Academic journal article ABA Banking Journal

Operational Risk and AML

Academic journal article ABA Banking Journal

Operational Risk and AML

Article excerpt

The growth of derivatives, structured products, sophisticated technologies, and the ease with which banks and financial institutions operate across geographies are welcome transformations. However, such innovations have exposed these organizations to huge operational risks, an area of major concern today. According to the Basel committee (BCBS), "Operational Risk is the risk of direct or indirect loss resulting from inadequate, or failed internal processes, people and systems, or from external events." Organizations closely monitor various components of Operational Risk in view of their impact on reserve requirements and eventually on profitability. One of the key elements of operational risk is money laundering.

Money laundering

Money laundering can be defined as the practice of filtering "ill-gotten" or "dirty" money through a series of transactions in order to camouflage the illegal nature of these funds. Money laundering and terrorist-financing activities now face increased scrutiny from regulators around the world, more so in the United States. With the advent of the PATRIOT Act, the focus has moved towards proactively determining and detecting money laundering at an early stage. Failure to act in accordance with these regulations may lead to stiff penalties and bad publicity.

A two-step process can help in achieving an effective Anti-Money Laundering (AML) program. First, organizations need to fine-tune their processes and policies with best standards on the compliance front and second, supplement these efforts with the implementation of the right kind of technology.

Step 1: Focus on policies and processes.

A sound AML Program should comprise the following:

* Know Your Customer Policy (KYC)

* Creation of customer profiles and risk indices

* Know Your Business Program (KYB)

* Know Your Employees Program (KYE)

Further, the Bank Secrecy Act of the USA clearly mandates every financial institution to:

* Designate a compliance officer

* Develop internal AML policies and procedures

* Initiate ongoing employee training programs

* Develop an audit process to test the efficacy of the AML program. …

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