In the U.S., the Treasury Department and Securities Exchange Commission (SEC) monitors financial businesses for AML violations, as dictated by the Patriot Act of 2002. Financial entities are required to establish the role of compliance officer and institute a continuous training program that makes all employees aware of the threat posed by money laundering. The compliance officer’s responsibilities include the careful monitoring of government lists for individuals and nations identified as having taken part in money laundering activities, and informing enforcement authorities of suspicious transactions.

In such an event, compliance regulations call for the refusal of a new account to the suspected perpetrator and, if warranted, a report is to be filed with the appropriate agency alerting the government. An integral component of the AML monitoring regime is its requirement that all financial institutions write and implement a training program that prepares employees to identify and respond to indications of illicit activity. Such training must be carried out on an ongoing basis and includes the adoption of best practices in the prevention of money laundering.

In preparing an awareness action plan, the firm is called on to identify the threat level it faces based on geography, clientele and other financial entities with which it does business. This amounts to understanding the environment in which a firm operates. In particular, financial entities must maintain a heightened awareness of the activity of non-certified institutions based in foreign countries. Other high-risk criteria includes an unusually high volume of a particular trading activity and the geographic origins of other financial companies with which the firm does business. In summation, these requirements are intended to empower financial firms to take an active role in helping the Treasury Department, SEC and other government agencies protect the nation against money laundering and financial terrorism.

The risks incurred by financial institutions that do not follow compliance requirements can be severe. The most notable example from recent history is the case involving Riggs Bank, which was fined $25 million by the U.S. Federal Reserve. The bank failed to follow requirements of the 2002 Patriot Act, did not put in place a compliance plan or training program and was found to have done business with foreign countries and financial interests that had been found guilty of violating federal law. Riggs had not reported suspicious financial activity involving transactions with Chilean and Saudi Arabian interests. In addition to the fine, the U.S. government placed the bank under close management, which is one of the most draconian sanctions allowed by law.

The long-term effect on Riggs was catastrophic. The financial burden imposed by the $25 million fine was only part of the worst-case scenario that unfolded. A consequent loss of confidence among Riggs’ existing, legitimate customers translated into lost business and a gradual erosion of resources. In the end, the bank was forced out of business, with its remaining assets eventually being purchased by PNC Bank. Lesser penalties may be levied, based on the nature of the infractions involved. One such measure includes the publication of sanctions incurred, which is designed to discourage other institutions from following a similar path. Of course, the organization in question may face damage to its reputation in the event of such publicity.

Controls and systems are essential if a financial institution is to maintain an acceptable level of compliance with AML monitoring, prevention and reporting requirements. At best, these controls serve to manage risk levels by ensuring AML legal requirements are met. The best application of this concept is to provide for internal controls that are customized to the functions and risk levels faced by individual departments within a financial entity. This involves an accurate and honest assessment of the types of financial activity with which a particular department is involved.

Communication is key. There must be an unimpeded channel of communication between a department and the institution’s AML compliance officer. This is the means by which suspicious activity will be reported to the individual who must assess the seriousness of the potential threat. The stakes are extremely high, not only for the future of the institution in question but for national security. Money laundering is an important issue, not only for financial monitoring and enforcement agencies, but for Homeland Security and the departments charged with safeguarding American citizens. Accountability among an institution’s departments depends also on the extent to which the employees in each area are familiar with their responsibilities. This is where frequent training and continuous awareness-building programs are important to protecting the institution’s interests. The desired outcome of training is the consistent and accurate filing of reports, and careful monitoring of financial transactions at all levels.