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Strengthening the Three Lines of Defence through AML/CFT Training
Strengthening the Three Lines of Defence through AML/CFT Training
To address the emerging threats of money laundering (ML), terrorism financing (TF), and proliferation financing (PF), the three lines of defence serve as a protective barrier. This protective barrier can be bolstered through Anti-Money Laundering / Combating the Financing of Terrorism (AML/CFT) training for the employees and compliance team that form a part of these lines of defence. In this infographic, the strengthening of the three lines of defence through AML/CFT training has been discussed in detail.
The three lines of defence in a business protect it from ML, TF, and PF threats by detecting, assessing, and reporting them. These three lines of defence comprise various stakeholders involved in the AML/CFT measures adopted by businesses regulated under the AML/CFT laws of India, such as the Prevention of Money Laundering Act 2002. Discussed below are the constituents of the three lines of defence along with the training they should be given to perform their role effectively.
First line of defence: Frontline Employees
The first line of defence against ML, TF and PF threats in a business comprises the frontline staff. Frontline staff includes employees who handle interactions with customers, suppliers, etc. Their responsibilities involve engaging with the customers to deliver the business services. Since they are uniquely positioned to have a direct relationship with clients and transactions, they have the potential to detect ML, TF or PF risks and prevent these threats from affecting the business. They can effectively perform their role when they are trained and have awareness regarding the following:
- Introduction to AML/CFT regulations in India
- Their importance, role and responsibilities in detecting and preventing ML, TF and PF risks
- AML/CFT policies, procedures and controls adopted by the business
- The meaning of ML, TF and PF and their common methods and red flags, to help them detect and report suspicious activities
- Know Your Customer (KYC) procedures including collecting and validating Officially Valid Documents (OVD) for verifying client’s identity and record-keeping requirements.
- Protocol on dealing with politically exposed persons (PEP) and high risk customers as well as maintaining relationships with clients after reporting suspicious transactions or activities
Second line of defence: AML/CFT Principal Officer and the AML/CFT Compliance Department
The duties of the AML/CFT Principal Officer and the AML/CFT Compliance Department is to ensure that the business is compliant with the AML/CFT laws of India. They play a pivotal role in keeping the ML, TF and PF threats at bay and ensuring that the business is not penalised under the AML/CFT regulations of India. Along with the training requirements for the frontline staff discussed above, the employees comprising the second line of defence should be trained in specialised AML/CFT measures such as:
- In-depth knowledge regarding AML/CFT laws and regulations applicable in India
- Conducting and reviewing the Enterprise-Wide Risk Assessment (EWRA)
- Obligations related to Targeted Financial Sanctions
- PEP and Adverse Media Screening
- Meaning and identification of beneficial owners of their clients
- The business’s policies and procedures with respect to customer due diligence (CDD)
- Conducting the Customer Risk Assessment process
- Reporting with Financial Intelligence Unit-India as required under AML/CFT laws of India
- Record keeping as mandated by AML/CFT regulations
- Operating AML/CFT software incorporated by the business to streamline its AML/CFT program
- Engaging and coordinating with the AML/CFT regulators such as Financial Intelligence Unit-India
Third line of defence: Independent Audits and Health Checks
Regular AML/CFT audits and health checks ensure that the AML/CFT program is robust and up to date. AML/CFT training can make the independent AML audit function more effective in the following ways:
- Changes in FATF recommendations concerning the sector in which the business operates
- Regulatory changes
- Technological changes at the entity level and in general
- Changes in business processes, introduction of new products and markets
- Latest National Risk Assessment (NRA) and Sectoral Risk Assessment (SRA)
Conclusion
AML/CFT training has the potential to bolster AML/CFT compliance to the next level. When the three lines of defence against ML, TF, and PF threats understand and participate in their responsibilities effectively, AML/CFT measures are strengthened and become impenetrable. Conducting the AML/CFT training on the components discussed in the infographic ensures that all team members are equipped with the necessary knowledge and skills to identify and respond to potential risks effectively.
We are committed to assisting proper enforcement of AML and CFT regulations to regulated entities in India by designing a personalised AML framework – policies, internal controls, and procedures – and ensuring effective implementation of the same.
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