Financial Institutions (FIs), Designated Non-Financial Businesses and Professions (DNFBPs), and Virtual Asset Service Providers (VASPs) are more likely to be affected by financial crimes such as money laundering and terrorist financing. To counter the risks associated with money laundering and terrorist financing, companies must establish an AML compliance department. In this article, we will explore the key roles and responsibilities of the anti-money laundering compliance department.

Money Laundering is a financial crime that involves the concealment of the origin, ownership, and destination of illicit funds. Criminals resort to various methodologies, including depositing small amounts into bank accounts, transferring funds through multiple bank accounts, or using shell companies to launder money.

What is AML Compliance Department?

AML Compliance Department is an independent department functioning in a regulated entity to counter money laundering and terrorist financing by following the regulatory requirements and implementing the AML compliance framework in the company.

The Role of AML Compliance in Preventing Financial Crime

AML Compliance Department is an independent department functioning in a regulated entity to counter money laundering and terrorist financing by following the regulatory requirements and implementing the AML compliance framework in the company.

The role of the AML Compliance Department is pivotal as they protect the integrity of the financial system and prevent crimes like money laundering that can impact the economy and society.

Money laundering and other financial crimes significantly threaten the global financial system. These crimes can have far-reaching consequences, destabilizing economies, funding terrorist activities, and facilitating corruption. The AML compliance department is at the forefront of efforts to prevent these crimes.

The primary responsibility of the AML Compliance Department is conducting Enterprise-Wide Risk Assessment (EWRA), preparing AML/CFT policies and procedures and ensuring their effective implementation, conducting customer due diligence, screening sanctions, monitoring transactions, and reporting suspicious activities and transactions to the Financial Intelligence Unit. The financial crimes compliance department analyses large volumes of data to detect unusual transactions or customer information that may indicate money laundering or terrorist financing.

One of the important functions of the AML compliance department is to train the frontline employees on identifying and detecting suspicious activities based on various red flags relevant to the nature and size of the business. It helps to create a culture of compliance within the organization and ensures that everyone is aware of their responsibilities in preventing financial crimes.

In addition, the AML compliance department is responsible for keeping up-to-date with the legal requirements and the best practices prevalent in the industry. The Anti-Money Laundering department must ensure that the organization is compliant with the following:

Anti-Money Laundering Legal Framework in India

  • The Prevention of Money Laundering Act, 2002 (PMLA), and the rules issued thereunder (PMLRules)
  • The Unlawful Activities (Prevention) Act, 1967
  • Weapons of Mass Destruction and Their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005.
  • Rules and Regulations enacted by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI)
  • Sector-specific AML Guidelines issued by Competent Authorities such as the Directorate General of India – Indirect Taxes and Customs
  • The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
  • The Benami Transactions (Prohibition) Act, 1988
  • The Indian Penal Code, 1860, and Code of Criminal Procedure, 1973
  • The Narcotic Drugs and Psychotropic Substances Act, 1985
  • International Financial Services Centres Authority (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022 for units operating in GIFT City, Gandhinagar

The AML Compliance Department also ensures that any changes in the regulatory landscape are considered and implemented suitably.

Risk-Based Approach 

One of the primary tools the AML compliance department uses is the Risk-Based Approach (RBA). This approach ensures that the company’s resources are used judicially. The controls remain commensurate with the risks following the ‘higher the risks, higher the controls’ concept. The Enterprise Wide Risk Assessment (EWRA), also referred to as Business Risk Assessment (BRA) / Firm Wide Risk Assessment (FWRA) / ML/FT Risk Assessment, helps determine the controls needed to bring risks within the company’s risk appetite.

The outcome of the risk assessment is used as a foundation to define internal AML/CFT policies, procedures, and controls.

Identification of Suspicious Transactions

Another critical function of the AML compliance department is monitoring transactions and customer behavior for suspicious activity. This includes identifying red flags considering the known typologies of money laundering and detecting unusual transactions and suspicious behaviour of customers.

AML/CFT Reporting

In addition to monitoring transactions, the AML compliance department provides periodic reports to the top management. It assists law enforcement agencies in collating necessary details and evidence in criminal matters. The AML Compliance Department also files Suspicious Transaction Report to the Financial Intelligence Unit of India.

