Frederic Boulier, noted expert on anti-money laundering and compliance, with NICE Actimize, a financial crime risk and compliance technology company, provides first reaction on the long-term issues regarding anti-money laundering as exposed by the recent HSBC anti-money laundering case. Recently in the United States, the Permanent Subcommittee on Investigations, Committee on Homeland Security and Government Affairs chaired by Carl Leven, just issued its “US Vulnerabilities to Money laundering, Drugs and Terrorist Financing” Staff Report released in conjunction with the recent HSBC hearing. Here is Boulier’s analysis of the situation below.

You have acknowledged the recent Report “US Vulnerabilities to Money laundering, Drugs and Terrorist Financing” delivered by the Permanent Subcommittee on Investigations, Committee on Homeland Security and Government Affairs. What is your first take analysis of these issues?

First of all, the report and the Senate subcommittee’s findings will have repercussions across the globe and banking industry for both institutions and regulators. The fundamental way that US regulators view and assess Anti-Money Laundering (AML) has just taken a seismic shift. The Senate subcommittee has called for a different approach to anti-money laundering regulation – AML is not a consumer compliance issue, it’s a banking system issue.

What do you mean by your comment that it is a banking system issue? What does that mean precisely?

The integrity of the banking system is tied to the safety and soundness of individual institutions. In the US this is assessed using a CAMELS rating system (which consider (C) capital adequacy, (A) asset quality, (M) management effectiveness, (E) earnings, (L) liquidity, and (S) sensitivity to market risk).

The Senate report suggest that AML controls need to be at the heart of the way that the safety and soundness of the institution are assessed and should be part of the CAMELS management an composite ratings. In short this means that strong AML controls are at the heart of the safety and soundness of institutions and that strong controls support the integrity of the banking system. It may seem obvious, but to date this was not properly recognized.

The outcome of this report therefore creates a seismic shift in the way that AML will be regulated in future. AML controls need to be at the very heart of banking institutions and are key to the safety and soundness of the banking system. Outcomes also highlight the importance that institutions must join up their thinking in terms of AML – from implementing holistic global policies, ensuring best practice at group and affiliate level and apply common systems and process to address risks. Ultimately this means a common approach to financial crime across the entirety of an institution.

Yes – the report recognizes that AML policy and procedure impacts the safety and soundness of institutions - this will have repercussions not just for senior bank management, but also for the regulators themselves. Considering OCC in the United States for example, three out of the 10 major recommendations from the report are focussed at the regulator itself. The findings highlight issues associated with the approach to regulation, sighting issues in the way that the OCC conducts examinations, communicates needs for corrective action and remediation, and in the way that it also failed to apply joined up thinking in the way that issues were dealt with - the OCC identified 83 Matters Requiring Attention over five years, without once citing a legal violation of federal AML law.

Can we expect big changes in the near future ?

The report suggests that the “OCC will have to undertake a sustained effort to ensure the newest round of changes produce a better AML outcome”. We will see major changes to the that OCC operates as it re-focuses on “safety and soundness” and that will mean greater visibility of issues, expectations of faster response from firms, increased regulatory pressure, wholesale review of standards and an institution-wide examination approach.

Do you think this reflects issues that will play out more globally on anti-money laundering?

Other global regulators are likely to follow suit in terms of thinking and in the way that they review and assess institutions. An undercurrent theme of the Senate report is that it’s not just activity within one jurisdiction that is important to a regulator, but activities across an institutions globally. Ultimately this could mean a more global approach to regulation. That increases the importance of global policies and enforcement of global policies at institutions. We’ve also seen that policy and procedure are not sufficient, implementation and practice with common solutions, common approaches and global platform standards allows an institution to understand how controls are operating and provides the visibility and auditability that are now required. This joined up thinking allows efficient implementation and a combined financial crime approach that allows institutions to meet increasingly demanding regulation efficiently, effectively and with more transparency.