Anti-money laundering drops down boards’ agenda

MEDIA RELEASE

30 September 2011

Anti-money laundering drops down boards’ agenda in wake of financial crisis

• Anti-money laundering costs rise by 45 percent
•
• Focus on ‘Politically Exposed Persons’ intensifies in wake of Arab Spring
•

Board level interest in anti-money laundering (AML) is being squeezed by other priorities, according to KPMG’s Global AML Survey 2011. The survey revealed a nine percentage point drop in boards considering AML to be a high profile issue (from 71 percent in 2007 to 62 percent in 2011).

Brian Dilley, Global Head of Anti-Money Laundering at KPMG says, “Although it is understandable that boards have been focused on their survival and the wave of regulatory change, they need to ensure that AML remains at the top table, or else risk massive fines and business disruption, particularly in relation to sanctions compliance.”

The survey also found that the operational costs of AML had risen by an average of 45 percent since 2007, with a further 28 percent rise predicted over the next three years. However, many AML professionals have a history of under-estimating future costs. In 2007 less than one fifth (17 percent) predicted a rise of 51 percent or more, whereas almost a third (31 percent) said their costs had actually risen by that amount when looking back over the same period.

“In a cash-constrained environment, it is imperative that AML professionals forecast realistic costs to the board: not only because of the significant risks that need to be managed, but also so they continue to retain credibility with boards who do not take kindly to repeated requests for additional funding,” says Mr Dilley.

Despite this rising expenditure, only 10 percent of respondents had off-shored or outsourced parts of their AML functions, with 80 percent having never considered this as an option. Banks may be missing opportunities to save money on some of the lower risk aspects of their AML programme.

The survey also included ‘anti-bribery and corruption activities’ for the first time and this was immediately ranked the third largest area of expenditure, indicating that the extra-territorial reach of, and heightened regulatory expectation associated with, the new UK Bribery Act and the US Foreign Corrupt Practices Act is having an impact.

Intensified focus on Politically Exposed Persons

Recent events in the Middle East and North Africa have intensified the focus on Politically Exposed Persons (PEPs). Since our 2007 survey, the number of respondents with formal processes to identify and monitor PEPs has increased from 71 percent to 88 percent. The Third EU Money Laundering Directive, which was implemented in 2007 and required banks to monitor PEPs, has had a clear impact, with the number of European institutions with such procedures rising from 65 per cent in 2007 to 94 per cent in 2011.

“As the Arab Spring of 2011 is prolonged into summer and beyond, it is interesting to see that financial institutions across the globe have had the foresight to up their game by adopting a risk-based approach to knowing your customers, as the majority (96 percent) now use PEP status as a risk factor.

“The challenge for banks is that, in some cases, PEPs have become sanctioned parties or persona non grata overnight and global authorities have scrutinised past transactions with PEPs with whom they had previously encouraged business.

“Banks need to ensure that they can justify their relationships with PEPs, particularly with an eye to future changes in their political standing. They should always be asking where the PEP obtains the funds that are passing through the institution, and be ready to explain the purpose of transactions that they undertake,” says Mr Dilley.

Relevance to New Zealand Banking Sector

New Zealand’s response to the Anti Money Laundering and Countering Financing of Terrorism Act 2009 is in early stages of planning and implementation, as we move towards full compliance by June 2013. As such reporting entities from New Zealand were not included in this survey but will be part of the next survey, scheduled for 2014. This year’s survey results give New Zealand the advantage of learning from the successes, concerns and opportunities for improvement highlighted by the findings.

Stephen Bell, Head of Forensics at KPMG New Zealand, says: “The New Zealand banking sector has the opportunity to learn from this survey before the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 legislation comes into effect in June 2013. Meanwhile, it’s crucial the sector remains focused on this issue and begins to plan and implement strategies to address it.

“At KPMG we are working with our clients to ensure they have the knowledge and support they need to be compliant. We have been engaging with clients on this issue since the legislation was first raised in 2009 running seminars, planning workshops, web conferences and one-to-one briefings to ensure that by June 2013, they have in place the checks and balances to safeguard themselves and their customers.”

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