Overall, the AML compliance department plays a critical role in preventing financial crimes and protecting the integrity of the financial system. By using a combination of risk assessment, policy development, transaction monitoring, and investigations, this department helps to ensure that businesses operate in a safe and secure environment.

Why is AML Compliance so Important?

AML compliance is a crucial aspect of regulated entities that aim to prevent money laundering and terrorist financing. The importance of AML compliance cannot be overstated, and here are some reasons why:

Protecting the Financial System:

Money laundering and terrorist financing have a significant impact on the economy. Financial crimes often result in a loss of confidence in the financial system. Regulated entities have to comply with the legal requirements to help protect the financial system of the country.

AML Compliance Department has a significant role to play by not only complying with the legal requirements but also being vigilant enough to protect the business from financial wrongdoers.

Protecting Brand Image and Reputation:

AML compliance department has to ensure that it follows the regulatory requirements. A regulated entity’s failure to comply with AML Laws and exploitation by financial criminals can tarnish the brand image and reputation of the company.

Avoiding Regulatory Scrutiny & Investigations:

It is the duty of the AML compliance department to ensure that it follows the true intent of the PMLA 2002 to avoid regulatory scrutiny and investigations. A compliant organisation can focus on its business goals and attain newer heights.

Avoiding Legal Penalties:

The AML laws and regulations provide for administrative and criminal charges. Non-compliance can result in fines, penalties, and criminal charges on the persons at the helm of affairs.

Protecting Customers:

AML compliance can help reduce financial crimes and thereby protect innocent customers from being duped. By implementing a proper AML compliance framework, reporting entities can ensure that customers’ interests are protected at all times.

How does the AML Compliance Department Work?

The AML compliance department is critical to any regulated entity’s operations. The AML compliance department must assess enterprise-wide risk and prepare and implement relevant AML/CFT policies and procedures to safeguard the company from being misused for Money laundering and terrorist financing.

Depending upon the nature and size of the business, the composition of the compliance department differs. For smaller organisations, a competent person who doesn’t hold sales, marketing, and decision-making functions can serve as the principal officer or AML compliance officer. In bigger organizations, the AML principal officer leads the compliance team composed of senior and junior compliance personnel.

For every organisations, it is important to appoint a qualified person to handle the AML compliance function.

Collaboration between AML Compliance Department and other Departments

The compliance department coordinates with marketing, sales, customer onboarding, accounting, procurement, and various other departments within the company to ensure compliance with the provisions of PMLA 20O2. It ensures timely action to save the company from various compliance risks.

The compliance department frequently interacts with the other departments to make them aware of the regulatory changes and the best practices prevalent in the industry. It conducts AML training to make sure everyone in the company is well-equipped to fight financial crimes.

AML Software, tools, and technology used within the AML Compliance Department

The Anti-Money Laundering (AML) compliance department is an essential part of banks, capital market participants, financial institutions, designated non-financial businesses & professions and virtual asset service providers. The AML compliance department ensures that the company complies with the relevant regulations and laws to prevent money laundering and other financial crimes. To enhance its effectiveness, the AML compliance department uses various software and technologies, including:

1. Enterprise Wide Risk Assessment Software

The purpose of this software is to help companies arrive at their enterprise wide ML/TF risk. EWRA software helps maintain various risk factors, probabilities of a risk materializing and its impact on the company, and the gross risk or inherent risk that the company carries. The AML/CFT risks could be related to geographies, products, services, delivery channels, technology, customers, type of transactions, etc.

The Enterprise Wide Risk Assessment Software helps maintain various controls designed to counter the ML/FT risk and arrive at the net risk carried by the company. If the net risk is within the company’s risk appetite, no action is needed. If not, one needs to take more remedial measures to counter the risks or decline the risk by not entering into such a transaction or business relationship.

2. KYC Software

KYC Software within the AML compliance Department helps capture individual and corporate customer information. It helps maintain information about the customer’s Beneficial Owners and the expiry dates of various documents. It also provides various features like biometric verification, including facial recognition and document verification. KYC software is a valuable investment for AML Compliance Department because it helps maintain compliance records for at least 5 years as per the legal requirements.

