A comparison of US and EU/UK requirements, processes and procedures regarding anti-money laundering (AML) audits. Also discusses international standards - the Financial Action Task Force (FATF) Recommendations - on AML audits. Contains practical tips on AML audit do's and don'ts, and how to avoid the more common traps and pitfalls when conducting, and following up, on an AML audit. In the US, an independent audit is required by the Bank Secrecy Act (BSA).
In comparing transatlantic notes, one of us, Ross Delston, an American and the other, Martin Owen, a British anti-money laundering expert, we have both been struck by the contrast between the focus on independent audit in the United States and other jurisdictions on the one hand and the European lack of emphasis on the other. We decided to explore further.
By ‘independent audit’ we mean review, by persons who are not part of the anti-money laundering / counter financing of terrorism (AML/CFT) compliance team, of the firm’s AML/CFT policies and procedures, for their appropriateness, compliance and effectiveness. (As with other core features of an AML program, independent audit is relevant not just to banks but to other kinds of financial institution; and now indeed to the designated non-financial businesses and professions (such as solicitors, accountants, estate agents) required to have AML systems and controls.) We are not referring to the financial audit done by the firm’s external chartered or certified public accountants to meet securities or company law requirements. The independent audit for AML may be done by external accountants, but also by independent consultants, solicitors or the firm’s own internal audit department.
Independent AML audit seems to be an AML nice-to-have in the UK and the EU, but a big deal in the rest of the world.
It’s not clear quite why this should be. If we look at the Financial Action Task Force (FATF) Recommendations, Recommendation 15 states that financial institutions’ anti-money laundering programs should include “an audit function to test the system”. And the FATF AML/CFT Methodology for Assessing Compliance with the FATF 40+9 Recommendations says that “financial institutions should be required to maintain an adequately resourced and independent audit function to test compliance (including sample testing) with [these] procedures, policies and controls.”
In the United States, independent audit is one of the four pillars of an AML program (along with: a system of compliance controls, a designated AML compliance officer and training). Implementation of the independent audit requirement is also one of the first elements that US financial regulators look at when conducting an on-site examination of a firm’s compliance with AML rules and the manual that US bank examiners use (and, by default, other financial regulators as well) sets forth in excruciating detail the many aspects of the firm’s AML program that must be tested. In Australia, the latest version (February 2007) of the proposed rules under their new AML regime stipulates that the firm’s risk-based approach assessment and its risk awareness and employee due diligence programs should be subject to “regular independent review”: to assess their effectiveness, whether they comply with the Rules, whether they have been effectively implemented and whether the entity complies with the programs. The results of the review, and any report, must be provided to senior management. Singapore’s new AML regime requires banks to “maintain an audit function that is adequately resourced and independent, and which will be able to regularly assess the effectiveness of the bank’s internal policies, procedures and controls, and its compliance with regulatory requirements.”
The Hong Kong AML Guidelines say that “internal audit also has an important part to play in independently evaluating on a periodic basis an institution’s policies and procedures on money laundering.” This is reflected in the self-assessment regime used in Hong Kong. Under the Canadian regime, banks are required to establish a system of independent procedures testing to be conducted by the internal audit department, compliance department, or by an outside party. Deficiencies are to be reported to senior management and the board of directors with a summary of steps taken or to be taken to address any deficiencies.
EU and UK standards. This all makes the EU generally and the UK specifically seem surprisingly reticent on the topic. Independent audit does not figure explicitly in the EU Third Directive, which simply requires firms to have appropriate policies and procedures for “internal control”. We can perhaps charitably assume that “appropriate” must include provision for independent review, but the terms of the Article do not suggest that review, let alone independent review, are AML priorities. The position in the UK is interesting.