AML Audit Hodder Law
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AML Audit: 61 Point Checklist for Regulatory Compliance

Prep your next AML audit with ease! This guide unravels the pitfalls and ‘must-haves’ of AML audits, explaining their types, purposes, and how to ensure a smooth and successful review. Master AML compliance and safeguard your financial institution.

Introduction

Yes we know, AML (anti money laundering) regulations are not very effective. Nonetheless these rules will be enforced and there is no way around them.

If your company or financial service needs to stay compliant with latest AML regulations an AML Audit is a key element of your legal and compliance strategy.

Combatting money laundering (ML) and terrorist financing (TF) is paramount to please financial watchdogs and regulatory bodies. Financial institutions (FIs) are obliged to participate in this fight against terrorism financing and money laundering, and a robust Anti-Money Laundering (AML) program is essential.

An AML audit is a vital tool for FIs to assess the effectiveness of their AML compliance efforts and identify areas for improvement.

What is an AML Audit?

An AML audit is a systematic and independent review of an FI’s AML compliance program. It evaluates the design, implementation, and effectiveness of controls in place to prevent, detect, and report suspicious activity. The audit ensures the program aligns with regulatory requirements and mitigates the risks of ML and TF.

AML compliance can be a complex area, and ensuring your program is effective requires an AML compliance effectiveness review – different from a financial audit. It might not be the most exciting process, but a thorough review offers valuable insights into your program’s health.

For non-bank reporting entities, choosing a qualified auditor familiar with AML requirements is key. Additionally, it’s wise to check if your bank or credit union has specific requirements for the auditor or a preferred vendor list.

The review itself is comprehensive, examining your entire AML compliance program. This includes your policies, procedures, risk assessments, and most importantly, how you put them into practice. An effective review goes beyond just legal compliance; it verifies that you’re following your own internal procedures as well.

There are two common issues auditors often uncover. The first is a gap between policy and practice. In other words, you might have great policies on paper but aren’t actually following them. The second issue is a gap between documentation and practice. Your documented procedures might look perfect, but if they don’t reflect what’s actually happening, you have a problem.

Here’s a tip to prepare for a smoother review: Before the auditor arrives, ensure your documentation aligns with your actual practices. This will save you time and avoid potential issues. Ultimately, the AML compliance effectiveness review aims to identify both of these potential gaps and ensure your program is operating effectively.

Who Conducts AML Audits?

Two primary options exist for conducting AML audits:

  • Internal Audit: An FI’s internal audit team, with appropriate AML expertise, can conduct the audit. This approach offers familiarity with the organization’s structure and processes.
  • External Audit: Engaging an independent third-party auditor with specialized AML knowledge provides an objective perspective and in-depth understanding of best practices.

To avoid conflicts of interest, the auditor shouldn’t be someone who develops or implements the AML/CFT program, like the Money Laundering Reporting Officer (MLRO) or compliance team, or someone with competing interests like the head of sales.

Key Components of an AML Audit

A comprehensive AML audit typically covers the following areas:

  • Risk Assessment: Evaluates the FI’s risk assessment process for ML and TF, ensuring it considers customer base, product offerings, geographic locations, and transaction types.
  • Customer Due Diligence (CDD) and Know Your Customer (KYC): Assesses the FI’s CDD/KYC procedures for customer identification, verification, and ongoing monitoring. This includes reviewing Customer Identification Programs (CIPs) and the adequacy of Customer Risk Assessments (CRAs).
  • Suspicious Activity Monitoring (SAM): Examines the FI’s transaction monitoring systems and processes for identifying and reporting suspicious activity. This includes reviewing Suspicious Activity Reports (SARs) filing procedures.
  • Sanctions Compliance: Evaluates the FI’s adherence to sanctions lists and embargoes issued by regulatory bodies.
  • Training and Awareness: Assesses the adequacy and effectiveness of AML training programs for employees at all levels.

Benefits of AML Audits

Regular AML audits offer numerous benefits for FIs, including:

  • Enhanced Regulatory Compliance: A well-conducted audit helps ensure adherence to evolving AML regulations and guidance issued by FinCEN (Financial Crimes Enforcement Network) and other regulatory bodies [1].
  • Reduced Risk of Regulatory Fines and Penalties: Proactive identification and correction of deficiencies in the AML program can minimize the risk of regulatory sanctions for non-compliance.
  • Improved Detection and Reporting of Suspicious Activity: A robust audit strengthens the FI’s ability to detect and report potential ML and TF activities effectively.
  • Stronger Reputation and Brand Protection: Demonstrating a commitment to AML compliance fosters trust with regulators, customers, and investors.

