a business or organization that is operating in a high-risk sector
• Having a high-ranking position with significant authority, such as control over or access to state assets and funds, policies, and operations, as well as control over regulatory permissions like being able to approve an operating license
• Conducting suspicious transactional activities, such as payments and transactions that are anonymous

When on-boarding a client who possesses one or more red flags such as these, you need to proceed with caution. Your AML/CFT systems and procedures should kick in to protect your institution against unscrupulous individuals while verifying legitimate transactional activity and creating a positive customer experience.

To make this possible, you first need to be able to detect and identify PEPs and RCAs. This has traditionally been an expensive and time-consuming undertaking that greatly slows down customer onboarding. As a result, compliance for PEP screening has been lax and irregular across the financial markets. Now, thanks to AI and other advancements in regulation technology (RegTech), screening for PEPs in global watchlists, government sources, and in adverse media is not only effective and fast, but also affordable.

We’ll address the solutions helping to mitigate PEP risk in the next article.

That is how it is supposed to work in theory.

PEP screening and monitoring in practice, however, is an incredibly challenging process. Governments and regulators are calling upon banks, credit unions, and a growing range of money services businesses (MSBs) to act as a shield against political corruption and financial crime.

At the same time, AML/CFT regulations and fines for non-compliance have become more stringent over the past few years. Just recently, congress passed the Anti-Money Laundering Act (AMLA) of 2020. This piece of legislation which is being dubbed “the biggest anti-money laundering reform in a generation,” significantly adds to the regulatory burden in AML compliance across the board for institutions involved in financial services.

Yet even with all of this, there is surprisingly little guidance and support available to financial institutions to help them conduct a “reasonable” level of due diligence towards higher-risk customers.

In the KYC2020 guide to PEP screening we will address these issues and others. In this first article, we are going to start by defining what a PEP is and identify some of the big challenges that stand in the way of a good PEP screening program.

What is the Definition of PEP and RCA?

PEPs are any individuals who run the risk of involvement in bribery, intimidation or corruption because of their position of importance, power or influence.

If that seems like a vague statement, that’s because it is.

The criteria for what defines a PEP are actually very broad and may vary from country to country. Even among the regions of a country, there can be significant differences. Some common and generally accepted examples of PEPs, according to the BSA in the US, include:

• Government officials. For example, members of legislative bodies, such as the US congress, executive bodies, such as a head of state, judiciary bodies, such as members of state federal supreme courts, and diplomatic positions. A good example here would be a Member of Parliament, Senator, and Supreme Court Judge.

• Members of government organizations and institutions. For example, top military officials and ranking members of centralized financial institutions, such as the Federal Reserve and World Bank.

• Executives at state-owned enterprises. For example, high-ranking members of the Federal Deposit Insurance Corporation (FDIC), and Department of Treasury.

Most banks, credit unions and other regulated entities rely on the criteria and recommendations put forth by the Financial Action Task Force on Money Laundering (FATF).

The FATF divides PEPs into a few different categories based on the perceived level of risk. However, even those categories are up for interpretation depending on the geographic location. For example, defining PEP based on the level of risk could be as follows:

• High risk PEPs could include, heads of state and government, active members of the Federal government and top-ranking officials of political parties, as well as heads of the military, judiciary, law enforcement and the board of central banks.

• Medium risk PEPs could include regional government officials, ambassadors, senior officials of the military, judiciary, law enforcement and other state agencies, as well as high ranking members of prominent religious groups.

• Low risk PEPs could include, mayors and members of county, city and district assemblies.

In 2012, the FATF’s latest definition of PEPs includes a distinction between foreign and domestic individuals. Foreign PEPs are people who are entrusted with prominent public functions by a foreign country, for example Heads of state or Heads of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, and important political party officials. In general, foreign PEPs represent a greater risk than their domestic counterparts.

To make things even more complicated, immediate family members, publicly known associates and even businesses that are either related to or closely associated with a PEP are also considered a risk and must be both screened and regularly monitored. This group of people and entities are called Relatives and Close Associates (RCAs).