3. Name Screening/Sanctions Screening Software

Name Screening software helps to screen individuals and entities against the Sanction lists. It also helps check if the customer is a politically exposed person (PEP). Most of the sanctions screening software support researching adverse media as well. Name Screening Software helps fulfill regulatory requirements for sanctions screening.

4. Transaction Monitoring Software

The AML Compliance Department has to monitor transactions and flag them if they have any suspicion. It is virtually impossible for humans to look at all the transactions, and that’s where transaction monitoring software comes into play. One can configure various parameters and red flags, necessitating a principal officer’s intervention before concluding the transaction. It helps prevent the company from financial crimes and report suspicious transactions to the FIU-IND.

5. AML Case Management Software

The AML Case Management Software used by the AML Compliance Department helps identify suspicious transactions or customers that require further investigation by the AML principle officer. The principle officer can look at those cases and decide whether it amounts to sanctions violation or requires enhanced due diligence or submission of the suspicious transaction to the FIU-IND.

6. Customer Risk Assessment Software

Customer Risk Assessment Software used by the AML Compliance Department helps identify risks associated with the customer based on various parameters like geography, products, services, customer attributes, delivery channels, etc. It helps classify customers into low, medium, and high risk to take appropriate measures to counter the risks associated with them.

Further, this solution also assists in maintaining the customer risk profile up-to-date as the business relationship with the customer advances.

7. FIU Reporting Software

FIU Reporting Software integrates with the FIU portal and helps submit regulatory reports like Suspicious Transaction Report with the FIU-IND. FIU Reporting Software helps reduce errors in filing reports and saves time and effort.

The AML compliance department uses various AML software and technologies to enhance its effectiveness in detecting and preventing financial crimes. The AML software and technologies are essential in ensuring companies comply with the relevant regulations and laws.

How does AML Compliance Build Brand Loyalty?

Financial Crimes Compliance helps build brand loyalty by demonstrating a commitment to conduct an ethical and transparent business. AML Compliance Department enforces various policies and procedures commensurate with the risk-based approach adopted by the firm. It creates a positive image in the mind of customers. Customers are more likely to do business with companies that have a reputation for complying with PMLA 2002 and associated regulations.

The regulated entities must maintain KYC, screening, and other compliance records for a minimum of 5 years and report suspicious transactions to the FIU. The transparency maintained by the company helps build trust with customers, who may feel more comfortable knowing that their business partner is being closely monitored and regulated.

A compliant entity avoids penalties and regulatory investigations, saves money on fines and legal fees, and retains its brand image.

Guidelines For AML Compliance Department

Anti-Money Laundering (AML) compliance department is crucial in ensuring that the regulated entity complies with laws and regulations to prevent money
laundering and terrorist financing. To effectively carry out their responsibilities, AML principal officers must follow specific guidelines.

Stay updated on the latest trends and techniques used in financial crimes

The AML Compliance Department must keep itself updated with the latest trends and techniques criminals use while committing financial crimes. Every day, criminals devise new typologies to launder money and finance terrorism, and the AML principal officer must remain one step ahead of the evolving threats.

The AML Compliance Department can stay updated with the latest trends by following FATF guidelines,  regulatory notifications, and circulars issued by the ministry and reading industry publications. Moreover, the head of the Compliance Department – the AML principal Officer can participate in conferences and training sessions and network with fellow compliance professionals.

Conduct regular risk assessments and update policies and procedures as needed

Another important guideline for the AML compliance department is to conduct regular ML/TF risk assessments and update policies and procedures as needed. EWRA helps identify gaps between the risks and the controls implemented to counter the risks. EWRA or Business Risk Assessment (BRA) should at least be conducted annually and aligned with the national risk assessment, sectoral risk assessment, ML/TF typologies observed by the company, and other emerging risks identified by the industry experts. The AML/CFT Program of the company should then be aligned with the EWRA, and necessary controls can be implemented. AML Compliance Department plays a crucial role in implementing the AML policies and procedures within the company and enforcing the compliance culture.

Maintain accurate records of all transactions and suspicious activities

AML compliance department is responsible for meeting the regulatory requirements as to record keeping. Principal officer must ensure that the compliance department maintains accurate records of all transactions and suspicious activities. These records are essential for identifying potential money laundering or terrorist financing activity and responding to regulatory inquiries and audits.