Examples of AML Audit Findings

An AML audit may uncover various control weaknesses, such as:

  • Deficiencies in customer risk assessments
  • Gaps in transaction monitoring systems
  • Inadequate employee training on AML procedures
  • Inconsistent application of CDD/KYC measures

Sources for AML Audit Guidance

Several resources provide valuable guidance for AML audits, including:

Complete AML Audit Checklist

This checklist outlines key areas for documenting your AML compliance program to prepare for a successful AML audit.

Policy and Procedure Documentation

  1. AML Policy: Ensure the latest AML policy is documented and accessible to all relevant personnel.
  2. Procedures Manual: Maintain a well-documented AML procedures manual outlining specific actions for staff to follow.
  3. Periodic Reviews: Document evidence of periodic reviews conducted to ensure the effectiveness of your AML policies and procedures.
  4. Updates & Amendments: Keep a record of any updates or amendments made to your AML policy, including the date and reason for the change.

Risk Assessment

  1. Institutional Risk Assessment: Conduct and document a comprehensive risk assessment specific to your institution’s vulnerabilities to money laundering activities.
  2. Customer Risk Assessment: Assess and document the risks associated with different customer types (e.g., high-net-worth individuals, politically exposed persons).
  3. Product/Service Risk: Evaluate and document the money laundering risks associated with each product and service your institution offers.
  4. Geographic Risk: Assess and document the geographic risks associated with the countries and regions you operate in or serve clients from.
  5. Risk Mitigation Actions: Document the actions your institution takes to mitigate the identified money laundering risks.

Customer Due Diligence (CDD)

  1. CDD Procedures: Ensure clear and documented procedures for customer identification and verification (KYC) processes.
  2. KYC Documentation: Maintain a comprehensive record of KYC documentation collected for each customer.
  3. Enhanced Due Diligence (EDD): Document procedures for conducting enhanced due diligence on high-risk customers.
  4. Source of Funds: Document your verification processes for the source of funds for all transactions.
  5. Customer Onboarding: Maintain complete documentation for the new customer onboarding process.
  6. Ongoing Monitoring: Document procedures for ongoing customer monitoring to identify suspicious activity.

Record Keeping

  1. Transaction Records: Keep all transaction records as required by AML regulations for the designated period.
  2. Customer Interaction Records: Document all significant interactions with customers, including the nature of the interaction and the date.
  3. AML Reporting Records: Maintain copies of all AML reports (Suspicious Activity Reports (SARs), Currency Transaction Reports (CTRs)) submitted to regulatory bodies, along with any supporting documentation.
  4. Retention Policy: Ensure a documented record retention policy is in place to comply with regulations regarding how long AML records must be kept.

Transaction Monitoring

  1. Monitoring Procedures: Document the procedures used for monitoring transactions to identify suspicious activity.
  2. Automated Systems: Regularly validate the effectiveness of any automated transaction monitoring systems used.
  3. Alert Generation: Document procedures for generating and handling alerts triggered by transaction monitoring systems.
  4. Suspicious Activity Reporting: Document procedures for investigating and reporting suspicious activity identified during transaction monitoring (SAR filing).
  5. Monitoring Reports: Retain records of regular transaction monitoring reports and the findings identified.
  6. Unusual Transaction Reviews: Document the review process for any unusual transactions flagged by the monitoring system.

Training and Awareness

  1. Training Program: Document the AML training program content and delivery methods for all relevant staff.
  2. Employee Training Records: Maintain records of employee attendance and completion of AML training sessions.
  3. Employee Certification: Verify that employees hold any required AML certifications and maintain records of their certifications.
  4. Training Updates: Document updates made to training materials and the frequency of AML training provided to staff.

Independent Review/Audit

  1. Independent Audit Schedule: Document the schedule for conducting independent AML audits of your institution.
  2. Audit Reports: Keep copies of all past AML audit reports conducted on your institution.
  3. Audit Logs: Document any changes made to your AML compliance program based on findings from previous audits.
  4. Remedial Actions: Document the actions taken to address any deficiencies identified during AML audits.

