Procedures for Ongoing Money Laundering and Financing of Terrorism Transactions Monitoring

14 April 2017

By, Bachir El Nakib, Senior Consultant, Compliance Alert (LLC)

Effective Money Laundering and Financing of Terrorism risk management requires proper governance arrangements such as described in relevant Basel publications of the Basel  Committee of Banking Supervision. In particular, the requirement for the board of directors to approve and oversee the policies for risk, risk management and compliance is fully relevant in the context of ML/FT risk. The board of directors should have a clear understanding of ML/FT risks. Information about ML/FT risk assessment should be communicated to the board in a timely, complete, understandable and accurate manner so that it is equipped to make informed decisions. Explicit responsibility should be allocated by the board of directors effectively taking into consideration the governance structure of the firm for ensuring that the firm's policies and procedures are managed effectively. The board of directors and senior management should appoint an appropriately qualified chief AML/CFT officer to have overall responsibility for the AML/CFT function with the stature and the necessary authority within the firm such that issues raised by this senior officer receive the necessary attention from the board, senior management and business lines.

The three lines of defence

As a general rule and in the context of AML/CFT, the business units (e.g. Front Office, Customer Facing activity) are the first line of defence in charge of identifying, assessing and controlling the risks of their business. They should know and carry out the policies and procedures and be allotted sufficient resources to do this effectively.

The second line of defence includes the chief officer in charge of AML/CFT, the compliance function but also human resources or technology. The third line of defence is ensured by the internal audit function.

As part of the first line of defence, policies and procedures should be clearly specified in writing, and communicated to all personnel. They should contain a clear description for employees of their obligations and instructions as well as guidance on how to keep the activity of the firm in compliance with regulations

As part of the second line of defence, the chief officer in charge of AML/CFT should have the responsibility for ongoing monitoring of the fulfilment of all AML/CFT duties by the firm. This implies sample testing of compliance and review of exception reports to alert senior management or the board of directors if it is believed management is failing to address AML/CFT procedures in a responsible manner. The chief AML/CFT officer should be the contact point regarding all AML/CFT issues for internal and external authorities, including supervisory authorities or financial intelligence units (FIUs).

Internal audit, the third line of defence, plays an important role in independently evaluating the risk management and controls, and discharges its responsibility to the audit committee of the board of directors or a similar oversight body through periodic evaluations of the effectiveness of compliance with AML/CFT policies and procedures.

A firm should establish policies for conducting audits of 

i)   the adequacy of the firm’s AML/CFT policies and procedures in addressing identified risks,

ii)  the effectiveness of firm staff in implementing the firm’s policies and procedures;

iii)  the effectiveness of compliance oversight and quality control including parameters of criteria for automatic alerts; and

iv) the effectiveness of the firm’s training of relevant personnel. Senior management should ensure that audit functions are allocated staff who are knowledgeable and have the appropriate expertise to conduct such audits. 

Management should also ensure that the audit scope and methodology are appropriate for the firms’ risk profile and that the frequency of such

audits audits is also based on risk. Periodically, internal auditors should conduct AML/CFT audits on a firm-wide basis. In addition, internal

auditors should be proactive in following up their findings and recommendations. As a general rule, the processes used in auditing should be

consistent with internal audit’s broader audit mandate, subject to any prescribed auditing requirements applicable to AML/CFT measures.

Compliance programs depend on accurate and timely information. Anti-Money Laundering compliance centres on sifting through thousands of transactions and matching them against risk profiles. The result of that process is a focused examination of transactions and identification of suspicious transactions

Anti-money laundering (AML) transaction monitoring solution/program/software allows firms and other financial institutions to monitor customer transactions on a daily basis or in real-time. By combining this information with analysis of customers’ historical information and account profile, the software can provide financial institutions with a “whole picture” analysis of a customer’s profile, risk levels, and predicted future activity, and can also generate reports and create alerts to suspicious activity. The transactions monitored can include cash deposits and withdrawals, wire transfers, and ACH activity.