Immediate family members who are considered PEPs include:

• Parents and children of PEPs
• Spouse or partner
• Siblings
• Aunts, uncles and cousins
• Indirect family members, such as in-laws

Close associates who are considered PEPs include:

• An individual who has a close business relationship or shares in the ownership of legal entities with a PEP
• An individual who is the owner of a legal entity which is known to have been set up for the de facto benefit of a PEP

How the PEP Definition Creates Challenges in PEP Screening

There are several factors that can make it harder for your institution to effectively conduct PEP screening and customer due diligence (CDD) while fulfilling AML/CFT compliance rules.

First and foremost, the absence of a universal definition of a PEP as well as a clear set of rules to determine the apparent risk level of a specific individual or entity is an obvious hindrance. Identifying a head of state or a high-level government official would take little work. However, there are many politicians and people of influence who would fit the definition of a PEP, but who may be considered low key and thus fly under the radar. Despite the presence of numerous watchdogs and the importance of approaching these parties with proper due diligence and ongoing monitoring, there is still limited specific guidance on how to identify, screen and continuously monitor PEP activity.

In other words, it’s largely up to your financial institution itself to decide how to screen, on-board, and monitor PEPs in relation to your Risk-Based Approach (RBA).

Moreover, PEP watchlists and the other resources that financial institutions use to identify a PEP vary significantly in quality and comprehensiveness. AML compliance data sources in general contain large amounts of “junk” or “404” data that effectively gets in the way of good PEP screening. This in turn leads to operational inefficiencies and an increase in costly, time-consuming false positives.

Keep in mind that even if individuals are identified as PEPs, this does not mean that they are actually involved in criminal activity. It just means you need to treat every PEP as high-risk, take precautions, and implement an ongoing monitory program for such individuals. You also need to consider the balance between oversight, regulatory compliance and maintaining a fundamental level of customer service.

When it comes to PEP screening, in order to unlock the protection such oversight affords your institution’s reputation and revenues, you need to know what to look for in the first place.

In the next article, we will dive more deeply into the risk posed by PEPs and why it is essential that you effectively screen for them.

Banks must check the identity of their clients at the time of onboarding.  In other words, they must make sure that clients are genuine.  They must also identify the risk they represent as clients to the banking system.  Different types of clients come with different levels of risk. The level of risk determines the frequency of ongoing monitoring and transactional screening that must be conducted throughout the client relationship. 

Lets take a look at high risk clients, and how to identify them.

Sanctioned Persons and Entities

These are the individuals, companies, and organizations that are persona non grata.  They are prohibited counter-parties. You should not be doing business with them.  Depending on your jurisdiction, dealing with them can incur severe penalties.  

Most government bodies and regulatory authorities publish these lists.  These are generally knows as sanction lists.  Sanction lists are regularly updated and you must continually screen your customers against these lists as part of your KYC process. 

PEP’s

Politically Exposed Persons usually have a high profile political role or serve in public office. They may be at increased risk of involvement in money laundering or even terrorist financing based on their position. 

Companies looking to do business with PEP’s need to disclose this and continuously monitor their transactions to ensure they are compliant and not engaging in nefarious activities.

Who can fall into this category?

Here is a list people can make the PEP list.

• Government officials, Presidents, Prime Ministers, and even cabinet members of countries.
• The second tiers are the officials of the ruling parties and their opposition parties.
• Any senior executives and board members of government-controlled entities. Any relatives or close associates of any of the people mentioned above.

Often, nepotism is the easiest way to move government funds to relatives. While employing family members into positions of power may buy loyalty, these appointments often lack the required auditing when going through procurement or tender processes.

Criminal Organizations

Money laundering happens through seemingly legitimate companies. Directors or owners can often be persons of interest who hide criminal activity behind the legitimate business. Your company must do regular screenings of customers against global watchlists and negative news as part of your KYC checks. This will ensure your company remains alert to any underhanded activities that could be funding crime.