Establish clear communication channels with regulators

The AML compliance department must establish clear communication channels with regulators to discuss various aspects of AML compliance. The AML compliance department must have written procedures highlighting the designated point of contact.

Be prepared to respond to regulatory inquiries and audits

The AML Compliance Department must be prepared to respond to regulatory inquiries and audits. Regulators may, as a part of routine exercise, conduct an examination of the company’s AML program or initiate an audit in response to suspected money laundering or terrorist financing.

AML principal officers should establish procedures for responding to regulatory inquiries and audits, including designated points of contact and protocols for providing the requested information. The internal auditors must test the effectiveness of the AML/CFT program and controls.

In conclusion, the AML compliance department plays a critical role in preventing money laundering and terrorist financing. By following these guidelines and staying informed about the latest trends and techniques used in financial crimes, principal officers can effectively carry out their responsibilities and help protect the company and the financial system as a whole.

The challenges of the AML compliance Department

The AML compliance department faces several challenges, including:

  • Keeping pace with ever-changing business dynamics and balancing them with the regulatory requirements
  • Frequent changes in ML/FT laws and regulations
  • Ever-changing nature of customer profiles and associated risks
  • Staying up-to-date with the latest money laundering and terrorist financing typologies
  • Complexity in sanctions compliance and varying nature of regulatory requirements across jurisdictions
  • Inadequate resources to counter financial crimes in terms of people, processes, and technology

The importance of training for AML Principle officers

AML compliance department can function properly if the principal officers and the overall compliance team are trained to prevent financial crimes.

Elements of an effective AML/CFT Training Program

  1. Overview of Money Laundering and Financing of Terrorism
  2. AML regulations in India
  3. International bodies fighting ML/TF
  4. FINGate registration for a regulated entity
  5. Enterprise Wide Risk Assessment
  6. AML/CFT Program and Procedures
  7. KYC and Customer Due Diligence
  8. Beneficial Owners identification and verification
  9. Dealing with PEPs, high-risk customers, and jurisdictions
  10. Dealing with Suspicious Transactions
  11. Sanctions Screening
  12. Ongoing Monitoring
  13. Record Keeping
  14. Roles and Responsibilities of principal Officer
  15. Role of top management in AML compliance
  16. Targeted Financial Sanctions implementation
  17. Red flags concerning ML/FT
  18. Regulatory reporting requirements
  19. Useful resources including FATF, FIU-IND, IFSCA, etc.
AML principal officers

Conclusion

The AML compliance department plays a vital role in safeguarding the financial system’s integrity by preventing financial crimes such as money laundering and terrorist financing. Effective AML compliance programs help regulated entities to avoid legal penalties and regulatory scrutiny, build brand loyalty, and protect their customers.

However, the AML compliance department faces several challenges, such as the constantly evolving nature of financial crimes and the complexity of compliance requirements. Effective training is essential to overcome these challenges and ensure that AML principal officers carry out their responsibilities effectively.

FAQs on Key Roles and Responsibilities of the AML Compliance Department

The main ingredients for AML compliance are as follows: 

  • AML Compliance Officer or a Principal Officer
  • Designated Director
  • Enterprise-Wide Risk Assessment
  • AML Policy, Procedures, and Controls
  • Customer Due Diligence
  • Ongoing Monitoring
  • Ongoing Training
  • Independent AML Audit
  • Record Keeping

AML Compliance requires due consideration of the provisions of PMLA 2002 and related circulars and guidelines, the appointment of the principal officer and the designated director, taking a risk-based approach and aligning policies and procedures in line with the enterprise-wide risk assessment, ongoing monitoring of transactions, training to the staff, and independent AML audit and record keeping for at least 5 years.

AML Compliance instills faith that the company is compliant with the legal requirements. Further, the risks of money laundering and terrorist financing are significantly reduced when the firm starts following the required legal requirements. It creates a positive image in the mind of customers, and customers are more likely to do business with companies that have a reputation for complying with PMLA 2002 and associated regulations.

KYC is a sub-sets of AML. It includes customer identification and verification, whereas AML is the parent term which includes various techniques to counter money laundering, including AML/CFT Program, KYC, customer due diligence, regulatory reporting, training, record keeping, independent AML audit, etc.

About the Author

Linkedin

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.