Anti-money laundering is now focused on effectiveness: Does your system work?

This new approach aligns the South African legislative AML framework with the FATF standards and with the expedited roll-out of the 4^th AML Directive of the European Parliament, introduced as a result of the terrorist attacks in Europe and the UK and following exposition of the Panama Papers. These new measures aim to enhance the efficiency of the current AML/CFT system and have been introduced to coherently supplement it. Although these measures were largely targeted at terrorist financing, the impact will be felt in all areas of finance, including tax. This comes as a result of substantial advances in communications and technology which make the global interconnected financial system an ideal environment for criminals to move and hide illicit funds, often to evade tax. Tax crimes (both direct and indirect taxes) are globally regarded as predicate offences for money laundering.

This new approach to the combating of money laundering and terrorist financing (AML/CTF) introduces a risk-based approach - as opposed to a rules-based approach - in getting to identify the customer. It also introduces beneficial ownership as a concept. Crime syndicates abuse corporate entities for criminal purposes. Accountable institutions are now required to probe for beneficial ownership to identify the natural person who ultimately owns or controls the legal entity constituting the client. The risk management compliance programme will have to provide for methodology and verification sources in order to address the obligation. 

The new regime also affects prominent persons: domestic and foreign. Accountable institutions now have to include the management of business relations with prominent persons in their Risk Management and Compliance Programs (RMCP). Businesses with domestic prominent influential persons are not inherently high risk but the potential of such risks need to be managed. Businesses with foreign prominent public officials on the other hand must always be regarded as high risk. In accordance with a risk management compliance programme an accountable institution will have to obtain senior management approval and establish the source of wealth and source of funds, and monitor the business relationship when dealing with a domestic prominent person posing a high risk or dealing with a foreign prominent foreign official. Accountable institutions are no longer burdened with long control lists and tick boxes for each and every client and can save time and costs through the introduction of a RMCP which entails applying time and resources in areas where it is most needed, that is where the identified risks are high.

There is huge innovation in the risk and compliance space. The potential uncertainties stemming from Brexit and the new US-Trump administration do not appear to have halted the development of initiatives to investigate, expose and punish those involved in business crime.

Across the globe, new legislation has been enacted or proposed which continues to reinforce the anti-corruption agenda. In Australia, the Coalition Government has engaged in a consultation process on proposed legislative reform including the creation of a new corporate offence for failing to prevent foreign bribery, following the UK Bribery Act model. In France, the bodies needed to implement the SAPIN II anti-corruption law are being created and established. The US Department of Justice (DOJ) extended the Foreign Corrupt Practices Act pilot programme intended to encourage corporate self-reporting and it has also sent strong signals that it will continue to take a robust approach to white collar and FCPA enforcement. Acting Assistant Attorney, General Kenneth A. Blanco recently confirmed that the US DOJ “will continue pushing forward hard against corruption, wherever it is”. He also confirmed that the Kleptocracy Asset Recovery Initiative is specifically designed to target and recover the proceeds of foreign official corruption that have been laundered “into or through the US”. He further stressed that in these kleptocracy cases, one of their goals is to return the assets to those harmed by criminal conduct. The Financial Crimes Enforcement Network (FINCEN) in the US has also introduced a final rule currently being implemented to be in force by May 2018 which applies to financial institutions who have to align their due diligence programmes with FINCEN’s guidance on core elements of a customer due diligence programme. These four core elements include: customer identification and validation, beneficial ownership identification and verification, understanding the nature and purpose of customer relationships to develop a customer risk profile, ongoing monitoring for reporting suspicious transactions; and on a risk-basis, maintaining and updating customer information.

Going forward, the extent of the workload and responsibilities of every company’s compliance office will increase exponentially as AML/CTF becomes the platform to combat crime effectively. This is the reason it has now become popular to criminalise non-compliance. The effect of non-compliance and subsequent sanctions on a company’s reputation and brand value adds further credence to the prediction above. It has already reached a point where the desire to obtain “credits” from the DOJ in the US is regarded as very similar to proving to the UK’s Serious Fraud Office that there has not been a “failure to prevent”, when it comes to investigations of bribery and corruption. 

A chain is only as strong as its weakest link. The success of the global AML/CTF framework depends on the extent to which each country aligns its own national regulatory framework with the global standard. If this is achieved effectively, criminals, tax evaders, kleptocrats and terrorists will find that it has become very difficult to disguise the origin of criminal proceeds or to channel funds for terrorist purposes.