Financial Institutions should report any activity identified as possible money laundering or criminal funding activities and will freeze customer accounts until investigations are complete.

Terrorist Activities

Governments release sanction lists that include terrorist activities. Financial Institutions use the lists for sanction screening of individuals, companies, and organizations as part of their KYC process. There are almost daily updates on the targeted financial sanctions lists. They are critical to limit criminal funds’ movement to terrorist organizations to help them fund arms deals and terrorist activities.

Transaction monitoring and ongoing sanction screening of new or existing customers is a minimum requirement for any KYC process. The frequency of ongoing monitoring will depend on the AML risk profile and the risk-based approach of the company.

Reduce the risk of non-compliance

Thanks to regulation technology (RegTech), quality and affordable solutions for KYC check and AML compliance are available to your company. For large financial institutions or small non-financial firms, ensure you stay on the right side of the law. Proper compliance reduces the risk of fines and warnings. Non-compliance, especially as it relates to sanctions screening for KYC, can be costly – not to mention the long-lasting reputational damage for your business.

KYC2020 is one of the world’s 100 most innovative regulation technology solution providers as ranked by RegTech Analyst. For a demo or appointment with KYC2020, please click here.

The danger of not having a good process in place can land your company and clients at an even higher risk.

Demanding customers

Instant gratification amplifies the customer’s requirements for faster decisions, speedier turnaround times. The online world has made same-day delivery the norm, and businesses select suppliers based on their supporting technology to make their lives easier and the opportunities to serve their end-customers better.

One of the main problems with manual AML compliance checks is the time and inefficiency of clearing false positives that arise from sanction screening. These delays cause unnecessary frustration.

How AI can help

With constant AI development and the introduction of rule-based decision systems and Machine Learning (ML), it’s possible to reduce these flagged queries, speed up screening, and approval times. The compliance databases and records update continuously, thereby making machine learning essential.

AI models learn from previous false positives that are normally manually processed and begin to establish patterns. These patterns become new rules to clear false positives that meet the recognized pattern automatically. The benefit of AI and ML in sanction, PEP, and adverse media screening is obvious, and your return on investment is evident.

Affordability

Sanction screening software has traditionally been very costly. Many SMEs simply cannot afford quality solutions. With the advent of RegTech, the number of compliance technology solution providers has increased dramatically. Finding high quality solutions that are also highly affordable is no longer a problem. The challenge now is to find solutions that are not only high quality and highly affordable, but also low-friction and autonomous.  For SMEs, a large percent of the AML compliance cost comes from manually having to clear false positives. With AI and ML you reduce the overheads for manual screenings. Sanction, PEP, and Adverse Media screenings are done faster and more cost-effectively. This allows smaller businesses to remain compliant and still offer their customers the best service and experience.

KYC2020 removes the cost and complexity of AML compliance with use of advanced technologies. KYC2020’s DecisionIQ solution uses AI and ML to clear false positives and deliver real-time actionable decisions to speed up customer onboarding.  KYC2020’s Adverse Media Check uses NLP to process and identify persons, PEPs, and entities in relevant negative news. It is no wonder why KYC2020 is recognized as one of the world’s most innovative regulation technology solution providers by RegTech Analyst. 

To request a free trial or learn more about our solutions, contact us.

For SME’s, credit unions, and Fintech companies, finding efficient and affordable solutions had been out of reach… until now.  RegTech innovators are taking advantage of AI, ML (machine learning), and NLP (natural language processing) to deliver compliant screening solutions that are fast, affordable, and low friction for smaller businesses.

The False Positives Challenge

There are a few factors that slow down the timing of approvals during screening. A main one is the volume of false positives exposed. This is a nightmare for companies looking to improve their customer acquisition. They win customers by advertising faster approvals in opening accounts and managing transactions.

When the volume of false positives spirals out of control, unexpected delays extend from a few days to weeks. Moreover, delays in customer onboarding and transaction processing do not just cause frustration for the customer but also for the company.

