AML lapses by Senior Management: Staying cautious to foster AML Compliance
The role of senior management of the regulated entity is very crucial in ensuring compliance with the AML regulatory landscape, whether it is the Prevention of Money Laundering Act, 2002 or the International Financial Service Centre Authority (AML, CFT and KYC) Guidelines, 2022.
Senior management drives the entity’s AML function by setting the right tone at the top and showing no tolerance towards money laundering instances or AML non-compliance.
The underlying AML responsibilities imposed upon the senior management of any regulated entity include:
- Ensuring compliance with the applicable regulatory framework, whether PMLA or the IFSCA (AML, CFT, and KYC) Guidelines,
- Reviewing and approving the internal AML policies, procedures, systems, and controls, including the adoption of the risk-based approach,
- Overseeing the implementation of relevant AML policies, procedures, and controls,
- Approving the onboarding of and execution of transactions with high-risk customers, including Politically Exposed Persons (PEPs),
- Regularly reviewing the details about the operations and effectiveness of the entity’s AML procedures, systems, and controls,
- Appointing a competent person as Principal Officer,
- Overseeing the AML measures implemented within the organization,
- Promoting a strong compliance culture within the organization.
With such a pivotal part to play, the senior management of the regulated entity cannot afford to go wrong in their decisions and actions around AML function.
The blog discusses the key mistakes or errors that senior management must avoid to establish an accurate, comprehensive, and effective AML compliance regime.
Mistakes to avoid by senior management in AML compliance
AML compliance is everyone’s responsibility in a regulated entity, including every member of the senior management.
The management must oversee the regulated entity’s fulfilment of the AML compliance obligations imposed by the law.
The following are the common mistakes that the senior management must be cautious and mindful of in the AML compliance journey:
Lack of awareness of the latest amendments in the AML laws and applicable guidelines
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Senior management must stay up-to-date with the latest guidelines and the compliance directives issued by the authorities. By this, the senior management knows about the measures to be applied and the reporting to be made with the FIU-IND. Only with updated regulatory awareness can the senior management develop a plan or strategy for AML compliance execution.
With outdated know-how, the senior management would not be in a position to envisage the newer controls and the regulatory obligations entrusted upon the entity, resulting in exploitation by criminals and non-compliance penalties.
If deprived of such updates and recent legal changes, the entity’s compliance efforts will be half-baked, exposing it to money laundering threats.
So, having enough awareness and knowledge of the relevant AML rules, guidelines, and notifications is inevitable.
Absence of a positive AML compliance culture in the entity
Is AML compliance a cost centre?
The answer is NO. Treating AML compliance as a “cost centre” is a wrong philosophy. The fact that it involves costs is true, but it saves you from the threats of financial crimes. It improves customers’ trust in you, boosts your business reputation, and protects the financial system and economy from risks.
When everyone in the entity, from top to bottom, is ready to commit towards preventing, managing, or mitigating money laundering risks, an AML compliance culture is created.
To create such a positive AML compliance culture, the senior management must:
- Define risk appetite and zero-risk-tolerance statements for the entity. These statements let the employees know the senior management’s expectations around AML compliance. Senior management must consistently promote this message in their actions across the entity.
- Promote employee training and engagement in AML and keep open communication channels accessible for the employees to raise their questions and concerns around money laundering or AML measures,
- Understand the why, what, and how of AML compliance initiatives. Support the AML efforts of the entity and propagate the value AML compliance generates for the business.
- Lead by example by displaying your non-tolerance of AML non-compliance.
By employing these tactics, the senior management can effectively discharge its duty of promoting a robust AML culture within the organization and achieving the AML compliance goal.
When the senior management fails to establish a positive AML culture, the entity is bound to experience failures in the AML efforts, resulting in increased vulnerabilities and non-compliance penalties.
Neglecting constant communication on AML compliance status and actions taken
Just building a strong AML culture is not enough. The Principal Officer and the other stakeholders must periodically update the senior management on the entity’s AML compliance status. So, communication is a crucial ingredient.
Leadership support and input are necessary for AML compliance. The management must have all the necessary data points and information to present the inputs and feedback for enhancing the AML function. This includes information on the effectiveness and operations of the existing AML policies, procedures and controls, risk-high business relationships, any identified compliance deficiencies, etc.
