Bipartisan AML bill is just the right touch

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Much of the discussion within the U.S. financial services community regarding anti-money-laundering efforts revolves around what constitutes “effective” regulation.

Regulators and other stakeholders want to improve the effectiveness of AML and combating the financing of terrorism (CFT), while financial institutions counter that outdated regulations make it difficult to do so.

Many agree that a truly improved AML system requires stricter beneficial ownership regulations; a greater ability to share information within and between institutions; less onerous reporting requirements; a more aggressive leveraging of technology; and updates to the 18-year-old Patriot Act and the Bank Secrecy Act of 1970.

The Illicit Cash Act, which was recently introduced with bipartisan support in the Senate Banking Committee, would address many of the industry’s longstanding concerns.

Under this proposal, the requirements for suspicious activity reporting would be streamlined and there would be greater transparency regarding the effectiveness of those reports in combating financial crime. The proposal also calls for increased coordination between government agencies and with the industries they supervise.

It ramps up communication between institutions and business units within the same company. In addition, it would beef up the Financial Crimes Enforcement Network’s expertise and technological firepower.

All of these proposed changes are to be applauded. But the flip side to these improvements is that U.S. financial institutions would face considerably higher expectations from regulators and have fewer explanations to fall back on if those expectations are not met.

The Illicit Cash Act, or some form of it, is likely to become law, given the broad consensus for AML reform. Bank boards, CEOs and AML officers should use the act’s introduction as an early warning to thoroughly examine internal AML programs and make the improvements necessary to keep pace with this rising bar. Several areas in particular warrant attention.

To begin, institutions should ensure that they have an aggressive talent management and professional development strategy. If the U.S. government makes a concerted effort to raise the quality of the people and resources on the front lines of regulation, institutions need to do the same thing with their compliance teams. Those teams need competitive compensation, adequate budgets and leaders who are innovative, committed and driven to conquer AML challenges.

Institutions must also put data at the center of AML efforts. One of the fundamental issues in combating money laundering and terrorist financing today is the extent to which regulations and practices were designed for the analog era.

However, AML is fundamentally a data problem, requiring the connection of information fragmented across multiple databases and controlled by separate entities. Institutions can help foster a data-based approach by breaking down information silos from within.

Under the Illicit Cash Act, government staff involved in AML matters would rotate between regulatory bodies to promote interagency cooperation. Institutions should follow the same principle by giving their AML personnel extended and structured exposure to various business lines as well as to different customers and geographies so they can build relationships and incorporate various perspectives in their work.

One of the most insightful provisions of the Illicit Cash Act would require annual reporting by the Department of Justice on the usefulness of the information gathered from financial institutions in enforcing AML laws. This knowledge would allow regulators to refine data collection requirements to focus on what really improves AML enforcement.

In the same vein, financial institutions need to establish — and act on — mechanisms that provide continual feedback on AML performance, rather than waiting for the results of periodic AML enterprise risk assessments. Furthermore, that feedback needs to be focused on actual impact, rather than merely examining whether all the regulatory boxes have been checked.

Monitoring the government’s regulatory and enforcement priorities — whether explicitly outlined in communications or implied in enforcement trends — has long been essential in developing an institution’s AML strategy.

The Illicit Cash Act would amplify the importance of doing so because the act signals a more proactive stance by regulators and law enforcement that could easily lead to dramatic changes in government priorities. However those priorities might evolve, the increased emphasis on communication between government and the industry puts the onus on the industry to use this transparency in managing compliance programs.

As much as the Illicit Cash Act would represent an important step forward for AML regulations in the U.S., it is unlikely to be the last word on the topic. For example, the proposal provides for stronger lines of communication between various U.S. agencies, but it stops short of establishing a body to coordinate AML regulations, enforcement and intelligence across agencies.

Ideally, such an AML office could liaise and coordinate not only with industry representatives, but with state banking regulators, foreign regulatory and law enforcement agencies, as well as with international bodies like the Financial Action Task Force. This level of coordination could further fill the gaps in knowledge and action that bad actors routinely exploit.

For now, however, the Illicit Cash Act is poised to give the U.S. financial services industry many of the improvements it has been asking for, making it incumbent on the industry to prepare accordingly.

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