Improve compliance to plug money laundering

While Indian financial institutions expand their branch network across villages and towns in rural and semi-urban India, it is important to understand their approach and preparedness to tackle money laundering and compliance measures. Events over the past year such as the IPL controversy, Madhu Koda scam, allegations on Hasan Ali and many others, have been a dark reminder of where India is positioned in the anti-money laundering landscape.

KPMG in India's recently launched, Anti-Money Laundering (AML) Survey 2012, which indicated a higher degree of awareness among financial institutions on the importance of AML compliance/requirements and the associated risks, including legal, regulatory and reputational risks, which is a positive sign. As a result, there has been an increase in the involvement of senior management on AML compliance.

However, on delving deeper into the findings of the Survey, we notice that while AML compliance is high on the agenda; the actual execution in terms of conducting an AML risk assessment, updation of information, ongoing due diligence, and so on, needs improvement.

Risk-based approach

Though a key initiative in reducing the risk of money laundering has been the Know Your Customer (KYC) norms laid down by the Government, it is equally important to adopt a risk-based approach to KYC. While it is encouraging to note that 86 per cent of the respondents of the Survey said they adopt a risk-based approach to KYC, which is in accordance with leading international practices, a detailed analysis revealed several inconsistencies in the parameters used for evaluating the risk.

Politically-exposed persons

An important aspect of KYC is identification of Politically Exposed Persons (PEPs), which requires financial institutions across the world to have specific procedures in place to identify PEPs. It is a matter of concern that only 77 per cent of the entities surveyed by KPMG stated that they have specific procedures in place to identify PEPs. This discrepancy might, however, arise due to the various parameters that exist that define PEP and hence differ across organisations.

Another important requirement of an effective AML policy is sanction screening. To ensure that sanctions list monitoring happens as an ongoing process — from account opening to regular screening for changes in the sanctions list or in the customer information — it is critical for organisations to keep a close watch on updation of sanction lists. Moreover, it is also important to have an ongoing monitoring process to review the customer's data against the PEP and sanctions list.

Increase in compliance cost

An overwhelming 82 per cent of the respondents visualised that their investment for AML compliance would increase over the next three years. These rising future costs can largely be attributed to:

Implementing/upgrading their transaction monitoring system

Introduction of policies and procedures in accordance with global best practices and

Transaction look-back reviews

In comparison with KPMG in India's AML Survey 2009 where introduction of global polices and transaction monitoring were indicated as the major focus areas needing investment, the current survey also indicates the same in addition to remediation/refresh exercise. This indicates that the cost of AML compliance is going to keep rising and institutions may be underestimating costs or deferring the investments required.

Challenges

A quick analysis of the AML compliance framework at various institutions reveals that while companies are aware of the need to enforce such programmes, their implementation comes with a set of challenges. At one end of the spectrum are MNC, banks and private sector financial entities that have sophisticated AML systems and adopt best practices in their processes. At the other end are smaller banks with little or limited automation.

Another challenge is managing accounts that have little or too much documentation especially with regard to establishing identity of the account holder(s). Considering India is still on its way to implementing a universal identifier for individuals (such as social security number in the US), financial institutions have to monitor these accounts closely to avoid misuse by money launderers. It is imperative that institutions evolve a process to tackle these challenges and reduce the time spent on them. Else, AML compliance implementation may only result in partial benefits for institutions.

While anti-money laundering compliance is high on the agenda, the actual implementation needs improvement.

(The author is Partner and co-Head, Forensic services, KPMG in India. The views are personal.)

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