AML guidance for the banking sector | Napier AI

With vast volumes of transactions flowing across borders daily, banks sit at the frontline of anti-money laundering (AML) efforts. Yet, many still struggle with implementing AML policies that are both compliant and effective.

This article offers guidance tailored for the banking sector, breaking down what AML means, what banking institutions must do to stay compliant, and how to avoid costly missteps, while building stronger, more risk-aware operations.

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Anti-Money Laundering (AML) refers to the laws, regulations and procedures designed to detect and prevent criminals from disguising illegally obtained funds as legitimate income.

The Financial Action Task Force (FATF) defines AML as an effort to ensure that financial systems are not abused for "money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction".  

The importance of AML lies in its preventive nature. Criminals rely on banks to place, layer and integrate illicit funds. Without strong AML controls, banks can unknowingly become vehicles for laundering, harming their reputation and exposing themselves to legal consequences.

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Banks play a pivotal role in the global AML framework. Their services whether retail, corporate, investment or correspondent banking can be exploited at every stage of the money laundering process.

For example:

• In retail banking, high cash volumes and personal accounts can be used to introduce illicit funds.

• Private banking and wealth management services are vulnerable due to confidentiality and complex ownership structures.

• Correspondent banking poses challenges due to limited information about the originator or beneficiary, particularly when dealing with foreign banks in higher-risk jurisdictions.

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Banks are legally required to comply with a range of AML obligations. These are driven both by national regulators and FATF’s international standards.

Here are the key AML requirements for the banking sector:

• Conduct risk assessments
  Banks must identify and assess the money laundering and terrorist financing (ML/TF) risks they face. This assessment forms the foundation of a risk-based AML programme.

• Implement Customer Due Diligence (CDD)
  Institutions must know their customers. This includes identifying the customer and beneficial owner, verifying their identity, and understanding the purpose of the relationship.

• Monitor transactions continuously
  Banks must monitor customer activity to detect suspicious patterns, especially in higher-risk cases. Monitoring should be aligned to the customer’s risk profile and reviewed regularly.

• Appoint a compliance officer
  A senior compliance officer should oversee the AML programme. FATF states that this individual must have the “authority, seniority, resources and expertise” to carry out their duties effectively.

• Report suspicious activity
  Any transaction suspected to involve criminal funds or terrorist financing must be reported promptly to the national Financial Intelligence Unit (FIU).

• Maintain records
  Banks should retain records of CDD, transaction histories, and internal controls for the minimum period required by law.

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When banks fail to comply with AML requirements, the consequences can be significant; legally, financially and reputationally.

Common failures include:

• Inadequate risk assessments
  Not understanding or properly documenting how AML risk applies across products, customers or jurisdictions.

• Weak CDD processes
  Failing to verify identities or identify beneficial owners can expose banks to criminal misuse.

• Lack of ongoing monitoring
  Without proper monitoring, banks risk missing red flags in customer behaviour or transactional activity.

• Poor internal governance
  When senior management does not engage with AML strategy, the organisation is less able to detect and manage risks.

• Insufficient training
  Employees who do not understand AML responsibilities are more likely to overlook or mishandle suspicious activity.

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To meet regulatory expectations and protect against abuse, banks should implement a strong AML strategy. Here are the key steps:

• Start with a comprehensive risk assessment
  Evaluate your exposure across customers, products, services and jurisdictions.

• Design risk-based CDD measures
  Use enhanced due diligence for higher-risk clients, and simplified measures only when appropriate and justified.

• Appoint a nominated compliance officer
  Ensure there is a senior individual with clear responsibility for the AML framework and authority to escalate issues.

• Deploy transaction monitoring systems
  Use tools that can detect anomalies and allow flexible rules depending on risk profiles.

• Create a reporting and escalation pathway
  Suspicious activity must be identified and reported to the FIU swiftly and consistently.

• Regularly audit and review
  Assess and update your policies and staff training to reflect emerging risks and changes in business operations.

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Photo by Jonas Degener on Unsplash