Online customers are not sticky, and according to a study done by Forbes, customer experience is perhaps the biggest reason why customers switch vendors.

Machine learning and AI

With AI and machine learning becoming an essential part of the compliance world. Companies can now manage the volume of false positives with autonomous clearing of alerts. AI based decision systems use a rule-based approach and built-in learning models to filter out the data.

Once the AI learns of a particular alert that is cleared manually, it will learn the behavior and create new rules to clear false positives automatically.

Decision systems for automated clearing of false positives can be a business savior. However, replacing human intelligence with artificial intelligence does not come without risks. You need to follow best practices to avoid auditor scrutiny and avoid penalties for non-compliance.

For example, one of the system’s most important features is that it must be auditable and provide transparent proof of decision that is easy to read and track. For more on best practices for AI-based decision systems, download this whitepaper from KYC2020.

An ongoing process

Ongoing monitoring of customers is a requirement for most AML compliance regimes since databases and sanction lists update almost daily.

Algorithms are always learning new alerts and rules. Manual processes are no match against AI-based systems for ongoing monitoring of customer lists. Development of AI, Machine Learning (ML), and Natural Language Processing (NLP) in AML compliance applications reduces the need for human reviews of false positives. This seemingly simple addition shortens the time required to get approvals.

Win-Win-Win

The best outcome for smaller companies is to move towards a tech-based compliance approach for their customers. This will help reduce the possibilities of fines for non-compliance and make it cost-effective for companies to carry out compliance.

KYC2020 provides affordable and effective AML compliance solutions that take advantage of latest technologies. KYC2020 is the best in class source for global Sanction, PEP, HIO, and Adverse Media data. We have designed our AI and NLP based screening and ongoing monitoring solutions to eliminate false positives and reduce manual work.

Contact Us for a free trial or to learn more about why KYC2020 is recognized as one of the world’s most innovative regulation technology solution providers by RegTech Analyst.

The anti-money laundering regulations and controls are in place to identify these activities and alert financial institutions. Reporting red-flags is critical to preventing and reducing these criminal activities, and ultimately stop the source of funds for criminals.

Criminals use “layering” to hide their funds. They move money in-between accounts and companies. The more layers, the harder it is for the crime divisions to track the source of funds.

Layering allows the criminal to remove themselves from the source, and each transaction helps add another layer of the legitimacy to the funds.

Placement of the funds

The first step in the layering process is called “placement.” This happens after the criminals have illegally acquired the funds from their activities. The most common way criminals do this is by moving money through a legitimate business often owned by the criminals or their families. This initial funneling of funds usually occurs through cash-heavy operations and companies like casinos.

The aim is to manage large volumes of smaller transactions that do not trigger deposit alerts at the banks. These reporting thresholds are common knowledge, and the criminals ensure that their transactions are always below these threshold alerts.

Moving money from these companies to suppliers and other criminal associates via false invoices and payments is standard practice.

This first layer of money laundering is only the beginning. Criminals add many more layers to reduce traceable funds.

How to identify money laundering activity

 Reg flags for layering by criminal organizations include:

• Large cash deposits into a variety of bank accounts
• Making international transfers in and out of offshore accounts
• Investing in and reselling high-value items like jewelry or art
• Purchasing property and real estate
• Investing in companies and legitimate businesses
• Using shell companies to move money in and out of accounts
• Multiple transactions via different banks and financial institutions

Banks, FIs, and even many non-financial firms such as charities, universities, MSBs, and even real-estate brokers, are regulated entities and must report suspicious activity (SAR) that indicates money laundering.  Banks are required to have transaction monitoring systems in place to monitor and alert for suspicious activity.  Additional suspicious activities include:

• Prominent transactions: Cash deposits into an account and immediately withdrawn.
• Regular transactions and deposits that are exact amounts or add up to an identical amount will raise a flag as layering.
• Transactions from high-risk countries can also trigger an alert.

