Anti-Money Laundering: A Brave New World for Financial Institutions

The banking sector has been required by law to monitor and report suspicious transactions potentially indicating the presence of money laundering. This does not necessarily mean, however, that current bank procedures are fully adequate to meet the new challenges of anti-money laundering policy in the post-9/11 period. Accordingly, banks should be alert to a number of areas that may necessitate modification of existing procedures or the adoption of new procedures and technologies.

- More stringent reporting rules.
From a purely procedural point of view, stricter reporting rules will necessitate additional outlays in time and cost as banks will have to file more reports and increase the efficacy of their internal compliance procedures. As one example, previous to the USA PATRIOT Act, a report had to be filed for transactions over US$10,000; now, transactions just under this limit must also be reported. Lowering the reportable minimum, however, blurs the line between reportable and ordinary transactions, and banks are increasingly feeling under pressure to scan all transactions in order to feel secure in their compliance with anti-money laundering regulations in the new era, at considerable additional expense.

- Higher bar for monitoring efficacy.
Ignorance is no longer bliss. Under the USA PATRIOT Act, a financial institution can be held liable -- and punishable by both monetary fines and criminal indictment -- if the institution is found to have handled illicit funds, either knowingly or unknowingly. While it is virtually impossible to completely block the movement of illicit funds through a financial institution, and prosecutions under these clauses of the Act are likely to be minimal, the new law has significantly raised the bar for judging the quality and efficacy of a bank's AML procedures. As a result, banks will find it necessary to implement more thorough monitoring programs, and employee training procedures in order to comply with this new regulatory stringency.

- New, more effective AML technologies.
In order to thoroughly monitor customer transactions, new account openings, and complex relationships between accounts for possible money laundering activity, large financial institutions will need to install powerful, scalable technologies capable of handling high volumes of transactions and multiple relational categories. A number of new technologies, many initially developed for government intelligence or defense agencies, have become available in recent years. The challenge for financial institutions will be to determine which solution is most appropriate for their needs. Due to the theoretical complexity of these state-of-the-art technologies, this selection process will require a careful and thorough assessment of competing vendors' products.

- Entire business lines may come into question.
Banks and other financial institutions will not only have to tighten procedural compliance, they may also have to reevaluate entire business lines. We can mention two examples here. Banks have traditionally done a good business in providing international correspondent banking relationships for domestic customers wishing to move funds abroad, and for overseas customers wishing to establish accounts in the US. The USA PATRIOT Act singles out correspondent banking in particular as a potential harbor for money laundering, and the Treasury department is examining methods for insuring positive identification of overseas account holders, barring relationships with shell banks, and other controls on correspondent banking. These policies are still in the making, and can assert themselves in a variety of ways. For example, Treasury is required by the Act to consider the efficacy of a bank's correspondent account monitoring as a factor in deciding whether or not to approve a bank merger. This type of regulatory leverage could potentially affect the fundamental corporate growth of an institution found to be lax in AML compliance.

The second example involves a relatively new area of banking: providing various monetary services -- such as check cashing, payment of government entitlements, and international money transfers -- to individuals with no formal account relationship (the "unbanked" sector). Because unbanked customers do not necessarily pass through a know-your-customer account opening procedure, banks may need to institute special monitoring procedures for unbanked services, particularly in regard to money transfers.

The above considerations for banks will apply to other financial institutions as well, with an even greater initial impact because most of these institutions are starting from zero and must build their AML programs from scratch.