It requires organizations to understand the signals, patterns and techniques used by terrorists to fund their operations. First, organizations need the ability to identify monetary flows, of any size, between terrorist organizations or nation states to operational groups. Next, the monetary flows must be tracked from those groups to operators and cells.
There are two distinct funding streams for terrorist financing – fundraising and the funding of terrorist operations.
Fundraising involves the flow of hundreds to millions of dollars to fund organizational operations . The funding of terrorist operations involves the flow of a few dollars to hundreds of thousands of dollars.
Compliance professionals need to be in front of problems before they arise. This means creating reliable systems and scenarios that can identify potential terrorist financing, as well as having an effective monitoring program in place.
When a financial organization is in reaction mode, the damage is already done. What is required is a combination of robust reactive monitoring mechanisms, such as regular transaction monitoring, along with with proactive targeted monitoring techniques that focus on specific scenarios identifiable with terrorists.
This is a cultural issue with financial institutions because of their historical emphasis on the bottom line. Compliance is a cost center, so it comes under added scrutiny. The lingering effects of the financial crises over the past five years have led to further cutbacks in compliance spending while regulatory pressure for institutions to do more has increased.
Some financial organizations have found ways to create efficiencies by further integrating compliance with operations, but resource constraints remain a big challenge.
With the attention generated by high-profile AML cases like HSBC (see Key Trends #1), organizations will likely implement further compliance efficiencies and provide more resources in manpower and analytic tools.
Beyond incurring financial losses, financial institutions that find themselves compromised by fraud, money-laundering or failure to adequately address AML concerns face other risks: costly regulatory investigations, erosion of brand equity, reputation degradation and increased costs associated with managing future risk.
With the recent serious regulatory actions taken against major financial institutions, the public climate has become less tolerant. Going forward, financial institutions face the prospect of much more adverse consequences such as criminal prosecution.
Given the complexity of laws and regulations, there is often confusion about best practices. Adding to this problem is the fact that AML remains constantly in flux and evolving.
Often financial organizations are left to best interpret regulations on their own, and they struggle with how much oversight and review is enough while weighing the costs of compliance programs and potential exposure of the bottom line.
Identifying the right independent consultant is a significant concern for organizations, regardless of how committed they are to their AML programs.
Typically, there is internal pressure to retain one of the larger consulting firms (Deloitte, KPMG, Kroll etc.) due to brand recognition as well as a means to prove to regulators the seriousness and quality of the AML program and procedures. These firms, of course, are capable of doing an outstanding job. However, it's often the case that they use less experienced, associate-level personnel in program oversight and implementation.
An alternative is the subject matter expert, a highly-specialized and experienced consultant – often with law-enforcement or regulatory experience – who is capable of providing detailed insights into specific aspects of an AML compliance program.