With the use of services offered by AML Compliance companies like KYC2020, you can get to know your customer and identify business risks related to money-laundering and financial crime.

KYC2020 provides affordable and effective AML compliance solutions. Our comprehensive databases offer the best global sanction, PEP, HIO, and criminal watchlist data. We offer AI-based sanction screening and adverse media monitoring solutions to complement our data. KYC2020 is recognized as one of the world’s most innovative regulation technology solution providers by RegTech Analyst.

For a consultation or to book a demo, please click here.

Most startups find hiring a professional to create an AML program too costly, so they end up creating their AML policy themselves. This is a risky proposition as they usually lack the expertise to identify potential pitfalls. Banks are wary of DIY attempts, and costly delays or false starts haunt those Fintechs that pursue the DIY method.

What is an AML Policy?

An AML policy details the steps your organization takes to combat financial crimes such as money laundering and terrorist financing. Regulations have slight variations depending on your jurisdiction, but largely follow the Financial Action Task Force (FATF) recommendations to help align global efforts in combating financial crimes. Since most jurisdictions largely apply the FATF recommendations, it is possible for you to create an AML policy through a template. But using templates can have its disadvantages which we will talk about later.

Why You Need an AML Policy for Your Fintech Startup?

While some Fintechs are regulated directly, and must comply with the law by having an AML policy, many more must comply because their financial partners require it. Failure to comply with AML regulations can result in fines, cease and desist notices, and permanent industry bans. For startups, even small fines can cause a business venture to fail, and delays while you negotiate your policy with the banks take time and resources away from the business venture. Enacting an appropriate AML policy to ensure you follow all AML regulations keeps risks to a minimum.

How To Create an AML Policy

Creating an AML policy must, therefore, be a priority for regulated organizations, and those Fintechs that partner with banks to provide financial services. For those interested in the DIY method, there are free resources online such as FINRA’s AML template. This template guides you through each piece of information you need to include in your AML policy complete with examples of how you should fill it in. You can use this template to create your policy and then have an expert review or complete the policy. This provides you with a cost-effective method of ensuring your policy follows all AML regulations without the need to hire a professional for the entire process.

Firm Policy

The first section of an AML policy outlines your firm’s policy on your intentions to combat money laundering and other financial crimes. Within this section you define the kinds of financial crimes that your Fintech startup could be exposed to and confirm your intentions to fully comply with all AML regulations, by detecting and deterring such attempts.

AML Compliance Personnel Designations

In the next section, you designate who is responsible for AML compliance within your organization. The key role you must fill to ensure AML compliance is the Chief AML Compliance Officer, or CAMLO. This individual oversees your entire AML compliance operation ensuring your overall compliance as well as determining how to improve the way you achieve compliance.

Sharing AML Information with Law Enforcement

This section provides an overview of your organization’s policies for sharing all AML information with the applicable authorities. As part of your AML compliance, you must share all of your findings related to AML with the authorities applicable to your jurisdiction. Within this section you should highlight which authorities your organization can share information with and how your organization will share that information. Generally, you must comply with all requests from FinCEN, National Security Letters, Grand Jury Subpoenas, and most law enforcement requests subject to a subpoena; however, some jurisdictions have additional discovery methods.

Sharing AML Information with Other Financial Institutions

While you are not required to share information with other financial institutions, it can help you fulfill your AML compliance obligations. Within this section, you must detail whether you intend to share certain types of otherwise confidential information with other financial institutions. If you intend to share information with other financial institutions, you should include how you intend to share that information and under what circumstances you intend to share information.

Procedure for Checking Sanctions Lists

The Office of Foreign Asset Control maintains a list of sanctioned entities and individuals. Though this section is not directly related to AML, the requirements to identify individuals are so closely tied to the AML expectations, that they are often lumped together. This section demonstrates your organization’s compliance with these sanctions. Within this section you detail your organization’s exact steps for checking all sanctions lists when opening a new account for a client, altering an existing account, or partnering with a client. For an inventory of global watchlists and a list of sanction screening solution vendors visit Mr. Watchlist. For help with what sanction lists you should be screening for your compliance program, check out this free Watchlist Builder Tool from KYC2020.

