For every business, it is essential to comply with Anti-Money Laundering (AML) regulations to prevent criminal activities such as terrorism financing, corruption, and drug trafficking. AML compliance and Know Your Customer (KYC) regulations safeguard your business and reputation. Failure to comply with these regulations leads to severe consequences such as hefty fines, reputational damage, and sometimes imprisonment.
In a global compliance survey conducted by Comply Advantage in 2023, 800 senior compliance decision-makers and C-suite executives from Europe, North America, and Asia Pacific were asked whether they consider the risk of anti-money laundering (AML) fines and violations in their business decisions and compliance investment. The survey found that there has been a significant increase in the number of firms admitting to incurring AML fines and making violations "all the time" for the third year in a row. The percentage of firms admitting to this behavior has risen from 61% in 2020 to 79% in 2022.
The complexity of the reasons for this trend raises an important question:
Do companies no longer fear the possibility of being fined?
Let’s dive into this topic and learn about some big AML fines of 2022 and inspect those violations that led to severe financial consequences.
The biggest punishments in 2022: Business Sectors
In 2022, many companies from UK and US had repeated violations of not preventing money laundering and other financial crimes. According to Financial Times Report, fines increased by more than 50 % worldwide this past year.
Even though AML failures usually result in fines years later, the most significant AML penalties in 2022 were imposed on the trading and brokerage sector with over $6 billion in fines, followed by banking with over $2 billion, gambling with over $71.4 million, cryptocurrency with $30 million, and asset management with over $2 million. Let’s take a closer look at each of these.
#5: Asset management
Firms in Europe faced penalties from regional regulators in 2022 for their failure to monitor clients and report suspicious activity to the Financial Intelligence Unit (FIU). The Netherlands Authority for the Financial Markets (AFM) found that one such firm had wrongly categorized some of its clients based on risk. As a result, out of over 250,000 accounts, only two clients were designated as "provisionally unacceptable."
The New York State Department of Financial Services (NYDFS) imposed a $30 million financial penalty in 2022 for significant violations related to anti-money laundering (AML), cybersecurity, and consumer protection in the crypto industry. This was the first enforcement action taken by NYDFS in the crypto sector. The AML's failings included having an insufficiently staffed compliance program, not transitioning swiftly from a manual transaction monitoring system, and not allocating enough resources to address risks specific to the firm. Additionally, the cybersecurity program had critical failures that did not fully address operational risks and did not comply comprehensively with several provisions of the Department’s Cybersecurity and Virtual Currency Regulations.
In 2022, the gambling industry faced a surge of AML penalties, with AUSTRAC imposing a hefty fine on an entertainment company that enabled its clients to transfer funds through opaque payment channels that posed a high risk of money laundering and terrorist financing. The organization also failed to trace the source of funds (SOF) passing through these channels or identify whether the SOF was illicit, according to the regulator. In 2022, the UK Gambling Commission levied its largest-ever fine due to money laundering and social responsibility shortcomings.
Passing customers' deposits up to £40,000 before carrying any SOF checks or not even establishing specific documents list required for SOF verifications, taking verbal reassurances from clients regarding their income, and entrusting open-source information to check SOF - there are only some of the AML compliance failures here.
Large-scaled global fines for violating anti-money laundering regulations with civil monetary penalties exceeded $2 billion this year. One of the largest penalties was put on the European Bank for neglecting the proper monitoring of high-risk clients and not completing adequate enhanced due diligence (EDD) measures. Moreover, this bank has provided deceitful information to other international financial organizations, claiming their AML policy is effective.
FCA also fines several other banks for not conducting satisfactory checks for money laundering and terrorism financing, particularly regarding deposits from customers in high-risk countries. In one case, it was discovered that a bank failed to perform the necessary check for politically exposed persons (PEPs) and had deficient compliance personnel to fulfill the required tasks.
Another bank was imposed with significant penalties by the Financial Crimes Enforcement Network (FinCEN), including a civil monetary fine of $140 million. The punishment took place due to the deliberate failure to establish and sustain an AML program that fulfilled the minimum criteria of the Bank Secrecy Act (BSA). More to the story, it was released that this bank neglected to report numerous suspicious transactions in a timely and accurate manner.
