Recent Developments in Anti-Money Laundering (AML)

This article highlights two significant updates from the last two weeks that are particularly relevant for AML practitioners. The first update pertains to the German regulator BaFin's new guidelines on the Anti-Money Laundering Act (GwG), while the second discusses concerns raised by the European Banking Authority (EBA) regarding the effectiveness of RegTech solutions in combating money laundering within European banks. 

BaFin's Updated Guidelines on the Anti-Money Laundering Act 

On November 29, 2024, the German Federal Financial Supervisory Authority released updated interpretation and application guidelines for the Anti-Money Laundering Act. This revision includes several significant changes and clarifications compared to the previous version. 

Key Changes: 

1. Clarification of Update Deadlines: BaFin has specified the deadlines for updating customer information to promote a risk-oriented approach. 
   

2. Internal Safeguard Measures: More detailed requirements have been established for the internal safeguards that obligated entities must implement to effectively prevent money laundering and terrorist financing. 
   

3. Expanded Risk Analysis Requirements: The requirements for creating and updating internal risk analyses have been broadened to ensure compliance with current legal standards. 
   

4. Incorporation of New Legal Changes: The guidelines have been adjusted to reflect changes to the AML Act that have been in effect since August 1, 2021, introduced by the Transparency Register and Financial Information Act. 

   
   

All these changes will require obliged entities to make adjustments to their policies and procedures, which will also affect providers of IT solutions to reflect such changes.  

For RAALS, one key aspect in the Guidelines is the strengthened effort for accessing additional sources of information, which could significantly contribute to determining risk factors. RAALS offers an OSINT module, which is a step in the direction of full compliance and improved risk management. 

Download full Guidelines (AuA AT) 

Concerns Regarding RegTech Failures in European Banks 

An article from MoneyLaundering.com sheds light on insights from the EBA about the failures of RegTech solutions in European banks. According to Carolin Gardner, head of AML at the EBA, a significant number of financial services companies have encountered issues due to an "unthinking" reliance on new technologies. This year, approximately half of the over 250 financial institutions found to have breached anti-money laundering rules in the EU faced scrutiny from national supervisors. 

Key Insights: 

• Ineffective Deployment of Technology: Financial institutions often struggle to effectively utilize the latest transaction-monitoring software and innovative tools, leading to persistent compliance gaps. 

• Premature Technology Implementation: Supervisors have noted that technology is frequently employed before it has been adequately tested, potentially weakening the institutions' systems and controls. 

• EuReCa Database: In January 2022, the EBA launched the EuReCa database to log "material weaknesses" found at financial institutions and the remedial measures taken. So far, 771 AML violations have been recorded, with Regtech-related issues at the core of many breaches. 

While RegTech products promise to enhance customer identification, detection of illicit transactions, and compliance processes, there is a growing concern that not all institutions are leveraging these technologies effectively. 

The findings are concerning, but Salviol believes there are solutions to address these issues. We discuss some of them below: 

1. Enhanced Testing Protocols: Develop rigorous testing frameworks that simulate real-world scenarios to ensure the effectiveness of AML solutions before full deployment. 
   

2. Effective business and data analysis: IT solution provider has to have good understanding of the processes and data before it can even start with designing and implementing AML solution.  
   

3. Collaborative Implementation Process: Establish a joint team of solution providers and bank personnel to oversee the implementation, ensuring proper integration with existing systems and workflows. The cooperation doesn’t stop with the release date.  
   

4. Data Quality Assurance: Implement robust data validation and cleansing processes to ensure the accuracy and reliability of input data, as this remains a fundamental challenge for IT solutions. 
   

5. Comprehensive Training Programs: Offer in-depth training sessions for bank staff on how to effectively use and interpret the outputs of AML solutions, fostering a collaborative learning environment. 
   

6. Regular Performance Reviews: Conduct periodic reviews/audits of the AML solution's performance, providing detailed reports and recommendations for improvement to maintain optimal effectiveness. 
   

7. Regulatory Compliance Updates: Maintain a dedicated team to monitor regulatory changes and technical standards to quickly update the solution to ensure ongoing compliance. Keeping track of all the changes is collaborative effort of the obliged entity and the solution provider.  
   

8. Adequate Dedicated Resources: Ensure sufficient resources are allocated to AML-related work, which requires meticulous attention to detail and time to analyze information and connect the dots, as overburdened teams can lead to issues like muted alerts, delayed case handling, and rule adjustments. 
   

9. Customizable Alerting Thresholds: Provide tools for banks to fine-tune alerting thresholds based on their risk tolerance and operational capacity, recognizing that the technology is a tool, and final decisions are made by people. 
   

10. Utilize the Tool's Capabilities: Encourage users to explore and leverage the full range of functionalities offered by AML solutions, as many institutions may not be taking advantage of the available capabilities.