Know Your Customer (KYC) Compliance

Your Fintech’s method for verifying the identities of your customers is required in writing within your organization’s AML policy. These regulations are commonly referred to as Know Your Customer, or KYC, regulations. These regulations are so close to the OFAC identification requirements that they are usually lumped together. In this section you must define reasonable procedures your company follows to confirm the identity of your customers. These procedures must include:

• Required customer information
• Customers that refuse to provide information
• Verifying information
• Record keeping
• Comparison of customers to terrorist lists
• Notice to customers
• Any organizations your organization relies on for identity verification

Customer Due Diligence

This section declares that your organization establishes a customer’s risk rating. It must outline how you will identify beneficial owners, politically exposed persons, and senior management of organizations. You must also define when your organization follows an enhanced due diligence procedure based on the individual’s risk rating.

Filing Suspicious Activity Reports and Currency Transaction Reports

Finally, your AML policy must declare your organization’s procedures for filing suspicious activity reports (SAR) and currency transaction reports (CTR). You must include that your organization will file CTRs for any currency transaction exceeding $10,000 and how you file your CTRs. Filing a SAR is determined by certain requirements and the result of your organization’s monitoring. In some cases you can move this responsibility to the partnering bank, while in other cases, you must file these reports with FinCEN directly.

Simplify the Process with KYC2020’s AML Policy Builder

Taking a template and filling it out for your specific business can become a difficult and time-consuming task. Figuring out how to write each section and what information must go in each section only becomes more complicated the more you learn. So, to make the process easier, KYC2020 created a special AML Policy Builder tool. This tool helps you create your AML policy without the hassle of typing out legalese. All you need to do is answer questions specific to your business, and the policy builder creates a full document for you to use. It also provides a review function, tracking and version control capabilities, and the ability to engage an AML specialist to securely and confidentially review your policy or AML compliance regime.

Reviewing Your AML Policy

Once you write your AML policy, whether you use a template or KYC2020’s AML Policy Builder tool, you will want to have an expert review it to ensure your program is complete and effective. The AML Policy Builder tool is supported by KYC2020’s network of qualified independent AML specialists. You can use the hire function from within the tool to engage an expert to review or help complete your policy. This allows you to benefit from the expertise of an AML professional without the high cost of having one create your entire AML policy.

Your AML policy defines exactly how you intend to achieve AML compliance and can be subject to review by various AML compliance agencies. So, getting your AML policy right the first time is of the utmost importance. If you are confused by any aspect of your AML policy, reach out to KYC2020 to have an AML professional review and guide you on the best practices used to achieve compliance.

• Financial Industry Regulatory Authority (FINRA)
• Financial Crimes Enforcement Network (FinCEN)
• Federal Financial Institutions Examination Council (FFIEC)

Financial Industry Regulatory Authority (FINRA)

FINRA is a private corporation in the United States that acts as a self-regulatory authority. It became the successor of the National Association of Securities Dealers in 2007 shortly after the SEC approved its formation. Since then, FINRA grew to over 3,400 employees working primarily out of Washington, D.C. and New York, NY with 20 other regional offices throughout the United States.

FINRA’s overall responsibilities revolve around regulating member brokerage firms and exchange markets, one part of which is ensuring AML compliance. With these responsibilities, the 3,400 employees oversee approximately 4,250 brokerage firms, 154,000 branch offices, and 625,000 registered representatives. As a part of these responsibilities, FINRA holds periodic regulatory exams for all member firms they oversee. These reviews help FINRA determine where they see room for improvement within these institutions for more streamlined compliance.

Despite being a private corporation, the Securities and Exchange Commission granted FINRA approval to discipline registered representatives and member firms. They also license individuals, admit firms to the industry, and create the rules that govern their behavior. In 2018 alone, FINRA levied approximately $61 million in fines and another $25 million in restitutions. This makes them one of the primary organizations you will have to deal with to achieve AML compliance if you are dealing in securities. They set the rules and regulate them, so be sure to pay attention to everything they do.

