Anti-money laundering (AML) regulations continue to evolve and are increasingly placing the onus upon financial institutions to apply Know Your Customer (KYC) rules with greater due diligence to help governments effectively counter tax evasion. Ensuring the collection, assessment, and secure maintenance of a growing volume of client data is an important obligation for reporting entities.
As the requirements for enhanced AML/KYC due diligence increase, there is a need for greater security and protection of client data. A failure to comply with AML regulations can attract heavy fines and reputational damage.
A failure to comply with AML regulations can attract heavy fines and reputational damage.
Constantly responding to evolving regulatory requirements and adapting related IT infrastructure to meet these growing and sophisticated demands can sometimes prove challenging to financial market participants, according to Dr. Dionysios Demetis, a lecturer in management systems at the Hull University Business School, who also holds a PhD in AML and Information Systems from the London School of Economics and Political Science. 5
“The increase in regulation and the constant co-mingling of additional phenomena into the AML regime, including terrorist financing, bribery and corruption, add to the complexity”, he says.
Asset managers and other financial sector participants who do not review, or consider upgrading their IT systems to meet today's stringent AML and KYC requirements may face greater scrutiny, potential fines, as well as the risk of reputational damage.
Most financial firms, however, are aware of the risks of non-compliance and look to implement the appropriate systems and controls. In a survey conducted by professional services firm EY looking at the challenges faced by financial institutions, compliance with regulatory requirements was cited as the top concern by 81 percent of respondents in the Americas, and 84 percent of European respondents. 6
Most financial firms are aware of the risks of non-compliance and look to implement the appropriate systems and controls
As a counterpoint to this heightened awareness, the EY survey also highlights the greater availability of tools. “Rapid technology advancements from software vendors and third-party asset servicers have enabled firms to reduce infrastructure complexity and cost by rationalizing the number of [internal] applications, which has increased the opportunities for outsourcing."
A report by industry consulting firm PricewaterhouseCoopers (PwC) 7echoed that view. “Given the significant effort required to establish internal AML controls, some advisers may consider outsourcing much of the operational aspects of their AML program to a third party service provider, for example, a transfer or administrative agent. This strategy would be consistent with currently common industry practices."
PwC reminds asset managers who take this approach, however, that they continue to have ultimate responsibility for all AML obligations and liabilities. As a result, they should choose their AML outsourcing partners carefully and monitor them continuously.
Dr. Demetis believes that the industry must look beyond a solely technological solution and move towards “the gradual establishment of an AML culture that can secure some degree of continuous improvement in several AML-related areas, such as governance, risk, technology controls, training and awareness."
As the risks grow, new solutions are becoming available for those forward-thinking asset managers who are prepared to drive this wide-reaching transformation.
- The Guardian (April 19, 2016) - Panama Papers: US launches criminal inquiry into tax avoidance claims
- Reuters (May 1, 2015) - BNP Paribas sentenced in $8.9 billion accord over sanctions violations
- The Guardian (December 6, 2012) - Standard Chartered to pay $670m to settle Iran sanctions allegation
- Eversheds (March 28, 2014) - The FCA issues another fine for failings in anti-money laundering controls: a lesson for asset managers?
- Email interview
- EY (2014) - 7 changes to asset management operating models
- PWC (September 2015) - Asset managers: AML ready?