Thus, with two-way open communication possibilities, the senior management can timely receive the AML complaint issues to its attention and suggest and implement adequate corrective actions.
If senior management establishes and maintains such a quick and smooth communication flow, achieving AML compliance would not be challenging.
No integration of AML requirements with business processes
AML compliance is one of the critical business functions and a goal as well. It helps the senior management achieve its goals of being a legally compliant entity with a positive brand image and a bunch of loyal and satisfied customers, as in present times, AML-compliant entities attract customers and have a good reputation in the market.
But this is possible when the AML objectives are ingrained well into the business goals.
So, making AML compliance a part of the business operations is very important. For example, the regulated entities must conduct KYC before onboarding a new customer. So, the customer acquisition team must ensure the completion of timely KYC and customer due diligence before establishing the business relationship rather than driving the customer relationship and onboarding separately. While onboarding the customer or executing a transaction, if any suspicion is spotted, the same must be investigated, and necessary action must be taken. Core business functions cannot be and should not be demarcated from the AML measures.
Thus, the senior management must take the necessary steps to integrate the AML procedures into the day-to-day business operations. These must work in a flow with no distraction to regular business. Such “business as usual” features of AML processes ensure better compliance outcomes.
Not allocating enough budget, time, and resources to the AML framework
What is needed to adhere to AML regulations in India?
- Enough budget.
- Proper tools and systems.
- Skilled resources.
- Adequate time.
The senior management is responsible for meeting these AML resource requirements. Without the availability of adequate resources, the Principal Officer would not be in a position to manage the timely and comprehensive AML compliance. Lack of adequate resources yields inappropriate results, such as gaps in customer identification, insufficient measures to monitor transactions and spot the risk indicators or incomplete reporting to the Financial Intelligence Unit (FIU-IND).
As with every business function, AML compliance also deserves a proper resource set-up, requiring investment around the following:
- Proper technological systems for various AML tasks like customer identification, monitoring, etc.
- Competent Principal Officer and the right team to support the officer
- Investment in AML training to create awareness
- Time and energy investment around reviewing the AML function and remediating the gaps
If the senior management ignores this aspect or misses any critical AML resource requirements, the entity might not achieve the desired future state of compliance.
The investment is made on the appropriate resources, and the regulated entity ensures:
- It stays regulatory compliant and avoids penalties
- Ensure qualitative and comprehensive measures for safeguarding the business against potential money laundering instances
- Enhances the customers and stakeholders confidence in the business
- Builds a strong reputation
- Reduces the changes of errors in compliance, saving time and cost of error
Missing out on AML audit framework
The AML Principal Officer will create the AML framework, including policies, procedures, and controls. With the senior management’s approval, the same shall be adopted and executed by the staff across the organization.
But what after the execution? What about its performance?
An often-ignored aspect of AML compliance is the performance measurement of the effectiveness and operating capabilities of the AML systems and controls. For this, the senior management must adopt and implement an independent AML audit function that focuses on monitoring the AML framework to:
- Identify the loopholes with the AML initiatives of the Principal Officer
- Recommend the enhancement in the procedures and policies to prevent financial crimes
With such a review function, senior management can implement the regulatory-compliant AML framework and avoid possible non-compliance.
Ignoring the background check of people in the compliance team
Senior management may not necessarily be directly involved in the appointment of every member of the AML compliance function. But should definitely take charge of the appointment of the Principal Officer.
The senior management must ensure that higher hiring standards are adopted for all the employees, specifically the AML compliance team. Appropriate screening and employee background verification must be done to ensure that only ethical, compliance-driven and clean people (with no financial crime or any other criminal history) are onboarded.
Any lapses in employee screening processes will increase exposure to money laundering and other threats. It will deteriorate the business’s reputation, and customers will lose trust.
How can AML India help you?
The senior management of the regulated entities must understand the common errors generally committed by the personnel in a similar role, harming the AML efforts. Pay attention to the points mentioned in this blog. If you need help overcoming these challenges, AML India is here to assist.
AML India is a prominent provider of AML compliance services in India. Our AML professionals and consultants take care of every AML activity for you. Be it documenting the AML policies and process, performing CDD, AML training, or conducting the Enterprise-Wide Risk Assessment, we handle all. We create a customized AML framework for your business and ensure its successful execution.
About the Author
Pathik Shah
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.
He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.