AML transaction monitoring solutions can also include sanctions screening, blacklist screenings, and customer profiling features.

The analysis is obtained primarily for the purpose of meeting various AML/CFT requirements, filing SARs/STRs, and fulfilling other reporting obligations. Broadly speaking, a risk-based approach requires that financial institutions employ intensive measures such as EDD to manage risk for clients or scenarios that are deemed higher-risk, while for lower-risk clients or scenarios, and where there is no suspicion of money laundering or terrorist financing, simplified measures may be permitted.

To apply a risk-based approach, countries and institutions must take appropriate steps to identify and assess the risks of money laundering and terrorist financing for different market segments, intermediaries, and products on an ongoing basis. In line with the concept of a risk-based approach is acknowledgement that the nature and extent of AML/CFT controls will depend on a number of factors.

 The FATF, a global financial organisation that sets standards related to AML/CFT procedures, recognises the following factors as determinants of the proper extent of AML/CFT controls:  

  • The nature, scale and complexity of a financial institution’s business.  
  • The diversity of a financial institution’s operations, including geographical diversity.  
  • The financial institution’s customer, product and activity profile.
  • The distribution channels used.  The volume and size of the transactions.
  • The degree of risk associated with each area of the financial institution’s operation.  
  • The extent to which the financial institution is dealing directly with the customer or is dealing through intermediaries, third parties, correspondents, or non-face to face access. 

Transaction monitoring, also known as business transaction management, is the supervision of critical business applications and services by auditing the individual transactions that flow across the application infrastructure.   

Transaction monitoring tools measure the response time performance of each component, as well as the links between any of the components. This information gives the operations team the precise data they need to see where a performance slowdown is occurring. It also provides the team with a view of the flow and performance of individual transactions as each makes its way across the data centre. Development and test organizations may also use transaction monitoring during the pre-production phase to identify potential bottlenecks..        

The ongoing monitoring processes

Ongoing monitoring, in relation to a customer of the Firm, consists of the following: 

1. scrutinising transactions conducted under the business relationship with the customer to ensure that the transactions are consistent with the Firm’s knowledge of the customer, the customer’s business and risk profile, and, where necessary, the source of the customer’s wealth and funds;

2. reviewing the Firm’s records of the customer to ensure that documents, data and information collected using customer due diligence measures and ongoing monitoring for the customer are kept up-to-date and relevant.

Complex or unusual transactions

The firm must pay special attention to all complex, unusual large transactions, or unusual patterns of transactions, that have no apparent or visible economic or lawful purpose, e.g., 

-          significant transactions relative to the business relationship with the customer

-          transactions that exceed set limits

-          very high turnover inconsistent with the size of the balance

-          transactions that fall outside the regular pattern of an account’s activity

 To examine as far as possible the background and purpose of a transaction mentioned above and make a record of its findings, which must be kept for at least xxxx years after the day it is made or, if any other provision of these rules requires the record to be kept for a longer period, for the longer period.

 The staff must prepare a written report of the examination and must make the report available to the Regulator and auditors for a period of 6 years after the day the report is completed. No tipping off rule applies.

Procedures for ongoing monitoring

Front desk or relationship officers  must though its interaction with customers understand and monitor the transactions initiated by them, while head office units/department tasks entrusted can be summarized as to:     

  1. -  Risk Management Department should monitor all loans transactions.
  2. -  Dealing Room should monitor all FX, money market, and capital market transactions that it conducts.
  3. - Operations Department must through its transaction processing and document examination closely monitor each transaction to ensure  there is AML maintained on an ongoing basis. Operations Department should ensure each and every transaction is under their monitoring.
  4. - Back Office Register and Trade Finance Register, or similar mechanism, should be maintained cumulatively capturing every transaction conducted by the firm. 

The monitoring may be, by reference to particular types of transactions or the customer’s risk profile; or by comparing the transactions of the customer, or the customer’s risk profile, with those of customers in a similar peer group; or through a combination of those approaches.

