Anti-money laundering (AML) is a critical issue in the financial industry, states, and even social life with the increased individualistic participation in financial means via digitalization. It aims to prevent illegal activities such as fraud, terrorism financing, drug trafficking, human trafficking, and tax evasion through economic systems. However, despite the implementation of AML regulations and compliance measures, the challenges in detecting and preventing money laundering continue to be a significant concern for financial institutions and regulatory authorities. We see different approaches in different locations for novel issues. Still, there is generally a standard set of legal concepts on one side and common ways of criminal attempts on the other. Although, companies in the related industries are still struggling with the fight against money laundering. This article states the main AML challenges and provides suggestions for companies to deal with them.
AML Challenges
#1 The complexity of money laundering methods
Criminals constantly find new ways to launder money, making it difficult for financial institutions to detect and prevent these activities. For example, money launderers may use shell companies, offshore accounts, and digital currencies to conceal the origin of funds. Additionally, money launderers may use complex transactions, such as layering and integration, to make it difficult for financial institutions to trace the source of funds.
#2 Lack of cooperation and information sharing between financial institutions and regulatory authorities
Financial institutions may be hesitant to share information with each other and with regulatory authorities due to concerns about legal liability and reputational risks. Furthermore, regulatory authorities may not have the resources or expertise to analyze the information provided by financial institutions effectively. Last year, in 2022, EBA and some other authorities published their suggestions and approaches to information sharing between parties. As a result, it is expected to see more collaboration among firms and also legal entities in the following years.
#3 Lack of data and technology resources
Financial institutions may not have the necessary data or technology resources to detect and prevent money laundering activities effectively. For example, they may not have access to sufficient data on customers, transactions, or third parties, or they may not have the necessary analytics tools to identify suspicious activity. In addition, especially small and medium-sized companies suffer from a lack of compliance officers, teams, and also resources to provide outsourcing solutions.
#4 Increased governance
Managing cross-border and multi-jurisdictional AML compliance standards can be a significant challenge for banks and financial institutions. Financial institutions may have to comply with different AML regulations in different jurisdictions, making it challenging to ensure compliance across the organization. Additionally, customer diligence needs have risen, requiring financial institutions to gather more information on their customers and their beneficial owners. This can be time-consuming and resource-intensive, and it can be challenging to identify beneficial ownership and take action to resolve AML deficiencies revealed by regulatory assessments.
#5 Lack of skilled personnel
Finding competent AML professionals can be problematic, as the demand for these professionals is high, and there may be a shortage of qualified candidates. High onboarding expenses, such as training and background checks, can also be a concern for organizations. Additionally, the high turnover rate of AML professionals can be a challenge, as organizations must continuously onboard and train new employees. Organizations must also keep employees informed of evolving regulatory obligations, which can be difficult with high turnover rates. On the other hand, different sectors may require different experiences, knowledge, and expertise. So it is hard to employ the right person with familiarity with a company's sector and expertise in AML regulation.
#6 Complicated procedures and technology
AML compliance necessitates many processes and technology solutions, such as integrating know-your-customer (KYC) data and systems. These processes and technology solutions can be complex and time-consuming, and they must be able to integrate with other systems and databases within the organization. Data quality must be enhanced and standardized to allow for centralized analysis of fraud and financial crimes. This cannot be easy to achieve, as data may be stored in different formats and systems across the organization.
AML's challenges in detecting and preventing financial crime continue to be a significant concern for financial institutions and regulatory authorities. To overcome these challenges, financial institutions and regulatory authorities must work together to improve information sharing and analysis and to develop new technologies and data resources. In addition, financial institutions should strengthen their AML compliance programs and ensure they are equipped with the resources required to effectively detect and prevent money laundering activities.
Suggestions to Deal with AML Challenges
The complexity of money laundering methods
A proactive approach to AML compliance can be effective for this problem. This approach involves actively identifying new money laundering methods and trends through research and analysis and then implementing controls and procedures to mitigate these risks. Companies can establish a dedicated team or unit responsible for monitoring and tracking new money laundering techniques and regularly update their systems and compliance procedures accordingly. Additionally, they can take advantage of external resources and intelligence, such as industry associations and government agencies, to stay informed about new money laundering methods and trends.
Lack of data and technology resources
The institutions should develop and implement a robust data management strategy that includes data governance policies, data quality controls, and data standards. Adopting advanced analytics tools and technology solutions that support the organization's compliance with AML regulations can be effective for this problem. These tools can include machine learning, artificial intelligence, and blockchain technology. Furthermore, financial institutions should regularly review and update their technology and data resources to ensure they are equipped to detect and prevent money laundering activities.
Increased governance
Management of cross-border and multi-jurisdictional AML compliance standards is one of the main difficulties for companies. They can establish a centralized compliance function that is responsible for managing compliance with AML regulations across different jurisdictions. They need to check the match between their AML compliance systems and regulations regularly. For example, financial institutions should develop and implement customer due diligence procedures that align with regulatory requirements and industry best practices to ensure customer diligence needs are met. After, they must follow all developments and updates in the sector and regulations.
Lack of skilled personnel
To deal with the challenge of finding competent AML professionals, companies should develop an AML staffing plan that includes recruitment, retention, and training strategies. Additionally, financial institutions should invest in training and development programs for existing employees to improve their AML knowledge and skills. Institutions should implement background check processes and online training to reduce onboarding expenses. On the other hand, they should establish a culture of compliance and encourage staff to report suspicious activity to ensure reducing the attrition rate. Furthermore, the employees must be informed of evolving regulatory obligations by providing regular updates, training, and education opportunities.
Complicated procedures and technology
Companies can develop an AML technology strategy that aligns with their overall compliance program. This strategy includes selecting, implementing, and maintaining technology solutions that support the organization's compliance with AML regulations. Additionally, financial institutions should establish a centralized data management function that is responsible for integrating and standardizing data across the organization. This can be achieved by implementing data governance policies, data quality controls, and data standards.
It is important to note that these are suggestions and may vary depending on the specific context and regulations of the region. Therefore, consulting with legal and regulatory experts is always recommended before implementing any policies or procedures.
