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Senior Management Increasing Efforts Globally To Combat Money Laundering

AML Considered A High Risk Area For Majority Of Businesses: KPMG International 

Attention being paid by senior management to money laundering challenges is at an all time high according to findings from a new KPMG International report.  Nine in ten of respondents (88 percent) said that AML issues are back at the top of the agenda for senior management rather than being squeezed by competing priorities as has been the case in similar studies over the past ten years (up from 62 percent in 2011).  A majority of all respondents (84 percent) stated that money laundering is considered a high risk area within their business risk assessment, further emphasizing how seriously management deems failures to meet the regulatory requirements.  In North America 67 percent of the respondents indicated AML is high risk.

"With regulatory fines now running into the billions of dollars, anti money laundering has never been a higher priority for senior management at financial institutions," said Teresa Pesce, head of AML Services for the Americas Region for KPMG. "Significant changes are being made by leaders of financial institutions in response to increasingly far-reaching global AML regulations, revision of the Financial Action Task Force's recommendations, and the U.S. Foreign Account Tax Compliance Act.  These initiatives are quickly changing AML from a standalone, and sometimes siloed function under compliance, to an increasingly complex and cross functional endeavor involving legal, risk, operations and tax."

Cost of Compliance Continues to be Underestimated

While the pace of regulatory changes is a big challenge for financial services firms, most organizations are planning to increase their investment in AML.  In fact, costs continue to rise at an average rate of 53 percent for banking institutions.  This exceeds the previous prediction of a rise of 40 percent in 2011.

The top three areas where AML budget has been invested are: transaction monitoring systems; updating and maintaining Know Your Customer (KYC) reviews; and recruitment.  However, satisfaction for transaction monitoring systems is poor with 35 percent saying their system is not efficient or effective.  Just over half of respondents said their system is able to provide the complete picture by monitoring transactions across businesses and jurisdictions.

Accurate cost forecasting is vital for informed decision making, but remains a key area of weakness due in part to the number of regulatory change announcements and the speed in which new regulations are expected to be implemented.  Senior management is likely to continue to underestimate AML expenditure unless lessons are learned from past mistakes.

Regulatory Approach is Fragmented and Inconsistent

With the volume of regulatory changes, questions are now being asked as to whether it is possible for a global institution to run a fully compliant AML program. Four in ten respondents (43 percent) indicated that a stronger relationship with regulators would be a welcomed change in approach, as compared to only 14 percent saying the same in 2011.

  • Respondents in the Americas and Western Europe were most interested in receiving additional regulatory guidance.
  • A quarter of respondents in Asia Pacific would like a less prescriptive approach, potentially due to the geographical spread of this region and the corresponding numerous and sometimes conflicting requirements.
  • Management in the Middle East and Africa would like to see increasing international cooperation to facilitate consistency of approach and as a means to learn from their counterparts in other countries.

A consistent regulatory approach was cited as the top AML concern, with 84 percent of respondents indicating that the pace and impact of regulatory changes are significant challenges to their operations.

"Despite an annual expenditure that is likely to exceed $10 billion in the next couple of years, institutions continue to fail to meet regulatory expectations," said Richard H. Girgenti, KPMG's US Service Line leader for Forensic. "Minimum compliance with regulatory obligations is no longer enough to stay out of trouble."

  • Financial organizations are crunched for time. Nearly one in five (16%) of respondents say they won't be FATCA-compliant by the IRS deadline of January 2014.
  • Outsourcing and off-shoring are growing trends. To date, 31 percent of respondents had outsourced and 46 percent had off-shored some of their AML functions. This is despite senior management concerns regarding a perceived lack of control and oversight, data confidentiality concerns or a lack of cost savings. Half of respondents expect this practice to increase in the future, as compared with only 20 percent of respondents who said the same in 2011.
  • Politically Exposed persons (PEPs) continue to leave organizations exposed. Financial institutions are more focused than ever on the need to exercise more scrutiny over PEP transactions as evidenced by the degree of senior management involvement in the sign off process for high risk relationships (82 percent respondents said this was the practice at their organization).
  • Sanctions compliance is still a sore spot. More than 70 percent of respondents find sanction screening systems effective in their organization; however, only 42 percent said they test the system for effectiveness at the implementation stage.
  • There is room for improvement in the adoption of a global approach. Only 32 percent of the respondents who have a global policy are able to maintain global consistency across subsidiaries and branches.

The KPMG global network was named the Global AML firm of the Year for 2014 by Finance Monthly; an international publication which provides news, insight, comment and analysis on funds, corporate tax, mergers & acquisitions and private equity. The Awards reflect confidence in the sector and celebrate those firms that have made bold strides in winning and maintaining business. The winning firms have shown excellence in service and an unflinching determination to adapt to a fluctuating market.

The survey results are based on responses from 317 AML and compliance professionals in the top 1,000 global banks, according to the 2013 edition of The Banker Magazine, as well as to KPMG's contacts in 48 countries.  The questionnaire was distributed in November 2013.