AML and Tax Compliance in the Asia-Pacific Region: Investing in KYC Systems, Data, and Processes

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1 White Paper April 2015 Risk Solutions Financial Services

2 Roles Organization Size Countries 14% 23% 24% 30% 22% 21% 20% 17% 12% 17% VP and Above Director / Sr Manager Manager Specialist Consultant / Other $500M+ $250M-$499M $100M-$249M $5M-$99M <$5M or Don t Know Industries Investment banking Retail banking Private banking / wealth management Money service, transfer, and FX Insurance Brokerage 2

3 Roles Organization Size Department 24% 22% 36% 9% 9% 5% 3% 8% 13% 13% 76% 54% 28% Senior Executive Manager / Supervisor Specialist $500B+ $101B-$500B $51B-$100B $11B-$50B $1B-$10B <$1B Compliance Operations Line of Business Other 3

4 Table of Contents Situation:... 5 Pressures are mounting Complication:... 5 Issues with KYC data, systems, and processes Solution:... 6 Financial institutions are investing to address KYC challenges, as Board awareness of risks increases Ensuring Success:... 7 KYC Best Practices Appendix:... 8 Supporting data from APAC AML and Tax Compliance Trends (AATCT) research study 4

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7 KYC Best Practices Data Management Watch List Screening & Monitoring Enhanced Due Diligence (EDD) Systems Management Talent Management & Training Gather as much customer information as possible during the customer on-boarding process. It s much easier to capture the information upfront, rather than go back to the customer and ask for additional data later. Verify the data that is provided. Be sure to understand the Ultimate Beneficiary Owner(s) for businesses. Set clear accountability within the organization for who is responsible for data integrity. Evaluate 3rd party watch list providers to support Sanctions & Enforcement and Politically Exposed Persons (PEP) screening. Dedupe your customer records as much as possible to prevent screening a single individual or business more than once. When you investigate an alert, be sure to maintain an audit trail. For higher risk customers, the top EDD information to evaluate is 12 : Criminal history Derogatory news (ideally from local sources that may be written in the native language, as well as international sources) Citizenship Asset ownership Associates / relationships Configure data collection systems to centralize customer information and make it accessible to appropriate personnel throughout the organization. Consider screening platforms that can check customer records against many lists concurrently and that have sophisticated algorithms to reduce false positives. Benchmark your institution s staffing levels to determine if levels are comparable to similar institutions. Hire the best available talent to fill compliance roles. Develop a succession plan for grooming internal successors. Ensure that internal staff receives adequate training on systems and tools. Ask vendors how they can help to support this process. Invest in compliance training through industry organizations and certification programs. Consider the training needs of front-line employees who may be responsible for collecting customer data. 7

8 Level of Agreement with the statement: Exposure to money laundering is considered a high-risk area within your organization s business risk assessment 100% 80% 60% 61% 40% 34% 20% 0% Strongly Agree (% 6&7 ratings) Neutral (% 3-5 ratings) Strongly Disagree (% 1&2 ratings) 5% On a scale of 1 to 7 where 1 means strongly disagree and 7 means strongly agree, to what extent do you agree that exposure to money laundering is considered a high risk area within your organization s business risk assessment? Operational Challenges Faced by Organizations in Complying with AML Regulations Compliance for both local and global AML regulations Greater regulatory requirements Complex regulations with wider KY (Know Your Customer) obligations Growing volume of data Manual (time consuming) process Screening technology/process produces too many false-positives Recruiting, training and retaining AML staff Lack of readily-accessible customer data Existing processes are too difficult to change Lack of senior management engagement 51% 40% 9% 50% 44% 6% 48% 45% 7% 47% 49% 4% 45% 49% 6% 45% 49% 6% 43% 49% 8% 42% 50% 8% 36% 53% 11% 32% 53% 15% 0% 20% 40% 60% 80% 100% Big challenge (% 6&7 ratings) Neutral (% 3-5 ratings) Small challenge (% 1&2 ratings) On a scale of 1 to 7 where 1 means not a challenge at all and 7 means an extreme challenge, how would you rate each of following in terms of being an operational challenge faced by your organization in complying with AML regulations? 8

