Compliance teams in regulated firms face a constant balancing act of staying efficient while ensuring Anti-Money Laundering (AML) procedures are comprehensive enough to prevent financial crime and mitigate undue risk.
The pressure is constantly on to streamline processes, minimise errors, and avoid costly penalties. However, despite even the very best efforts, many firms are unknowingly making mistakes that could expose them to significant risks. Are you falling foul of one (or more!) of these common AML compliance mistakes?
1. Over-reliance on manual processes
For some compliance teams, there comes a sense of control that comes with manual processes. Many compliance teams believe that manual handling of Know Your Business (KYB) and Know Your Customer (KYC) checks offers a more thorough, hands-on approach. But this outdated approach is one of the biggest obstacles to efficiency and accuracy.
Manual data entry, document verification, and client screening are time-consuming and error-prone. Human error is inevitable, and when it occurs in high volumes, it becomes a compliance nightmare. One missed detail or data entry mistake could allow a suspicious customer to slip through the net, potentially opening the door to dirty money being funnelled through your firm and, ultimately, regulatory non-compliance.
Modern AML solutions are designed to streamline KYC/KYB checks with minimal human intervention. Automation tools can reduce errors, flag suspicious activity faster, and speed up onboarding, allowing your firm to seize opportunities rather than let them slip away.
2. Neglecting to update compliance policies frequently
AML regulations, particularly in regions like the UK, EU and US, change frequently. And as such, compliance policies and procedures must follow suit. Yet, this isn’t always the case.
Failing to update your policies in line with regulatory change can lead to gaps in your compliance framework, putting your firm at risk of costly penalties and bad PR. Applying outdated AML measures across different jurisdictions is a recipe for disaster, especially if you’re managing complex client structures with a cross-border presence. Outdated policies could mean you’re unknowingly violating current regulations, leaving your firm vulnerable to hefty fines and reputational damage.
To stay compliant, it’s crucial to regularly review and update your policies, making sure they reflect the latest legal requirements. A proactive approach will ensure your firm doesn’t get blindsided by new regulations or audit findings that reveal compliance gaps.
3. Not verifying beneficial ownership thoroughly
In the fight against money laundering, understanding the true ownership of a business entity is crucial. Yet many firms don’t dig deep enough when verifying ultimate beneficial ownership, often accepting surface-level information that fails to reveal hidden risks.
This lack of analysis can result in unknowingly doing business with criminals or sanctioned individuals, putting your firm at significant risk of regulatory fines and reputational damage. Ensuring that your AML processes include detailed checks on beneficial ownership is essential.
Invest in systems that trace ownership chains and flag complex or high-risk structures, helping you to uncover the real people behind each entity and safeguard against potential violations.
4. Ineffective management of client data
The sheer amount of data firms handle – particularly when managing complex client structures – can easily become overwhelming. If you’re not managing this data efficiently, critical information can slip through the cracks, increasing the likelihood of non-compliance.
Overloaded compliance teams may miss key patterns in client activity that are high risk or fail to identify suspicious activity in time, which not only hampers operational efficiency but also raises the risk of regulatory non-compliance.
By using advanced software that helps teams to collect, organise and interpret data for KYC and KYB onboarding checks, compliance teams can detect anomalies more quickly and streamline risk assessment, allowing for a more thorough and proactive compliance approach.
5. Failing to properly evaluate PEP risk
PEPs, or Politically Exposed Persons, pose a higher risk for money laundering activities, yet many firms either misidentify them or apply blanket rules that slow down the entire onboarding process.
If your team is too cautious, you may end up applying enhanced due diligence to individuals who don’t require it, creating unnecessary bottlenecks. On the flip side, failing to properly screen for PEPs can lead to missed risks, exposing your firm to regulatory penalties.
To manage this risk effectively, firms need reliable screening tools that accurately identify PEPs based on risk levels and undertake enhanced due diligence (EDD) where required. Taking a risk-based approach to PEPs ensures you’re focusing EDD on the right individuals without slowing down the entire process.
🔗 The importance of PEP screening and customer experience
6. Inconsistent training for compliance teams
Even the best compliance policies and tools are useless if your team doesn’t know how to use them effectively. Many firms make the mistake of offering sporadic or inconsistent training, leaving their compliance teams ill-equipped to handle the latest regulations or technologies. This creates a major compliance risk, as poorly trained employees are more likely to overlook critical details or misunderstand their obligations under AML rules and regulations.
🔗 Understanding the vital role of AML training in regulated firms
Regular, comprehensive training should be a priority for every compliance team. Not only should training cover regulatory updates, but it should also focus on specific risks relevant to your firm’s operations. A well-trained team is your best defence against non-compliance.
