Organizations that require regulatory compliance programs must adhere to the 5 pillars of AML Compliance. These pillars are almost the same for AML, BSA, and OFAC compliance programs. This article explains the 5 pillars of AML. However, it is equally important to hire a professional service for reliable compliance like KYC AML Guide as a source of information.
Overview of 5 Pillars of AML Compliance
Since Money Laundering was first identified as an illegal activity, Regulators are trying to mitigate it. For this purpose, Federal Reserve established minimum requirements for a compliance program in 1987. Banks and Financial Institutions under the BSA (Bank Secrecy Act) must fulfill these requirements while establishing an AML Compliance program. Previously, there were 4 pillars of AML but in 2016, 5th pillar of AML was added to enhance the Due Diligence requirements.
Here are the 5 Pillars of AML Compliance with a brief explanation:
1st Pillar: Hiring A Compliance Officer
Firstly, dedicated human resources are required to manage all the work. So, a Compliance Officer should be hired who is experienced and skilled in the policies and procedures of BSA, AML, and OFAC. Relevant to the Money Service Businesses (MSBs) the requirement for a compliance officer increases. Look at this paper on the compliance officer and requirements. Likewise, the management of the firm should regularly monitor the performance of a compliance officer.
2nd Pillar: Internal Policies, Procedures & Controls
Utterly, it is the most important pillar of the 5 Pillars of AML Compliance. This pillar addresses the following primary concerns:
- How to run a business with being compliant with pillars of AML and pillars of BSA compliance.
- How to keep business in compliance with ongoing monitoring
- How to ensure the implementation of AML/BSA/OFAC policies and procedures for upholding compliance.
3rd Pillar: Training of Employees
All employees of the organization must receive adequate compliance training. Accordingly, Anti Money Laundering Compliance training is mandatory to ensure financial security. The duration of the training should be sufficient enough to train and highlight the importance of AML compliance. Also, the training program should be conducted at least once a year.
4th Pillar: Testing and Review
Similarly, the Anti-Money Laundering Program should be tested and reviewed regularly or at least whenever it is updated. This ensures that the loopholes in the system are covered timely. Moreover, this testing and review of the AML compliance program should be independent as it will show real-time errors. In this way, the testing will not be conducted by the compliance department but by the core authority of the organization.
The testing should also have an independent risk assessment to determine the risk levels. This risk-based approach will ensure risk identification and mitigation in the testing phase. Hence, the actual implementation of the 5 Pillars of AML Compliance shall become risk-free.
The third stage of testing and review needs an outside body to test and review the AML and BSA Compliance program. In this way, a transparent and unbiased review will be conducted.
5th Pillar: Due Diligence
Due Diligence is the latest advancement in the original BSA and AML rule issued in 2016. Indeed, it has improved financial transparency and customer trust in the system. Due Diligence process has three phases that are explained in our article, Customer Due Diligence vs Enhanced Due Diligence. Overall, Due Diligence has four basic requirements mentioned in the BSA and AML compliance rules.
- Identify and Verify the Identity of Customers
- Identify and Verify the Identity of Beneficial Owners including the UBOs (Ultimate Beneficial Owners)
- Declaring the Nature and Purpose of the business relationships with customers for Risk-profiles
- Ongoing Monitoring of the transactions and behaviors of costumes to maintain the risk profiles and update information.
Benefits of 5 Pillars of AML Compliance
To Enumerate, there are 5 benefits of the 5 pillars of AML Compliance listed and explained below:
Improved regulatory compliance:
They help financial institutions and other regulated entities to comply with regulatory requirements and guidelines. In fact, the regulatory authorities require everyone to comply with KYC AML guidelines. These pillars help in building an improved foundation for compliance.
By implementing effective AML compliance measures, financial institutions can build a positive reputation in the market. Also, they can gain customer trust and stakeholders’ confidence. Clearly, when a firm is legally compliant with AML regulations, it will be more reputable and trustworthy for customers.
Mitigated financial and legal risks:
AML compliance helps financial institutions to mitigate the risks of financial and legal penalties. These risks may result due to non-compliance with the AML regulatory requirements. Therefore, 5 pillars or AML help is mitigating these risks through a risk-based approach guided by due diligence.
Prevention of financial crime:
The 5 pillars of AML compliance help to prevent financial crimes such as money laundering and terrorist financing. Again, it can have a negative impact on society as a whole and put the financial sector at risk. So, the pillars of AML compliance can help prevent Money Laundering, Terrorism funding, and fraud.
Improved operational efficiency:
AML compliance measures such as risk assessments, SAR, and internal controls can help financial institutions to streamline their operations. It reduces the risk of fraud and other financial crimes and helps in strengthening a secure financial model.
Above all, the 5 pillars of AML Compliance are a vital part of KYC and AML regulations. They make the foundations of a robust KYC and AML system for protecting customers and the firm from financial crimes. To help mitigate Money Laundering and Terrorism Funding, BSA, OFAC, and AML compliance is necessary for the US. Firms need to stay regulated and updated with any advancements or changes in the AML regulations. Moreover, they should always stay ahead of criminals and keep improving their AML systems for a stronger financial future.