Trading and Brokerage Sector
In 2022, The Financial Conduct Authority (FCA) and the Securities Exchange Commission (SEC) forced multiple trading and brokerage companies to pay fines and restitution payments worth more than $6 billion. Regulators have uncovered the scam scheme that involved hiding the high risks of complex options trading strategy.
The SEC found out that a number of senior employees had deceived institutional investors into believing that their finances were safeguarded against sudden market downturns by hedges integrated into the fund's investment portfolio.
Senior officials purchased cheaper and less effective hedges in secret when the cost of hedges rose. These hedges provided a lower level of protection, and investors were given falsified documents, which concealed the risk of the fund's investments.
The COVID-19 pandemic showed up the real risks of the product that emerged in the investors' funds loss of more than $5 billion.
A firm was fined more than £2 million for not having effective procedures, systems, and controls in place to reduce the likelihood of being exploited for fraudulent trading. Additionally, the financial regulator detected a cyclical arrangement of alleged transactions that seemed to have been executed to prevent tax refunds in various European nations.
The Largest Penalties for AML Violations
Over $8 billion in fines were levied against financial institutions in 2022 for AML-related infractions, bringing the total amount of AML fines since the global financial crisis of 2007-2008 to an estimated $56.1 billion.
The violations that received the biggest penalties typically involved repeated infractions and a failure to implement AML measures that were tailored to the firm's risk profile. These included deficient customer due diligence processes, failure to monitor politically exposed persons (PEP) and high-risk entities, inadequately staffed compliance programs, and insufficient checks on sources of funds (SOF) and sources of wealth (SOW).
What to Expect in 2023
As per our worldwide compliance analysis, almost half of the companies (48%) believe that the area of their compliance function that could be at risk during an audit is their understanding of regulations. In order to ensure smooth and hassle-free audits in the future, compliance personnel must be informed about the following Anti-Money Laundering (AML) regulations that will be implemented in 2023: The Financial Action Task Force (FATF) will continue to prioritize the objectives set by the new Singapore presidency in July 2022, which will include forthcoming regulations related to enhancing asset recovery, preventing illegal finances linked to cybercrime, and enhancing the efficiency of global AML measures.
In order to tackle illicit financial flows, the US will focus on three main themes. These include enhancing regulations and laws, modernizing regulatory and enforcement frameworks, particularly in the crypto industry, and targeting wrongdoers who use the US financial system to launder criminal proceeds.
Similarly, the European Union will update its AML/CFT regulations as the AML package goes through the EU governance process. In 2023, the European Union is expected to introduce additional measures to combat environmental crime, address de-risking, and take action against the increasing number of cross-border money laundering cases.
The Role of Technology in AML Compliance
Technology plays a significant role in AML compliance. Financial institutions can leverage technology to improve their AML programs and prevent criminal activities. Some of the ways that technology can be used in AML compliance include:
- Implementing automated AML monitoring systems that can identify suspicious transactions in real time.
- Using machine learning and artificial intelligence to analyze vast amounts of data and identify potential AML risks.
- Implementing blockchain technology to increase transparency and traceability in financial transactions.
- Using biometric identification systems to improve KYC procedures.
Steps to avoid AML violations and penalties
To avoid the possibility of facing AML penalties in 2023, companies need to take certain measures. These may include:
- Setting up a transaction monitoring system that can screen transactions in real time and can be tailored according to different risk levels for different business processes.
- Another step could be to improve customer screening protocols by automating the process and going beyond regulatory requirements. Additionally, it is important to have access to comprehensive watchlists and sanctions screening software for real-time global coverage.
- Lastly, providing thorough training to compliance personnel on AML requirements, including reporting obligations, sanctions/asset-freezing measures, and conducting adequate SOF and SOW checks can also help mitigate the risk of AML fines.
AML compliance and KYC regulations are critical in safeguarding your business and reputation. Failure to comply with these regulations leads to severe consequences such as hefty fines, reputational damage, and sometimes imprisonment. Financial institutions must implement effective AML controls and procedures, regularly review and update their AML programs, and ensure that their employees are adequately trained on AML compliance. Technology plays a significant role in AML compliance, and institutions can seek the services of AML compliance providers for solutions to help them comply with AML regulations and prevent criminal activities.
KYCAID taking into account all the problematic points of AML compliance and business security issues has created a complete technological and legal toolkit that simplifies AML compliance for businesses. Based on propriety technology and backed up by compliance managers 24/7 KYCAID is a perfect fit for your business!