This is the third and final article of a three-part series that provides guidance on the practice of incorporating money laundering risk into risk management. This article will focus on implementing money laundering risk management duties for senior executives and final thoughts on the importance of incorporating money laundering risk into risk management.
Directors and Supervisors’ Performance of their Duties
The guidelines, laws and regulations mentioned in the previous articles all place the anti-money laundering (AML) work of directors and supervisors in a prominent position. When money laundering risk is included in the overall risk management of financial institutions (FIs), the directors and supervisors must consider the specific management actions depending on their management level.
At the board of directors’ level
An FI’s board of directors bear the ultimate responsibility for the effectiveness of money laundering risk management. They are the decision-making body for the AML work, and their work should highlight their leadership.
First, examine and approve the money laundering risk management strategy that is consistent with the strategic objectives of the institution and that is applicable to the whole institution. The purpose of a money laundering risk management culture is to make it clear (in writing), that the financial products or services provided by the institution shall not be used as channels nor tools for money laundering. Through a strong reward and punishment system, the implementation of a money laundering risk management culture and money laundering risk management strategy can be effectively promoted across the organization rather than merely having words that are written in reports.
Second, ensure that the effective money laundering risk management policies and procedures of the institution are fully implemented across the institution by examining and approving the performance, monitoring and evaluation report system of senior management on money laundering risk. And, to the greatest extent possible, ensure that the institutions engaged in the business of money laundering residual risk control are within the acceptable range.
Third, regularly review the money laundering risk management reports submitted by senior management, including but not limited to changes and trends in AML laws and regulations; major money laundering risk events and solutions; problems found during the AML inspection and rectification progress; changes of important money laundering risk indicators; implementation of the annual AML work plan; implementation of key AML work projects and so on.
Fourth, regularly review the audit results of internal or external audit departments on the money laundering risk management system of the institution and urge senior management to address the departments and personnel who violate the rules.
In particular, the board of directors should review the self-assessment report on the risk of money laundering and terrorist financing of financial institutions. Ensure that senior management takes the necessary measures to identify, assess, monitor and control/mitigate money laundering risks effectively. This should be done in order to fully understand the distribution and management of high-risk clients, high-risk financial products or businesses in money laundering; the matching of compliance resources and the money laundering risk faced by the institution; and the overall situation of the institution's money laundering risk management and the effectiveness of senior management in managing money laundering risk. The board of directors should not superficially seek to understand the money laundering risk of the institution only through quantitative indicators. Qualitative analysis is also very important, even more important than data.
The board of directors should also understand and support senior management’s suggestions on managing money laundering risk compliance resources or on giving up some customers or businesses to avoid money laundering risk.
In this process, the members of the board of directors should be truly knowledgeable and perform their duties conscientiously. They should not review, make decisions and examine on a pro forma basis.
At the level of the board of supervisors
An FI’s board of supervisors is responsible for supervising the money laundering risk management, supervising the performance of the board of directors and senior management in money laundering risk management, and supervising the rectification. They also propose suggestions and opinions on money laundering risk management.
Some FIs try to assess the AML performance of their senior management through the human resources department under the supervision of the board of supervisors. However, without strong supervision and implementation by the board of supervisors, the performance assessment of the senior management by the human resources department will become illusory.
The board of supervisors’ performance records should show their supervisory opinions on the AML work by the board of directors and senior management. In particular, it is necessary to make clear in writing whether the performance of the board of directors and senior management can promote, according to the established road map, a complete management system, including the FI's money laundering risk management strategy, money laundering risk management policies and procedures. In addition, the board of supervisors should supervise when the board of directors and senior management address the departments and persons responsible for money laundering risk management.
At the senior management level
An FI’s senior management is responsible for implementing the money laundering risk management strategy, implementing the overall policy and system approved by the board of directors, and undertaking the implementation of money laundering risk management. Thus, senior management plays a core role in money laundering risk management that directly determines the quality of AML work, the size of money laundering exposures and the effectiveness of money laundering risk management.
Senior management should know and be in control of the money laundering risk management status of the institution and know the FI’s compliance resources in relation to their money laundering risk. If the money laundering risk does not match with the compliance resources and there is risk exposure, senior management should report this to the board of directors in a timely fashion and solve the money laundering risk.
Final Thoughts on Bringing Money Laundering Risk Into the Comprehensive Risk Management of FIs
AML administrative punishment is the motivation for FIs to do a good job in AML
Compliance risk―the loss caused by AML administrative punishment imposed on FIs―is one of the main motivations for FIs to carry out AML work. Although AML work is directly manifested in the form of a cost center, it also creates invisible benefits for FIs and indirectly reduces the loss caused by reputational risk and legal risk. AML work also creates more social benefits.
In order to prevent the risk of money laundering, FIs need to invest in compliance resources, establish and improve the financial crime prevention and control system, and build the “steel great wall” of green finance. For FIs, this is the equivalent to installing environmental protection and purification equipment; FIs must invest in AML work to see the blue sky and breathe fresh air. Also, AML supervision should be strengthened. External regulatory pressure will be the strongest motivation to promote this work.
Social responsibility is the natural mission of FIs in doing a good job in AML
FIs are not only profit-making institutions, they should also bear social responsibility. They must not attach importance to performance while neglecting responsibility and they must not attach importance to profit while neglecting compliance. They may not make money and must dare to accept all customers and dare to embrace all customers. They must not leave opportunities for criminals to bring harm to the society, which would lead to the loss of people's lives and property. Even more importantly, FIs and practitioners may not collude with criminals and become accomplices.
FIs should take more initiative to bear social responsibility. They must not profit at the expense of people's wellbeing and must firmly hold the bottom line that the financial products or services provided by the institution will never become channels and tools for money laundering, even if they might pay higher costs for doing this work well.
The performance of directors and supervisors is the decisive factor for FIs to do a good job in AML
The concept of risk-based AML requires FIs to reasonably allocate compliance resources invested in different fields according to the level of money laundering risks brought by different fields. Only the directors and supervisors can decide how to allocate various resources of an FI. To this end, the regulatory authorities should focus on supervising the performance of the AML duties of the directors and supervisors of FIs, and the superior departments of FIs should assess the performance of the AML duties of the directors and supervisors as well as regulate the behaviors of the directors and supervisors who do not perform their duties properly. This has a “multiplier” effect on promoting the AML work.
The lifeline of FIs’ AML work is embedded in business operations
The money laundering risk faced by FIs matches with the customer groups and the financial products or services that they provide. AML work cannot exist independently from the specific business of FIs. It cannot be merely self-entertainment and it cannot be artificially separated from business operations.
Money laundering risk management measures should be embedded in the business operations of FIs, and AML work should be carried out at the same time. This is also the fundamental reason why the business department is positioned as the first line of defense to prevent money laundering risk. The AML compliance department or personnel should deeply explore how to help FIs operate steadily and prevent credit risk, operational risk and liquidity risk through money laundering risk management measures, so that the AML work will have more vitality.
Liu Lihong, Business Management Department of the People's Bank of China
This article does not interpret the relevant laws and regulations but tries to practice the relevant laws and regulations from the perspective of personal understanding. These understandings only represent personal views and have nothing to do with any organization.