The stakes for financial institutions remain high
The financial-services industry has been roiled by a perfect storm of disruptive forces. Complex regulatory-compliance requirements, aging legacy assets and operating models, digital innovation and fintech have rapidly changed the operating environment. The evolving regulatory landscape that accompanies those changes, worldwide political changes and record monetary fines have made anti-money laundering (AML) and sanctions compliance a major challenge for financial institutions globally.
The stakes are high; regulatory action has produced a wave of investigations and sanctions, jeopardized licenses and found individuals personally accountable and liable for noncompliance. To assess global industry trends, AlixPartners conducted its 2017 Global Anti-Money Laundering and Sanctions Compliance Survey of 361 financial institutions to gauge how institutions are addressing the challenge. Based on the survey results, we have identified key trends and challenges financial institutions should address in 2018 and beyond.
Boards of directors at financial institutions play a crucial role in the adoption and implementation of effective enterprise-wide AML and sanctions-compliance programs. It’s up to them and senior management to set the strategies, ensure there are adequate resources and empower leaders to promote an effective AML-compliance program and monitor the organization’s risk profile.
Based on our survey findings, however, many boards appear to be falling short in meeting this important requirement. Twenty percent of the surveyed financial institutions indicated that they “do not provide AML and sanctions compliance training for their boards of directors or are unaware whether their boards are being briefed on AML and sanctions matters”. While this number represents the global average, regional differences are noticeable as well. The percentage of boards that have not received AML and sanctions-compliance training or briefings on these issues exceeds the 20-percent mark at financial institutions outside of the United States. This is noteworthy as often these jurisdictions are considered to be at higher risk for money-laundering and/or sanctions breaches.
Boards and senior management should set the tone for their organizations by creating a culture of compliance. If compliance officers are bootstrapped and cannot obtain adequate support and resources, then it’s likely that the financial institution’s leadership is not seriously engaged in AML compliance.
Boards of directors should keep in mind that they have a duty to ensure that their financial institutions reach not only their financial goals but also their regulatory-compliance and corporate-governance goals. Considering recent enforcement actions, in which certain AML-compliance officers were personally sanctioned, we expect management teams and boards of directors to deepen their involvement in AML efforts rather than employing a check-the-box mindset.
De-risking and strange bedfellows
Based on our survey, the observed trend of de-risking has continued in 2017. Sixty-three percent of respondents said they had experienced it in some form. That underscores the importance of collaboration between financial institutions and the need to achieve common compliance standards that may sometimes be higher than local regulatory standards.
The de-risking trend seems to have led to a reduction in relationships—primarily correspondent banking—maintained by institutions. The same cannot be said about the volume of transactions. Based on trends observed and responses to our survey, it seems that some financial institutions have found different counterparts, often away from traditional “trade routes”, that put less effort into AML and sanctions compliance. They have created nested relationships that often lead to increased risks of money-laundering and sanctions breaches, or have been abused for money laundering and bypassing various sanctions regimes.
By taking a fresh look at inherent as well as perceived risks, financial institutions can become risk intelligent even before they conduct a formal AML-risk assessment. Boards and senior executives should consider several key questions in managing risk appropriately:
Does the financial institution possess a culture of compliance that exists throughout the organization, or are there siloes present that inhibit a more integrated compliance approach?
Has management established appropriate incentives to incorporate AML-compliance objectives across the organization?
Does senior management set the tone through active engagement and involvement in AML-risk mitigation?
Are the financial institution’s policies and procedures aligned with the business’ operating model and its various lines of business?
Does management possess a holistic view of its customers, across geographies?
Are the financial institution’s various reporting, technological and other systems integrated geographically?
Is ongoing compliance monitoring and testing sufficient to identify potential weaknesses?
A majority of our survey respondents identified automated transaction-monitoring systems for sanctions compliance as one of their top investment areas in the next 12 to 24 months. Our experience suggests that those costs lie not only in system implementation and maintenance but also in the analysis and utility of the output of those systems.
Sanctions programs are continually evolving. Consequently, financial institutions should make sure their compliance programs can keep pace with changes in sanctions requirements by revising those programs as businesses change and regulatory frameworks evolve. Financial institutions should also ensure that sanctions-compliance considerations are included in their development and introduction of new products and services—and incorporated into customer and counterparty onboarding. A failure to update sanctions programs, such as by failing to monitor changes to suppression lists as sanctions change, could pose significant risks to financial institutions.
Over the course of 2017, we have seen new sanctions focused on Venezuela, Russia, Iran and North Korea. Although some of those sanctions—mainly those issued by the US Office of Foreign Assets Control—are more limited in scope than past sanctions regimes, the actions reflect heightened risks to institutions that do business in these countries.
We may also see a renewed focus on certain Asian jurisdictions, which in the past have been used as vehicles to bypass sanctions regimes due to their business-friendly nature and ease of incorporation. Financial institutions would be well-advised to review counterparties and new customers. Similarly, they should conduct institutionalized customer due diligence or enhanced due diligence and focus on the potential sanctions risk—whether along traditional trade routes or alternative/new routes by which transactions are aimed to potentially evade sanctions.
AML and sanctions compliance remains a significant challenge for financial institutions globally, with notable differences between regions. As financial institutions become more complex and more interconnected across jurisdictions, and as rules, regulations and various sanctions regimes continue to evolve, firms will need to devote considerable resources to AML and sanctions-compliance issues.
Boards appear to be taking AML and sanctions-compliance matters seriously and are investing significant resources in the design and implementation of policies, procedures, systems, controls and training that will enable them to meet their compliance requirements more efficiently and cost-effectively. However, based on certain survey responses and regional differences, we may conclude that boards at some financial institutions are not yet fully engaged, and management is playing catch-up in some areas.
The race to keep up with differing compliance standards has redrawn the competitive landscape for banks, and those banks that can get AML and sanctions compliance right will undoubtedly emerge as winners in the ever-increasingly global competitive landscape.
About the survey
The AlixPartners 2017 Global Anti-Money Laundering and Sanctions Compliance Survey surveyed compliance, risk-management and legal executives, C-level executives and board members from a diverse group of financial institutions, both online and through interviews. The institutions included a range of global financial institutions, including retail, corporate and business banking; private banking and global wholesale banking; broker-dealers; asset managers; insurance companies; money-service businesses (MSBs); and other types of financial institutions, including sovereign central banks.