Traditional AML compliance processes are established sets of procedures that businesses use to detect, prevent, and report instances of Money Laundering, Terrorist Financing, and Proliferation Financing (ML/TF and PF). Traditional AML compliance processes, such as Customer Due Diligence (CDD), Name Screening, Enhanced Due Diligence (EDD), Ongoing Monitoring, and Suspicious Activity Reporting (SAR), involve a tick-box approach and manual methods.
Adopting manual processes with a tick-box approach focuses on meeting minimum regulatory requirements, which undermines the effectiveness of AML efforts. With advancements in technology, criminals are also adopting new ways to engage in their illicit activities, requiring a thorough understanding and proactive risk management to effectively combat financial crime, including ML/TF and PF, which traditional AML compliance processes are not capable of.
Traditional AML compliance processes come with various challenges that impact the overall performance of the AML compliance function. Understanding and addressing these challenges is crucial for businesses to comply with legal obligations and counter financial crimes.
Here are some common challenges of traditional AML compliance processes:
Traditional AML compliance processes usually involve manually conducting sanctions screening procedures. As the volume increases, businesses find it difficult to screen customers. Further, the sanctions lists are dynamic in nature. It is humanly impossible to track the changes in the sanctions lists. This manual work exposes a business to Targeted Financial Sanctions (TFS) non-compliance.
Similarly, KYC, when conducted manually, requires seeking identification documents and information from customers, which is a challenge as not all customers are cooperative in providing details and documents in a timely manner. KYC software automates this process by providing a self-service feature and extracting data from documents uploaded by the customer.
Conducting traditional AML compliance processes, such as screening or KYC, is resource intensive as it requires having dedicated employees to conduct these processes, which puts businesses in a situation where a significant amount of their resources is utilised in ensuring adequate AML compliance.
Traditional AML compliance processes, such as sanctions screening and KYC, have a longer turn-around time, often creating situations where transactions are executed prior to the completion of the customer due diligence (CDD) process. This results in non-compliance, exposing the DNFBPs to regulatory fines and penalties.
Due to the involvement of manual inputs with longer turn-around time, traditional AML compliance processes tend to be inefficient. Â The dependence on traditional AML compliance processes results in loss of business and high costs. DNFBPs must look at automating these processes to combat ML/TF and PF effectively.
AML/CFT laws are ever-evolving as ML/TF and PF threats are a matter of global concern. Manual processes prove highly inefficient when there is a sudden change in regulatory requirements. A mere change in the FATF grey list or blacklist requires reperformance of Customer Risk Assessment (CRA) and Enterprise-Wide Risk Assessment (EWRA). Further, the regulators keep changing the compliance obligations to outsmart the criminals, and if the DNFBPs are using traditional AML compliance methods, they often find it difficult to keep pace with that.
Another major challenge with traditional AML compliance processes such as screening or KYC is the difficulty of scaling. A certain number of employees in a workforce can manage only a certain number of clients or client files and workload, which obstructs business expansion plans. With traditional compliance methods, it gets really difficult for DNFBPs to upscale or downscale their compliance team and resources.
Traditional compliance processes are error-prone due to the manual work involved in it. If KYC records are not accurately maintained, it results in incorrect risk assessment and increases the risk of financial crimes. Sometimes, a typographical error in entering a customer’s name might result in a sanctioned individual going unnoticed.
Therefore, to improve the efficiency of AML compliance processes, businesses should implement AML software to automate traditional AML compliance processes. This will help them decrease unnecessary costs and time and improve their capabilities in preventing and detecting financial crimes, including money laundering, terrorist financing, and proliferation financing.
