Why Do Financial Institutions Need AML/CTF?

Financial institutions are a high-risk sector as they offer channels for financial transactions at multiple levels, from the local community credit unions to international banks. As a registered bank, trust company, brokerage firm or an investment dealer, you are a “regulated entity”, if you:

RISK EXPOSURE

Banks and other financial institutions create business partnerships with individuals or entities without information of their business dealings, sources of funds, the purpose of the transaction or invoicing of goods. This allows the proceeds of crime to be laundered through various methods, exposing financial institutions to risks of money laundering (ML). Transactions with sanctioned individuals or regimes may also expose financial entities to terrorism financing (TF), thus attracting hefty lawsuits and regulatory fines.

COMPLIANCE REQUIREMENTS

Compliance begins with mandatory client verification (KYC) and Screening for Sanctions/PEP/Adverse Media/Beneficial Ownership at the time of client onboarding, or establishment of a new business relationship. Financial entities are also required to monitor, track and report suspicious activities: unusual transactions, market manipulations, tax evasions, transactions with virtual currency exchanges, trading in illicit goods, transactions with sanctioned entities or countries, transactions in a geographic territory experiencing political turmoil or terrorist activities.

GAPS IN COMPLIANCE

The ability to use large amounts of cash for transactions and conceal the sources of funds or ownership, allow illicit funds to be laundered. The globalization of the financial industry means earnings of financial crime in a foreign country can be integrated into the formal economy of another country. Terror activities can be funded through a series of layered transactions or fake invoicing methods. This makes financial entities highly vulnerable to AML/CTF compliance and liable to be penalized for non-compliance.