Putting AML Practices to Better Use

Suddenly, anti-money laundering compliance is the new black.

We saw that last week with the latest advisory bulletin from FinCEN, a six-page bulletin of advice on how financial institutions can promote a culture of compliance for AML. The Organization for Security and Cooperation in Europe published guidance in July about how AML compliance can be applied to fight human trafficking. Multiple voices have said AML’s know-your-customer principles can be applied to FATCA, the nettlesome new tax law that requires international banks to disclose more information about overseas customers to U.S. authorities. As sanctions continue their revival as a weapon in foreign policy fights (thank you, Vladimir Putin), AML principles will be important there, too.

Why all the attention? Well, for almost every corrupt act that transpires—bribery, human trafficking, cyber-theft, tax fraud, drug dealing, gun running; the list is endless—one result is someone holding a pile of money he should not have. For all our efforts to stamp out the corrupt acts themselves, however, they keep on happening. So it’s no surprise that governments want to pursue the money as well. Once you shut down the profit opportunity, the appeal of corruption diminishes radically.

After all, anti-money laundering compliance is fundamentally about knowing the party at the other end of your business transaction. That expertise can be useful in lots of situations. All companies struggle to know their third parties to comply with the Foreign Corrupt Practices Act. Pharmaceutical companies struggle to know whether doctors prescribe their medicines for off-label purposes. Retailers struggle to know whether their manufacturers use sweatshop labor. If AML compliance teaches you how to know your business partners, then more power to AML programs, because compliance officers need that skill all the time. Of course we should obsess over it.

The FinCEN guidance from last week makes that idea sound easy. The six principles outlined there are not really anything new, and can trace their roots back to similar directives in the COSO framework or the U.S. Sentencing Guidelines for effective compliance programs. The first principle, “Leadership should be engaged,” is the same as “tone at the top.” Another principle, “Information should be shared throughout the organization,” is a cousin to the Information and Communication component in the COSO framework. Risk assessments, evaluations of effectiveness, autonomy of the AML compliance staff—it’s all in there, and none of it is news.

Hey, compliance officers might think, that sounds familiar! We have good tone at the top! I have autonomy and answer directly to the board! Why don’t I take all those processes for good AML compliance and graft them onto my own anti-corruption program? Anything I can do to get sweatshops, bribery, smuggling, and human trafficking out of my supply chain is fine by me!

Well, yes and no. Let’s get to the hard part.

Effective AML compliance is all about scrutinizing financial transactions, but the underlying corrupt acts are more about moving goods (including people) from one place to another, or about establishing commercial relationships that wouldn’t otherwise exist. So if you want to use AML compliance to stamp out corruption, those two realms—the financial and the operational—need to cooperate and communicate well. Right now, too often, they don’t.

Take the OSCE’s review of AML and human trafficking as an example. On the very first page the OSCE warns: “Most of the effort to stem [human trafficking] has focused on the crime itself, and not on the proceeds derived from it … anti-trafficking and anti-money laundering communities work in isolation from each other.”

That is, the red flags that might cause alarms for anti-trafficking officers aren’t the same red flags for AML compliance officers, and vice-versa. Suspicious Transaction Reports can miss the relatively low-dollar amounts used in human trafficking, and some countries don’t have the right legal procedures to confiscate a trafficker’s ill-gotten gains. The anti-trafficking community is still nurturing databases of known traffickers, something anti-corruption or anti-terror communities already have for Politically Exposed Persons or terrorism suspects.

In other words, human trafficking is one example where AML compliance practices doesn’t quite align with how the corruption risks actually work. So if you want to use AML principles in your own compliance program—tracking suspicious financial transactions, feeding them to law enforcement, closing off accounts to questionable people—ask yourself: do the AML procedures I’m looking at fit the corruption risks my company has? Am I going to catch the right types of misconduct? How can I tailor them to my specific risks? (Help is out there. For human trafficking, for example, plenty of groups publish guidance on the subject so companies can fight it more effectively.)

Discussion about AML compliance and its relevance to anti-corruption programs is only going to get more common in the future. That’s a good thing. Choking off the money supply is a great way to quash corruption. Still, even if AML is going to be a regulatory priority, that does not mean it’s going to be easy.