The in place automated software which provide ongoing checking of existing customers against sanction lists, Operations Department, Risk Management Department, and Treasury Department, as the case may be, should, on a monthly basis, re-check all existing customers against the most up to date sanction lists.

Operations Department should quarterly review, with input from Marketing Dept., Risk Management Dept., and/or Dealing Room, and report to the MLRO and management, a summary of all transactions conducted with or for Level 3 (i.e. High Risk) customers together with their conclusion of whether those transactions are up to the Firm’s expectation when KYC/CDD is conducted during establishment of business relationship with the customer and whether there has been any money laundering concerns.

MLRO should conduct its own ongoing AML Monitoring by sample checking client and/or transaction records and by reviewing the effectiveness of Operation Department’s ongoing AML monitoring. 

Linked one-off transactions

All staff shall be alert to the one-off transactions that are linked to the same person, and be aware of the pattern of the series of those one-off transactions.

If any staff member knows, suspects, or has reasonable grounds to know or suspect, that a series of linked one-off transactions involves money laundering or terrorist financing, they must make a suspicious transaction report to the MLRO.

Suspicious Transaction Reporting and No Tipping off

Every employee has a legal responsibility, to ensure there is internal and/or external reporting made whenever money laundering or terrorist financing is known or suspected. 

Recognition of Suspicious Transaction

The types of transactions which may be used by a money launderer and terrorist are virtually unlimited, thus it is difficult to specifically list out all types of transactions that might constitute a suspicious transaction. Suspicion may arise where a transaction is unusual or inconsistent with a customer’s known business or personal activities or with the normal business for that type of account. Thus the key to recognising unusual or inconsistent transactions is for the Firm to know its customers well enough under KYC.

A transaction that is unusual or inconsistent with a customer’s known legitimate business and risk profile does not of itself make it suspicious. An effective systemic approach to the identification of suspicious financial activity involves the following four steps::

Step one: Recognition of a suspicious financial activity indicator or indicators.

Step two: Appropriate questioning of the customer.

Step three: Review of information already known about the customer in deciding if the apparently suspicious activity is to be expected from the customer.

Step four: Consideration of (a), (b) and (c) above to make a subjective decision on whether the customer’s financial activity is genuinely suspicious or not.

The firm must consider the following matters in deciding whether an unusual or inconsistent transaction is a suspicious transaction with more examples: 

1. whether the transaction has no apparent or visible economic or lawful purpose;

2. whether the transaction has no reasonable explanation;

3. whether the size or pattern of the transaction is out of line with any earlier pattern or the size or pattern of transactions of similar customers;

4. whether the customer has failed to give an adequate explanation for the transaction or to fully provide information about it;

5. whether the transaction involves the use of a newly established business relationship or is for a one-off transaction;

6. whether the transaction involves the use of offshore accounts, companies or structures that are not supported by the customer’s economic needs;

7. whether the transaction involves the unnecessary routing of funds through third parties.  

Obligation of officer or employee to make Internal Reporting MLRO 

If an officer or employee knows, suspects, or has reasonable grounds to know or suspect, that funds are (a) the proceeds of criminal conduct; or (b) related to terrorist financing; or (c) linked or related to, or are to be used for, terrorism, terrorist acts or by terrorist organizations, the officer or employee must promptly make a suspicious transaction report to the Firm’s MLRO providing as many details as possible (the internal report).

All reports are made on a strictly private and confidential basis. When making the report, copies of all relevant documents should be attached. 

The Firm’s  Staff should: 

(1) complete the internal report as fully as possible but do not delay submission if waiting for information,

(2) ensure that the internal report should not be placed in the customer file, and

(3) not tip off the customer or any third parties. 