Regulatory Compliance

  1. Regulatory Updates: Maintain documentation of changes in AML regulations and any internal adjustments made to comply with the updated regulations.
  2. Registration Records: Maintain records of all registrations with relevant regulatory bodies.
  3. Reporting Compliance: Ensure all mandatory AML reports are filed with the appropriate regulatory bodies on time.
  4. Agent/Third-party Compliance: Document due diligence procedures conducted for any third-party agents or service providers your institution works with.

Board and Senior Management Involvement

  1. Board Minutes: Maintain minutes of board meetings where AML compliance discussions took place.
  2. Senior Management Updates: Document updates provided to senior management regarding AML activities and risks.
  3. Approval Records: Maintain documentation of board and senior management approval for AML policies and procedures.

Internal Controls and Self-Assessment

  1. Internal Control Review: Ensure thorough documentation of internal control reviews conducted to assess the effectiveness of your AML compliance program.
  2. Self-Assessment Reports: Document the findings of self-assessments and gap analyses conducted to identify areas for improvement in your AML program.
  3. Action Plans: Maintain documented action plans outlining the steps you will take to address any gaps identified during self-assessments.

Whistleblower Procedures

  1. Whistleblower Policy: Ensure a clear and documented whistleblower policy is in place to encourage staff to report suspected money laundering activities.
  2. Channels: Document the available channels for employees to report suspected AML violations (e.g., hotline, email address).
  3. Protection Programs: Document the procedures in place to protect whistleblowers from retaliation.

Correspondent Banking and Payment Monitoring

  1. Correspondent Banking Due Diligence: Document the due diligence procedures conducted on any correspondent banking relationships your institution has.
  2. Payment Monitoring: Document the strategies used for monitoring payments to identify suspicious activity.
  3. Sanctions Screening: Document the procedures used for screening transactions against sanctions lists.
  4. Politically Exposed Persons (PEPs): Document the process for identifying and monitoring Politically Exposed Persons (PEPs) and their transactions.

IT Systems and Data Security

  1. System Documentation: Maintain documentation of your AML IT systems, including functionalities and user access controls.
  2. Access Controls: Document procedures for data access controls, ensuring only authorized personnel have access to sensitive AML information.
  3. Data Security Reviews: Document the frequency and findings of regular IT security reviews conducted to identify and address vulnerabilities.
  4. System Audits: Document system audits conducted for AML software to ensure its effectiveness in detecting suspicious activity.

Reporting and Escalation Procedures

  1. Reporting Lines: Clearly document internal reporting lines for AML issues, specifying who staff should report suspicious activity to.
  2. Escalation Procedures: Document the procedures for escalating significant AML issues to senior management or relevant authorities.
  3. Response Records: Maintain documented responses to escalated AML issues, including the actions taken to investigate and resolve the issue.

Communication with Regulators

  1. Regulator Interaction Records: Document all communication with regulatory bodies regarding AML compliance matters.
  2. Inspection Readiness: Prepare documentation demonstrating your institution’s readiness for regulatory inspections, including AML policies, procedures, and training records.
  3. Feedback Implementation: Document the implementation of any feedback or recommendations provided by regulators following inspections or interactions.
  4. Legal Opinion: Last but not least, it’s common to have legal expert provide their opinion on your AML audit and strategy to mitigate risks and avoid legal pitfalls.

Anti-Money Laundering (AML) Template for Small Firms

FINRA provides a template for small firms to assist them in fulfilling their responsibilities to establish the Anti-Money Laundering (AML) compliance program required by the Bank Secrecy Act (BSA) and its implementing regulations and FINRA Rule 3310. The template provides text examples, instructions, relevant rules and websites and other resources that are useful for developing an AML plan for a small firm.

Download AML Audit Template

Hodder Law AML Audit Expertise

Hodder Law possesses extensive experience in all aspects of AML compliance, including AML audit preparation and support. Our team can assist FIs in:

  • Developing and maintaining effective AML programs
  • Conducting internal AML audits
  • Responding to regulatory inquiries and examinations

By partnering with Hodder Law, FIs can ensure their AML compliance programs are robust, effective, and meet the highest standards.

Conclusion

AML audits are critical tools for FIs to safeguard their institutions from ML and TF risks. Regular audits promote regulatory compliance, enhance risk mitigation strategies, and strengthen overall financial integrity. For FIs seeking to navigate the complexities of AML compliance, Hodder Law stands ready to provide comprehensive legal guidance and support.

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