When Basic AML Training Just Isn’t Enough

Deutsche Bank is reportedly leading an internal investigation into an alleged USD6bn laundry, using ‘relatively FCAbasictrainingsimple transactions’ to clean cash. Simple transactions used to launder money should be easy to identify – if the software does not pick it up, then the employees handling the transactions should be able to spot a suspicion. Basic anti-money laundering training would guide someone to tell their AML team if something in a transaction does not look right. What if it did, and the message is still not getting through?


Regulated financial institutions spend money on ineffective training programmes; employees spend time attending training sessions that offer no new information on the subject or on how to approach the issue at hand. There are a myriad reasons why training programmes do not have the desired effect, but why do firms still use them?

They do so because they have little choice. A robust regulatory environment, a requirement to train all employees on the risks associated with financial crime and the spectre of a large financial penalty for not doing so have backed banks and other regulated firms into a corner. Gone are the days of leaving all knowledge of money laundering, terrorist financing, sanctions busting and bribery to the compliance department. In the present environment, we have to train all employees, management, directors and the C-suite on financial crime risks. And this, as compliance officers know, comes at a great cost to a bank.

Compliance generates no revenue – the compliance department is a straight-up cost centre. Although the argument that having an effective compliance programme in place could save you a few million dollars in regulatory fines is quickly gaining ground, compliance officers – it appears – are still bound by tight budgets. This is sometimes to the detriment of quality training, forcing compliance officers to compromise on the standard of training they want to deliver to employees.

Compliance budgets are larger than they were a few years ago. The coffers are deep enough to attract and retain talented individuals to maintain good compliance procedures in banks, and to ensure that every employee has at least a basic grasp of anti-money laundering, sanctions and anti-bribery and corruption requirements – how it works and who the ‘bad guys’ are. But compliance training where employees sit through another session on placement, layering and integration and learn nothing more relevant to their role, do not encourage anyone to think in terms of risks posed to their business line.

Beyond the money laundering cycle

Basic training has done a great job; meet bank staff from any division in a corporate, retail or investment firm and they will be able to trot out the three stages, and this was not the case five years ago. Except now, the information comes by rote – it is learned, absorbed, recalled when asked but is it really embedded into how bank employees do their jobs?

FCAadvancedtrainingAdvanced or more specific AML/CTF training courses on the market should address the particular risks posed by different areas of banking. Looking into trade based money laundering operations using examples and knowledge from people who have worked in trade financing first hand, not simply adding a few slides to a power point describing false invoicing would be a good start; but this is rarely the case.

It’s about the people, stupid

Global AML efforts are now hinged upon a risk based approach – the basic principle of applying most resources where the greatest risks lie. To do this, employees need to understand the risks – what they look like, where and when they can occur. The emphasis must be on engaging the learners.

“To combat financial crime and terrorist financing, the people who work with clients must be aware of the risks. Not just compliance and the firm’s financial intelligence unit, but front line business people in an institution.” Kim Manchester, a compliance veteran and CEO of ManchesterCF told Financial Crime Asia.

This rings true. The customer facing employees – whether private banking relationship managers or traders creating OTC derivatives – know their client well enough to offer them precisely the right product at the right time. They also should be able to know with the same precision when a deal does not add up. Compliance officers can erroneously believe that ML/TF is not an issue for some of the more sophisticated financial products. Let’s take derivatives as an example. Some compliance officers do not consider AML/CTF something that derivatives traders need to be concerned with and so they did not need training on this area.

This is a huge oversight which could end up costing a financial institution. Mis-priced derivatives contracts can be used as an instrument to launder money and to channel funds to bribe takers. If the traders who engineer these products are able to recognise and report unusual activity – such as a price that does not chime with the market – compliance training is hitting the mark. But if these traders are sitting through a course which spends only a fraction of the time looking at how financial criminals try to manipulate sophisticated products, they might never spot a suspicious transaction. AML/CTF training must reach far beyond the basic stages and into the specific business lines run by banks on the markets. Because this is where the real financial crime takes place.


Indonesian AML and counter terrorist financing efforts

In February, the Financial Action Task Force placed Indonesia on its list of jurisdictions with strategic anti-money laundering deficiencies. Despite the potential impact on financial aid the listing could have, Indonesia is still unable to pass effective rules on counter terrorist financing. The FATF recommended Indonesia address three specific points:

(1) Adequately criminalising terrorist financing (Special Recommendation II);
(2) Establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); and
(3) Amending and implementing laws or other instruments to fully implement the 1999 International Convention for the Suppression of Financing of Terrorism (Special Recommendation I).

In March, Indonesian police officers from the notorious and elite Detachment 88 anti-terrorist squad. Officers shot and killed five suspected terrorists, who were funding planned attacks through armed robbery, targeting gold dealers and currency exchangers. This typology is well aired among the Indonesian banking compliance unit and the arrests put Indonesia’s CTF efforts on global news wires.

INCSR analysis

The US Department of State’s International Narcotic Control Strategy Report also highlighted endemic corruption as a chink in Indonesia’s AML/CTF armour.

Indonesia has a weak AML/CFT regime, according to the INCSR assessment, a cash-based economy, weak rule-of-law and ineffective law enforcement institutions, the presence of major indigenous terrorist groups combined reduce the impact of international standards and national law.

Non-drug related crimes generate the majority of money laundering activity: corruption, illegal logging, theft, bank fraud, credit card fraud, and maritime piracy, sale of counterfeit goods, gambling and prostitution.

Banks are already required to follow enhanced due diligence procedures for both foreign and domestic PEPs. Although the FATF recommendation on this was only made official in February this year, many financial institutions in Asia, perhaps influenced by other industry groups, had already adopted monitoring domestic PEPs as best practice.

KYC covered entities: Banks, finance companies, insurance companies and insurance brokerage companies, pension fund financial institutions, securities companies, investment managers, providers of money remittance, and foreign currency traders. NB High value goods dealers and lawyers are not covered by KYC rules.

Convictions and the law

There were four convictions for money laundering between January and October 2011.

In October 2010, the Government of Indonesia enacted a new AML law that partially complies with international standards. To meet international standards and ensure effective implementation and enforcement of the law, INCSR recommends staff in both the executive and judicial branches should receive more training on AML/CTF.

The PPATK – Indonesia’s Financial Intelligence Unit  – needs a significant increase in staff to meet its responsibilities under the law. In an effort to place some of the legal burden on industry and bank partners, PPATK plans to open three AML centers in different regions of Indonesia to serve as resource centers for organizations that must comply with the new regulations. There is hope that this will place some of the legal burden on AML/CTF on to practitioners and bank partners. How this will happen remains to be seen and will be a focus of discussion at the 4th Annual ACAMs Conference in early April.

Despite a reported high-level commitment to the action plan developed to address some of the persistent gaps in its AML/CFT legislation, the government has not met its projected timeframes. Essential draft CFT legislation will not be submitted to parliament until at least early 2012.

The October 2010 AML legislation only provides for the temporary suspension of terrorist assets linked to the UN list of designated terrorists and terrorist organizations and does not allow for an immediate and ongoing freeze.

Corruption, particularly within the police ranks, impedes effective investigations and prosecutions. Prosecutors and judges should be given additional training on tracing and documenting financial flows and presenting this evidence convincingly in court.

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