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Banks count the cost of the war against money laundering
February 9, 2010
As the war against terror hots up, banks are playing an increasingly important role in addressing anti-money laundering (AML) and financing of terrorism issues. They are consequently pumping more money into anti-money laundering (AML) systems and compliance than ever before, according to a global study by KPMG.
Recent estimates suggest that US$500 billion to US$1 trillion is laundered worldwide by drug dealers, arms traffickers and other criminals.
Banks act as gatekeepers for the legitimate financial system and it is only through their vigilance that the system can be protected from providing organised criminals or terrorists with a mechanism for concealing the proceeds of illicit and corrupt activity. They play a crucial role in the prevention, detection, and reporting of money laundering.
Andrew Dinsdale, KPMG's Financial Services Chairman said: "AML is a serious issue that needs to be addressed at senior management level. More than 60 per cent of all banks saw AML as a high profile issue at senior management level, while in the Asia Pacific region, only about half of the banks thought it was a high profile issue.
"Of the 209 financial services institutions interviewed about their spending over the last three years, 83 per cent said they have invested an average of 61 per cent more in combating money laundering over the last three years. Our recent global study shows that the main driver behind the past and projected increase in spend is transaction monitoring. "The report, 'Global Anti-money Laundering Survey 2004 - How Banks Are Facing Up to the Challenge' shows that this trend is set to continue with most banks expecting spending to increase by over 40 per cent over the next three years, demonstrating that much remains to be done to enhance anti-money laundering systems and controls.
"It's fair to say that New Zealand banks will be faced with a higher spend on AML, particularly in relation to KYC systems (know your customer) and transaction monitoring methodology, aimed at risk-based transaction monitoring and staff training," said Mr Dinsdale.
Mark Leishman, Associate Director, KPMG Forensic added, "with increasing spending and importance on AML measures at a global level, and with the report showing that there was varying levels of AML standards across all countries, ,members of the New Zealand banking and finance sector must protect themselves so they are not placed at a potentially greater risk compared to other parts of the world."
"The New Zealand self regulatory approach places emphasis on the banks and financial institutions to adopt their own sound practices in this regard."
Two thirds of the survey respondents also indicated that they have generated a greater number of suspicious activity reports (SARs) over the last three years, due in large part to better systems for detection and reporting. In turn, this has created a challenge for national law enforcement agencies in deploying the resource necessary to process and act on the increased volume of reports.
The report shows that the vast majority (84 per cent) of banks found the increased burden of anti-money laundering regulation was acceptable. However, most of these believed the requirements could be more effective in combating money laundering in a number of different ways including improved communication with, and feedback from, law enforcement, and better harmonisation of requirements across the world.
"As this challenge intensifies, regulators' resources may have to be increased to address this likely increased volume of suspicious activity reporting. They will need to engage effectively with the banking industry to give banks positive evidence that their AML efforts are leading to higher detection and prevention of criminal and terrorist activity," Mr Leishman said. Mr Dinsdale concluded: "The survey shows that anti-money laundering is still very much "work in progress" within the banking industry, with plenty of work left to be done.
"It is clear that banks are committed to playing their role in the war against money laundering and international terror, and also that they want their role to be effective.
"The challenge for policy makers and law enforcement is to engage more effectively with the industry, and give banks positive evidence that their efforts are leading to improved rates of detection and prevention of criminal and terrorist activity.
"We must not lose sight of the fact that this is about fighting criminality, not about box-ticking," said KPMG's Financial Services Chairman.
Other key findings from the report;
* More than 60 per cent of banks saw anti-money laundering as a high profile issue at senior management level, 34 per cent saw it as moderate profile, and only 5 per cent considered it low profile. Banks in Latin America and Russia were particularly likely to consider it high profile (87 per cent and 88 per cent respectively), while only about half the banks in ASPAC and Africa thought it high profile.
* A large proportion of respondents have a formal program of independent testing of their AML systems, although western European banks scored poorest on this, with only 59 per cent carrying out formal testing of the effectiveness of their AML systems and controls. This compares to 100 per cent in the Middle East and 91 percent in North America.