The officer or employee must make the report (a) irrespective of the amount of any transaction relating to the funds; and (b) whether or not any transaction relating to the funds involves tax matters; and (c) even though (i) no transaction has been, or will be, conducted by the Firm in relation to the funds; and (ii) for an applicant for business—no business relationship has been, or will be, entered into by the Firm with the applicant; and (iii) for a customer—the Firm has terminated any relationship with the customer; and (iv) any attempted money laundering or terrorist financing activity in relation to the funds has failed for any other reason.  

The officer or employee should note that the obligation to report is on the individual who becomes suspicious of a money laundering transaction, rather than on their superiors, and once a suspicion is reported, staff still remain under an obligation to report further suspicions regarding the same customer. 

The MLRO should acknowledge receipt of the report in writing, which will form part of the evidence that the report has been made. 

If the officer or employee makes a suspicious transaction report to the MLRO in relation to the applicant for business or customer, the officer or employee must promptly give the MLRO details of every subsequent transaction of the applicant or customer (whether or not of the same nature as the transaction that gave rise to the internal report) until the MLRO tells the officer or employee not to do so. 

An officer or employee who fails to make a report under this rule may: 

(a) be subject to the Firm’s disciplinary action;

(b) commit an offence against the AML/CFT Law; and

(c) be dealt with under the Financial Services Regulations,  (Disciplinary and enforcement powers). 

Staff should refrain from carrying out transactions which they know or suspect to be related to money laundering until they have informed the MLRO who consents to carrying out the transactions. Processing a transaction involving the proceeds of crime in these circumstances will lead to the Regulator taking disciplinary action against the Firm and may result in criminal sanctions against the Firm for assisting money laundering.

Obligations of MLRO on receipt of internal report 

If the MLRO of the Firm receives a suspicious transaction report (whether under this division or otherwise), the MLRO must promptly—  

  1.  give the individual making the report a written acknowledgment for the report, together with a reminder about the provisions of Tipping off; and
  2. consider the report in light of all other relevant information held by the Firm about the applicant for business, customer or transaction to which the report relates; and decide whether the transaction is suspicious; and
  3.  give written notice of the decision to the individual who made the report.  

A reference in this rule to the MLRO includes a reference to the Deputy MLRO. Note that the Deputy MLRO acts as the MLRO during absences of the MLRO and whenever there is a vacancy in the MLRO’s position.

External reporting

If the Firm knows, suspects, or has reasonable grounds to know or suspect, that funds are (a) the proceeds of criminal conduct; or (b) related to terrorist financing; or (c) linked or related to, or are to be used for, terrorism, terrorist acts or by terrorist organizations, the Firm must promptly make a suspicious transaction report to the FIU with a copy to the Regulator and ensure that any proposed transaction relating to the report does not proceed without consulting with the FIU.

 The report must be made on the Firm’s behalf by the MLRO; or if the report cannot be made by the MLRO (or deputy MLRO) for any reason by a person who is employed at the management level by the Firm, or by a legal person in the same group, and who has sufficient seniority, experience and authority to investigate and assess internal suspicious transaction reports.

The MLRO must make the report— 

1. whether or not an internal suspicious transaction report has been made in relation to the funds; and

2. irrespective of the amount of any transaction relating to the funds; and

3. whether or not any transaction relating to the funds involves tax matters; and

4. even though— 

(i)      no transaction has been, or will be, conducted by the Firm in relation to the funds; and

(ii)     for an applicant for business—no business relationship has been, or will be, entered into by the Firm with the applicant; and

(iii)    for a customer—the Firm has terminated any relationship with the customer; and

(iv)   any attempted money laundering or terrorist financing activity in relation to the funds has failed for any other reason.  

The report must include a statement about – 

1. the facts or circumstances on which the Firm’s knowledge or suspicion is based or the grounds for the Firm’s knowledge or suspicion; and

2. if the Firm knows or suspects that the funds belong to a third person—the facts or circumstances on which that knowledge or suspicion is based or the grounds for the Firm’s knowledge or suspicion. 

 


 

 

 

 

 

 

 

 

 

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