With the amount of money laundered globally in one year estimated at 2 – 5% of the global GDP, or $800 billion – $2 trillion ; the financial services industry has started focusing on AML compliance as part of fraud risk management measures.
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This is reaffirmed in the KPMG India Anti-Money Laundering Survey 2012, with 86 percent of the respondents stating that their senior management including board of directors take an active interest in AML related issues and discussions.
Rohit Mahajan, Partner and co-Head, Forensic Services at KPMG says, “Organizations are using AML compliance as a parameter to measure senior management performance, which in turn is increasing accountability across organizational processes and products.
Today, management is setting leadership examples by integrating AML compliance within the business strategy and actively publicizing the AML compliance programme internally – all these activities point to the growing seriousness among the management towards AML compliance.â€
Since India became a member of the Financial Action Task Force (FATF) in late 2010, regulators have become more stringent in their outlook to money laundering. Along with the proposed amendment to the Prevention of Money Laundering Act, 2002 (through the Prevention of Money Laundering (Amendment) Bill, 2011 which is currently under review), regulators are also advising financial institutions to regularly assess money laundering risks in their products/services/transactions/delivery channels as well as to evaluate if their current policies and procedures mitigate those risks.
Although, an increasing number of respondents said (65 percent) they conducted periodic risk assessments (either half yearly or yearly) to evaluate their money laundering risks, a significant number (32 percent) said they undertook this based on a change in product/ procedure or regulatory change. This is a matter of concern, considering the reach of the financial services sector in India.
Beneficial Ownership
Beneficial ownership, referring to the person who ultimately owns an account or on whose behalf a transaction is conducted, is now a key component in identifying sources of money laundering. It is interesting to note that only 52 percent of the respondents identify the beneficial ownership up to the natural person.
“With the non-identification of beneficial owners up to the natural person(s), it is difficult to state whether adequate customer verification procedures are deployed before commencement of the relationship. It is also hard to judge how the screening procedures for identification of politically exposed persons (PEP) and sanctioned entities/individuals are implemented by the organizations,†says Rohit Mahajan.
Ongoing due diligence
One of the aspects of an ongoing due diligence process is the need to keep relevant Know Your Customer (KYC) data items up-to-date. Without up-to-date data, banks cannot have sufficient visibility on customers, nor screen a company’s principals effectively against sanctions lists.
The survey indicated that around 72 percent of the respondents had specific procedures in place for updating the principal information on an ongoing basis which comprises of collecting customer information and data to fill any gaps that might exist in the KYC process. Other respondents who did not have a proactive strategy in place to update KYC records cited various reasons such as system limitations, cost and lack of legal mandates.
According to Rohit Mahajan, one of the greatest immediate challenges to this process is presented by the Foreign Account Tax Compliance Act (FATCA). “FATCA requires institutions to identify all individuals who hold 10 percent or more of the shareholding in the company and this is likely to infringe on the KYC arrangements that are already in place.
Though the FATCA legislation has its roots in taxation, the objective is specifically to identify relevant U.S. persons and parties for reporting purposes under the requirements of FATCA. Hence, if the KYC data is not regularly updated as per specific procedures, this will lead to a disruption in the whole process,†he says.
Cost of compliance
Not only is the risk of money laundering being taken more seriously, an overwhelming 82 percent of the survey respondents indicated that the cost of AML compliance would increase over the next two to three years. This rise, including direct and indirect cost, would in all likelihood be in the area of 10 to 20 percent and be channeled largely into areas such as implementing / upgrading transaction monitoring systems, implementing global policies and remediating/ refresh exercise.
Rohit Mahajan further iterates, “Our Global AML survey has consistently shown an increase in AML costs, and there is no sign of respite for AML professionals given the surge of changes and new legislations on the horizon. AML will undoubtedly continue to be a high cost activity in the foreseeable future.â€
Download the full survey report from here