* Increased spending was especially pronounced in North America where 29 per cent reported increased spending of more than 100 per cent in the past three years. KPMG attributes this to the impact of the USA PATRIOT Act 2001, passed in the wake of September 11th.
Recent estimates suggest that US$500 billion to US$1 trillion is laundered worldwide by drug dealers, arms traffickers and other criminals.
Banks act as gatekeepers for the legitimate financial system and it is only through their vigilance that the system can be protected from providing organised criminals or terrorists with a mechanism for concealing the proceeds of illicit and corrupt activity. They play a crucial role in the prevention, detection, and reporting of money laundering.
Andrew Dinsdale, KPMG's Financial Services Chairman said: "AML is a serious issue that needs to be addressed at senior management level. More than 60 per cent of all banks saw AML as a high profile issue at senior management level, while in the Asia Pacific region, only about half of the banks thought it was a high profile issue.
"Of the 209 financial services institutions interviewed about their spending over the last three years, 83 per cent said they have invested an average of 61 per cent more in combating money laundering over the last three years. Our recent global study shows that the main driver behind the past and projected increase in spend is transaction monitoring. "The report, 'Global Anti-money Laundering Survey 2004 - How Banks Are Facing Up to the Challenge' shows that this trend is set to continue with most banks expecting spending to increase by over 40 per cent over the next three years, demonstrating that much remains to be done to enhance anti-money laundering systems and controls.
"It's fair to say that New Zealand banks will be faced with a higher spend on AML, particularly in relation to KYC systems (know your customer) and transaction monitoring methodology, aimed at risk-based transaction monitoring and staff training," said Mr Dinsdale.
Mark Leishman, Associate Director, KPMG Forensic added, "with increasing spending and importance on AML measures at a global level, and with the report showing that there was varying levels of AML standards across all countries, ,members of the New Zealand banking and finance sector must protect themselves so they are not placed at a potentially greater risk compared to other parts of the world."
"The New Zealand self regulatory approach places emphasis on the banks and financial institutions to adopt their own sound practices in this regard."
Two thirds of the survey respondents also indicated that they have generated a greater number of suspicious activity reports (SARs) over the last three years, due in large part to better systems for detection and reporting. In turn, this has created a challenge for national law enforcement agencies in deploying the resource necessary to process and act on the increased volume of reports.
The report shows that the vast majority (84 per cent) of banks found the increased burden of anti-money laundering regulation was acceptable. However, most of these believed the requirements could be more effective in combating money laundering in a number of different ways including improved communication with, and feedback from, law enforcement, and better harmonisation of requirements across the world.
"As this challenge intensifies, regulators' resources may have to be increased to address this likely increased volume of suspicious activity reporting. They will need to engage effectively with the banking industry to give banks positive evidence that their AML efforts are leading to higher detection and prevention of criminal and terrorist activity," Mr Leishman said. Mr Dinsdale concluded: "The survey shows that anti-money laundering is still very much "work in progress" within the banking industry, with plenty of work left to be done.
"It is clear that banks are committed to playing their role in the war against money laundering and international terror, and also that they want their role to be effective.
"The challenge for policy makers and law enforcement is to engage more effectively with the industry, and give banks positive evidence that their efforts are leading to improved rates of detection and prevention of criminal and terrorist activity.
"We must not lose sight of the fact that this is about fighting criminality, not about box-ticking," said KPMG's Financial Services Chairman.
Other key findings from the report;
* More than 60 per cent of banks saw anti-money laundering as a high profile issue at senior management level, 34 per cent saw it as moderate profile, and only 5 per cent considered it low profile. Banks in Latin America and Russia were particularly likely to consider it high profile (87 per cent and 88 per cent respectively), while only about half the banks in ASPAC and Africa thought it high profile.
* A large proportion of respondents have a formal program of independent testing of their AML systems, although western European banks scored poorest on this, with only 59 per cent carrying out formal testing of the effectiveness of their AML systems and controls. This compares to 100 per cent in the Middle East and 91 percent in North America.
* Increased spending was especially pronounced in North America where 29 per cent reported increased spending of more than 100 per cent in the past three years. KPMG attributes this to the impact of the USA PATRIOT Act 2001, passed in the wake of September 11th.
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