Enforcement: Ten Secrets To Building A World-class Financial Crime Function

Commonwealth Bank has been fined A$700 million for moving A$8.9 billion through its flawed smart ATM channel in breach of AML/CTF laws.

Westpac is in the middle of a case that will exceed those figures, with A$11 billion in disputed transactions and 23 million alleged breaches.

National Australia Bank (NAB) has been buried in an uplift program for more than 18 months, flushed out its management team and is bracing investors for potentially the biggest fine in Australian corporate history.

Amid these challenges the chief executives of all three banks have stepped down while the complicated "uplift" work takes place.

Australia and New Zealand Banking Group (ANZ), on the other hand, released a statement last week saying it "is not aware of any impending litigation from [the Australian Transaction Reports and Analysis Centre] AUSTRAC". The bank has been fielding calls from skittish institutional investors following Westpac's anti-money laundering litigation, some of which may potentially have had links with child exploitation.

ANZ is benefiting from a decade-long commitment to its financial crime compliance framework, which began a decade earlier when it had an A$6.95 million run-in with the fearsome U.S. Office of Foreign Assets Control (OFAC). As Australian banks stare down the barrel of A$1 billion-plus AML/CTF fines, ANZ's penalty seems like a bargain with the benefit of 2020 hindsight.

In view of the challenges facing Australia's banks, Thomson Reuters Regulatory Intelligence has compiled the "top ten" management lessons that can be drawn from ANZ's world-class approach to managing financial crime risks. The checklist applies equally well to banks from around the world that find themselves operating in an environment of heightened financial crime enforcement risk.

1. Hire effective people and hold onto them. Let them understand the business. Get recruitment and incentives right.

Guy Boyd, ANZ's head of group compliance, has been with the bank since 2006 in a range of financial crime and sanctions-related roles. His 13-year history with the bank reflects a strong corporate culture. This stability of tenure has given him time to forge strong relationships with key decision makers and to give them confidence that he understands the business's key risks comprehensively.

Vin Danwar, a risk management expert with the Country Fire Authority in Victoria, said choosing the right people and then investing in their success was crucial.

"Compliance teams need strategic big-picture thinkers, not merely textbook tick-box scholars. Please start hiring people [with] diversified experience who can think broadly and strategically with potentially global experience who have seen other parts of the world.

"Most the risk and compliance teams have little to zero experience in designing and implementing controls that are practical and able to be monitored. Mere checklists and risk summaries will not make any organisation safe," Danwar said.

2. Resource the compliance team properly. Give managers the talent they need to protect the organisation, customers and the board. Respect their expertise and listen to their advice.

When respect and trust flourish in an organisation, problems are less likely to fester. Middle managers will have the confidence to escalate important issues but not bury their line managers in defensive "incident reports".

"All of these points relate to a good culture that is set by the board and executive. Treating your risk teams as assets, rather than a prescribed must-have drain on resources, is a prerequisite," said Stuart Norbury, principal at Lawson Delaney.

Tapas Shyam, assistant vice-president at tech company Intellect Design Arena in Sydney, said managers should treat the AML/CTF team like a revenue centre rather than a cost centre. Adequate budgets for mission-critical technology spending to manage operational and regulatory risks were essential, he said.

"Most banks wait for the regulator to give them a slap on the wrist or a punch to the face before allocating money to initiatives aimed at beefing up compliance processes," Shyam said. "This is a classic recipe for disaster where banks keep chasing their tail only to get slapped by another billion-dollar fine on the next issue as soon as they wrap up remediation on the first."

3. Engage with regulators at every opportunity.

Government agencies are often regarded as monolithic entities, but they are ultimately made up of individuals making decisions. Building respect, trust and open lines of communication is the best way to ensure that "spot fires" are managed before they turn into existential threats.

One way for firms to foster a strong relationship is to support industry outreach events organised by regulators by sending along senior representatives. This is something ANZ has always done; not to engineer regulatory relations, but because it has an AML team that deeply respects the regulator and wants to learn. It shows.

Skye Bowie, a lawyer and compliance expert at QSuper Group, said this was a simple but symbolic gesture.

"I agree with the engagement with regulators. It sends a positive message that your organisation is engaged with the regulator and allows an organisation to anticipate future directions and priorities," Bowie said.

"I'm aware that some don't attend regulator events to keep a low profile."

4. Go above and beyond. AML and CTF is a passion, not just a job.

Financial crime compliance needs to be treated as a critical company asset, and leaders should encourage their teams to innovate.

Bhawna Bhardwaj, associate director of AML at National Australia Bank (NAB), said this passion for the work is crucial in effective teams. Realistically, however, not all team members can be inspired all the time. A good proxy for this is to select and support people who want to keep on learning.