Financial Crimes Enforcement Network (FinCEN)

FinCEN was formed in 1990 with the goal of combating domestic and international money laundering, terrorist financing, and other financial crimes. They’re a bureau of the United States Department of Treasury that analyzes information about financial transactions. They are one of 147 Financial Intelligence Units (FIUs) that make up the Egmont Group of Financial Intelligence Units. FinCEN’s director summed up their mission through a statement in 2013 as, “safeguard the financial system from illicit use, combat money laundering and promote national security.” They accomplish this mission through following any financial trails that might lead to a case of money laundering, terrorist financing, or other financial crimes.

One of FinCEN’s primary responsibilities revolve around data collection and data use. They created the FinCEN Query which allows other Financial Intelligence Units to search the mass amounts of data FinCEN collects on all financial transactions. The search engine operates similar to Google making it easy for any of the Financial Intelligence Units to find any information they need. They also create four yearly reports:

• Suspicious Activity Report
• Currency Transaction Report
• The Designation of Exempt Person
• Registered Money Service Business

These reports contain their findings on various threats and indicators facing the United States when it comes to combating money laundering, terrorist finance, and financial crime

Through the use of the extensive data they collect on financial transaction, they conduct investigations into at risk individuals and organizations. This puts anyone not following AML regulations at risk of an expensive investigation that could halt your business entirely. So, to avoid a nasty letter from FinCEN, make sure you follow all financial requirements and regulations to ensure you do not participate in money laundering, terrorist financing, or any other financial crimes.

Federal Financial Institutions Examination Council (FFIEC)

The FFIEC was established in 1979 through the Financial Institutions Regulatory and Interest Rate Control Act of 1978. They are composed of five banking regulators that create uniform guidelines and standards that every financial institution must follow. The five banking regulators that make up the FFIEC include:

• Federal Reserve Board of Governors
• Federal Deposit Insurance Corporation
• National Credit Union Administration
• Office of the Comptroller of the Currency
• Consumer Financial Protection Bureau

In recent times, one of the top priorities of the FFIEC became protecting financial institutions from cyber-attacks. They achieve this through creating guidelines and standards for cyber security that every financial institution must follow. As part of their effort to help financial institutions combat cyber-attacks, they released the Cybersecurity Assessment Tool. Regulators of the FFIEC use the results of this tool as part of their examination into any financial institution.

Another helpful resource the FFIEC released to simplify compliance with the Bank Secrecy Act and Anti-Money Laundering is their BSA/AML info base. Within this infobase you can find guidelines to help you achieve AML compliance, examination manuals, and a range of other resources to help you maintain compliance. Since their overall goal surrounds helping financial institutions combat financial crimes, they aim to teach appropriate standards you should follow to maintain compliance. You can also use this database to see exactly what the FFIEC looks for during compliance examinations of your organization. This helps ensure you pass your examination when that time inevitably comes. You should look to the FFIEC to help you create procedures and maintain compliance with all BSA and AML regulations.

Do You Need Help Achieving and Maintaining AML Compliance?

These organizations are only the tip of the iceberg when it comes to navigating the complexities of AML Compliance. There is the OFAC which regulates all foreign assets, the OCC, FDIC, FRB, CFPB, and then various state level oversight agencies. These organizations play an important role in ensuring you remain compliant with all AML regulations.

If you need help navigating the complexities of AML compliance, contact KYC2020 for a consultation today. They offer software tools to help you manage all aspects of AML compliance and streamline your AML Compliance Program to ensure efficiency. KYC2020 also supports a network of qualified CAMS certified AML Compliance Specialists to help answer any of your questions and guide you through the process of achieving AML compliance. AML compliance does not have to be costly or complicated, so let KYC2020 help you decide your next steps to achieving and maintaining AML compliance in a cost effective and efficient way.