Anti-money laundering (AML)

The AML challenges in correspondent banking

AML does present challenges for correspondent banks of all sizes. However, some of these could be addressed more effectively by making better use of analytics in the area of compliance, as well as by providing specialised, robust training for compliance professionals. 

Inefficient systems and processes 

AML alert investigations tend to be highly manual, and transaction monitoring systems – often originally designed for retail banking, rather than correspondent banking – can generate hundreds of thousands of alerts per month. More than 90% of these will typically be false positives, resulting in high costs and the risk that illicit transactions will be missed. 

Mounting costs 

Across the industry, banks have collectively been fined billions of dollars for compliance breaches. High costs are also involved in maintaining AML compliance systems and processes: WealthInsight predicted that banks would spend $8 billion on AML monitoring in 2017. 

Indirect structures 

Some domestic and regional banks use indirect structures which enable them to act as aggregators for smaller banks. These structures may involve downstream clearing or nested relationships, making it difficult for correspondent banks to monitor payment activity effectively. 

Information sharing 

It’s not always easy for banks to share information across borders, or get feedback from governments about the SARs they have filed. Collaboration is key if financial institutions are to share information and understand law enforcement’s priorities more clearly.

Anti-money laundering (AML) and the role of technology

Despite the AML challenges in correspondent banking, developments in technology could make transaction monitoring and screening programmes much more effective. 

Despite the challenges, developments in technology could make transaction monitoring and screening programmes much more effective. 

According to AML experts, analysts spend as much as 80% of their time finding data instead of fixing problems – so there’s plenty of scope for new solutions to speed up the information gathering process. Progress is being made in the use of technologies like advanced analytics, AI and machine learning. Focus is also on using technology to verify identity, analyse behaviour patterns and expedite KYC onboarding.

Key takeaways from the 5th AML Directive

The 5th AML Directive (5AMLD) came into effect in early 2020 to mitigate criminal economic activity. The following is a summary of the key changes. 

Beneficial Ownership Registers 

The main focus of the latest directive is allow public access to centralised and public registers of companies and their beneficial owners. There will no longer be a requirement to demonstrate legitimate interest. Banks are obligated to report discrepancies between the information contained on public registers and beneficial ownership information obtained through CDD. 

Anonymous Parties 

A hallmark of the new regulation is its mitigation of anonymous parties in the payment chain. Sounds straightforward, but in the case of cryptocurrency products, anonymity is a central tenet. From peer-to-peer exchanges to crypto tumblers, regulation is attempting to tackle these issues. In addition to specifically addressing cryptocurrencies, the updated regulation also covers the following areas related to the storage and movement of funds. 

Prepaid Cards 

Prepaid cards are largely anonymous, but 5AMLD will subject them to further customer due diligence. The threshold at which prepaid cards will be subjected to due diligence is dropping from EUR 250 to EUR 150. 

What’s more, the new regulation prohibits the use of prepaid cards issued outside the EU unless they were issued in a country that enforces an equivalency of 5AMLD. 

Virtual/Cryptocurrency Exchanges 

Following on the regulation of 4AMLD, cryptocurrency exchanges and wallets are now obliged to perform the same AML checks traditional financial institutions must make. 

These entities have to register with their respective financial authority to conduct business within the EU. They will be required to carry out customer due diligence, monitor behaviour and report suspicious behaviour. 

Politically Exposed Persons (PEPs) 

EU member states are requested to issue a list of politically exposed persons. Used interchangeably with the term “senior foreign political figure,” PEPs are ear-marked as higher-risk for financial institutions. 

While PEP status is not indicative of criminal behaviour, 5AMLD requires on-going monitoring of these individuals and updates on changes to their risk profiles.

High-risk third countries 

The European Commission has adopted a list of third countries with deficiencies in their anti-money laundering and counter-terrorism financing frameworks. Banks and other entities covered by 5AMLD are required to increase due diligence on operations involving these countries to more effectively identify suspicious activities. 

Art dealers 

Traders of high-value goods such as fine art have to report suspicious activity and perform customer due diligence checks under 5AMLD. 

Those acting as intermediaries or trading in high-value goods must apply for AML identity verification checks for transactions exceeding EUR 10,000.