9 Operational Challenges Faced by Organizations in Complying with Tax-Compliance Screening Regulations Complex regulations requiring more data from customers Compliance for both local and global tax regulations Growing volume of KYC (Know Your Customer) data-capture requirements 64% 33% 4% 61% 32% 7% 59% 35% 6% Lack of readily-accessible customer data Too many false-positive screening results Manual (time consuming) process Staffing and training issues in internal departments Existing processes are too difficult to change Lack of senior management engagement 56% 40% 5% 53% 39% 8% 53% 42% 5% 49% 42% 9% 43% 48% 9% 40% 47% 13% 0% 20% 40% 60% 80% 100% Big challenge (% 6&7 ratings) Neutral (% 3-5 ratings) Small challenge (% 1&2 ratings) On a scale of 1 to 7 where 1 means not a challenge at all and 7 means an extreme challenge, how would you rate each of the following in terms of being an operational challenge faced by your organization in complying with tax compliance screening regulations? [ Don t know responses were excluded from the results] Quality of source data; Availability of trained resources during remediation effort to balance remediation and BAU(client onboarding); Absence of alert and case management tool in most scenarios and in most scenarios it has to be customized. Delay in decision making by senior management to make those investments Adapting to frequent change in Tax Laws Adverse Media tracking and availability of native script is one of the challenges from operations perspective. Alerts/reporting by branches AML regulations are becoming complicated year after year AML Technology Solution and staff acquaintance with it Awareness in consumers should be spread by government and regulator, so that not only financial institutions but consumers were made aware about KYC requirements Biggest challenge is turning deaf ear by the management in terms of staffing. Inadequate staffing creates more stress and poor quality in performing investigation as management wants the work to be completed before deadline. Pretending as if all the required quality is maintained, in reality it is otherwise. Conduct/compliance of relationship manager and client facing staff Continuous change in rules and regulations and way of working Data dumped in some of the old systems is difficult to retrieve For the government to provide customer privacy Giving management visibility of ROI on compliance initiatives What else would you add as a critical operational challenge that your organization currently faces in complying with AML regulations? 9

10 AML Investment Areas over the Past 3 Years Enhancing transaction monitoring systems Receiving, updating and maintaining KYC Implementation of FATCA Provision of training Increasing internal reporting requirements Procedural updates Maintaining sanctions lists Recruitment Anti-bribery and corruption acts Transactijon look-back reviews 45% 46% 9% 44% 47% 9% 40% 50% 10% 36% 52% 12% 35% 56% 9% 34% 57% 9% 34% 53% 13% 34% 55% 11% 34% 51% 15% 33% 56% 12% 0% 20% 40% 60% 80% 100% High investment (% 6&7 ratings) Neutral (% 3-5 ratings) Low investment (% 1&2 ratings) On a scale of 1 to 7 where 1 means no investment and 7 means very heavy investment, how much AML investment would you say your organization has put toward each of the following over the past 3 years? Changes in Total Investment in AML Activity - Past and Future 30% 25% 20% 15% 10% 5% 7% 5% 8% 11% 19% 16% 25% 22% 17% 14% 7% 12% 5% 2% 14% 15% 0% Total AML investment has decreased Total AML investment has not changed Increase of less than 10% Increase of 10%-24% Increase of 25%-49% Increase of 50%-99% Increase of 100% or more Don t Know Amount total investment increased compared to 3 years ago Anticipated amount increase over the next 3 years How has your organization s total investment in AML activity increased compared to 3 years ago? How much do you anticipate your organization s total investment in AML activity to increase over the next 3 years? 10

11 Internal AML Structure and Staffing Changes over the Past 2 Years Increased staff 67% Centralized all functions with HQ 27% Reduced staff 14% No change 12% 0% 10% 20% 30% 40% 50% 60% 70% How have your internal AML structure and staffing changed over the past 2 years? (select all that apply) 100% Level of Agreement with the statement: Your organization s Board of Directors takes an active interest in AML issues 80% 60% 57% 40% 40% 20% 0% Strongly Agree (% 6&7 ratings) Neutral (% 3-5 ratings) Strongly Disagree (% 1&2 ratings) 4% On a scale of 1 to 7 where 1 means strongly disagree and 7 means strongly agree, to what extent do you agree that your organizatijon s Board of Directors takes an active interest in AML issues? 11

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