"You can't have everyone carrying the same passion. We need all kinds of people to build a great team. What I would like to add is: be a person who wants to learn and evolve," Bhardwaj said.

5. Participate in public-private partnerships in a meaningful way, not just to build relations with regulators.

Public-private partnerships to fight financial crime, such as the Fintel Alliance, are the future of effective AML, and help to build a genuine partnership with the financial intelligence unit.

Luke Raven, compliance manager at Airwallex in Sydney, said this was another area where ANZ had shone.

"ANZ's leadership around engaging with AUSTRAC and being a key part of the Fintel Alliance, which particularly focused around tackling the emotive child exploitation material typology, is inspiring. It's great to have [one of the] 'big four' leading the way in these grim times," he said.

6. Engage the financial crime compliance team in commercial decisions at an early stage.

Matt Maddocks, senior consultant at ORC Professional Services in Singapore, said it was evident during his five years with ANZ in Asia that a financial crime compliance ethos was embedded across the bank. He said this proactive approach meant the business units actually wanted to work with the financial crime team.

"Every single person I liaised with in a junior or senior capacity at FinCrime ANZ took their role very seriously. So kudos to them," he said.

7. Be bold when it is warranted, cautious when required. A great MLRO knows the difference.

Despite the "move fast and break laws" mantra of the fintech era, it is not always essential to be first to market. When lines of trust and communication have been established, it is much easier for senior managers to rely on their money laundering reporting officer's (MLRO) advice.

Dr Elena Stephens, a legal expert with Axiom in Chicago, said banks should not be railroaded into becoming innovators at the expense of traditional qualities such as stability and prudent risk management.

"I would add: stop stretching your reach. Downsize if the service is not profitable. We don't need innovation at all costs. The banks have always been conservative in their approach to business and should continue to be that way," Stephens said.

8. Treat the financial crime compliance team as custodians of the bank's most valuable assets: trust and brand.

Conservatism is not always a bad thing. Agility and innovation are vital in the disruptive age of technology, but firms should not jettison the counterbalancing qualities of knowing their strengths and playing to them. When a trusted financial crime risk expert urges caution, it makes a lot of sense to listen.

Dean Wyatt, head of financial crime at Indue in Brisbane, said ANZ's financial crime compliance function exemplified these qualities.

"Whenever I've spoken to senior folks at ANZ regarding financial crime they seem switched on — especially in the governance component. They may not be the best innovators of the tech world, but they aren't leaving chasms of International Funds Transfer Instructions (IFTIs) unreported in their wake," he said.

ANZ's decision to delay the launch of real-time payments on the New Payments Platform (NPP), despite falling behind its competitors, was a good case in point, he said.

"I remember clearly as the analytics teams all met in advance to discuss the NPP. It was very clear they were concerned about NPP and sanctions," Wyatt said.

9. Foster a team of AML entrepreneurs.

Financial crime compliance is not law enforcement. It is ultimately a business support role. Strong AML teams lead to corporations with a conscience, but they also have a deeply entrepreneurial spirit. This involves thinking differently, being prepared to support commercial teams and avoiding any semblance of the old "business prevention department" stigma.

There are times to say, "We simply can't do this." But having a commercial mindset and being a good communicator means this message stands a greater chance of being well received, and respected.

Anti-money laundering teams need to support their business' revenue engines. Only by doing this will they win the front-line's trust.

Sam Scerri, senior manager at Deloitte, said this positive mindset had been evident when he worked at ANZ.

"As a proud ex ANZ banker who has been involved in some fairly 'interesting' payment events, one thing was always clear. The MLRO system and support provided to bankers by the financial crime team has always been a first-class partnership," Scerri said.

10. Trust ... but verify

Senior managers and boards need to listen to their risk teams but be willing to challenge and audit what they say. They must create an environment where people feel able to challenge ideas respectfully and without causing offence. A culture of healthy scepticism, with the opportunity to raise questions both down and up the management chain, could perhaps have insulated several major banks from regulatory disaster.

As the Australian Prudential Regulation Authority report into risk culture at the Commonwealth Bank pointed out, strengths can easily become weaknesses if they are not tempered. Likewise, even a culture of positive reinforcement can prove fatal if people are not free to criticise, or to tell the proverbial emperor he is somewhat under-dressed.

Mark Linter, an independent executive risk adviser in Melbourne, said ANZ did a good job of striking this balance.

"Certainly, smart, strong individuals work there. Risk and compliance management is a non-stop and continuous process, not a task. Reassurance on no exposures should be readily available but it's never a bad thing to check," he said.

Links to Regulatory Intelligence commentary on the recent Australian AML/CTF cases:














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Thomson Reuters Regulatory Intelligence and Compliance Learning

Thomson Reuters Regulatory Intelligence and Compliance Learning on:

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