Aml laws implications

Mohammad Fheili – [email protected]

How To Cope with Ever Changing & Escalating AML

Rules, Sanctions, and

Laws?

All Must Begin At The 1st Point Of Interface With the Client.

The


Mohammad Fheili “Over 30 years of Experience in Banking. [email protected] (961) 3 337175

Risk & Capacity Building Specialist. Trainer in Risk & Compliance University Lecturer: Economics, Risk, and Banking

Operations Currently serves in the capacity of an Executive (AGM) at

JTB Bank in Lebanon. Served as:

• An Economist at ABL,• Senior Manager at BankMed• Senior Manager & Chief Risk Officer at Group

Fransabank Mohammad received his college education

(undergraduate & graduate) at Louisiana State University(LSU), and has been teaching Economics and Finance forover 25 continuous years at reputable universities in theUSA (LSU) and Lebanon (LAU).

Finally, Mohammad published over 25 articles, of thosemany are in refereed Journals (e.g., Journal of MoneyLaundering & Control; Journal of Operational Risk;Journal of Law & Economics; etc.) and Bulletins.”


To Immune Your Institution

To ExploitThe Rules


How To Ride The Storm?

The Choices in AML Com

pliance


Compliance Cycle

Service Cycle

st1Client Interface

Interface

CIP, KYC

AML Compliance (Regulator Decides)Client Engagement is CONSTRAINED by:The Bank Must be AML‐Compliant, andDeemed Responsible & Accountable.

Customer Satisfaction (Customer Decides)Client Engagement is DRIVEN by: The Potential forRevenue: Interest Income, Commissions & Charges;and a Word‐of‐Mouth Free Marketing

Both Cycles Are Ongoing Processes; None is a Destination

by itself

The Most Critical Customer Interface; ManageWith Care: You Either Collect all the needed information (CIP & KYC)

to ‘Immunize’ and/or ‘Exploit’; or You have planted the seeds of Troubles to

Come . . .

Branch

ClientIs

Engaged

AML Landscape:The Service Cycle


In Desperate Search for Data toIdentify, and Assess Risks whichMay Be Encountered In theProcess of Serving the Client.The Correct & Complete Dataabout the Client helps in: Increasing Evidence on the

Probability of Occurrence, and Improve our Understanding of

Potential Outcomes.This is Effective Compliance RiskManagement.

Non‐Identifiable Risk

Non‐Identifiable Risk The Idea here is to improve upon our

understanding of the client so we can Servehim/her better, and Secure Compliance. This isOperational Risk Management

The More Data is collectedthe more effective is RiskIdentification, Assessmentand Management:• CIP• KYC• DD• EDD• Etc.

Identified & Identifiable

RisksMore = Complete, Timely, Accurate and Consistent Data.

AML Landscape: Risk &

Compliance


Increasing Our Understanding of Potential Outcomes

Increa

sing

Evide

nce on

Proba

bility of

occurren

ce

Ambiguity

Unc

erta

inty

Ignorance

A Bank is expected tocollect ALL neededdata to move closer toRisk Management &Compliance BUT Awayfrom: Ambiguity, Ignorance, and Uncertainty.

AML Landscape:Build U

nderstanding


CIP, KYC

On Going Monitoring & Compliance

End

DD, EDD

On Going Follow up & Service

Handling Complaints Cross‐Selling Updating Customer

Profile (CIP), Etc….

“Satisfaction Cycle” MUST NOT Be Competing with “Compliance Cycle”

Customer Risk ScoringCustomer Due Diligence RiskAutomated Transaction Monitoring SystemsCash Aggregation and Reporting Systems,Etc…..

AML Landscape: Exploit The Rules

Compliance Cycle

Service Cycle

ClientIs

Engaged

st1Client Interface

Interface

Branch


Level Of Maturity in AML Compliance

Nature & Extent o

f Efforts Dep

loyed

DD

EDD

RBA

Moving in this direction is a clear indication that there is a desireon the part of the FI to continue on serving the client. Otherwise,the FI would be engaged in De‐Risking

Due Diligence

Enhanced Due Diligence

Risk‐Based Approach to AML Compliance

Enhancing Compliance Capabilities …

AML Cost

Skills Needs

Know‐How

AML Analytics

Those Enhanced AML Compliance Stepsrequire the Use of Technology. Increasereliance on Technology; Increaseexposure to Technology Failures. In suchan instance, does the FI have a goodtrack record with Managing TechnologyIssues?

Pragmatic &

Loss Data

How To Be Pragmatic About Compliance?


Information Technology.

Customer Expectations.

Digital Competitors.

Banking Organizations NeedTo Adapt.


Information Technology at the forefront ofOperational Risk: But ….!

The Introduction of any form of technology in a given production process or the meremodification of an existing IT environment necessitates a number of changes whichspillover on Branch Performance: Staff Skills, Workflows, Policies & Procedures, and ahost of other changes.

In today’s technologically intense production processes,information technology (IT) risks cannot be consideredindependently of other types of risks since it reflects onour ability to serve and satisfy our clients. Recognizing these challenges and acknowledging thatthe Branch has a role to play in managing this risk willput management one step ahead. Because processes areTechnology dependent, data collection has changed from being mostly qualitative tooverwhelmingly quantitative; Types/Nature of Mistakes committed by Employees areDifferent; etc.

Information Technology


Technological Advancements have led to:• Increased Usage of Impersonal Electronic Services: LowCost Electronic Services; Widespread and DiffusedCustomer Base. This, in turn led to:Lower Customer Intimacy (How much intimacy can one get

out of e‐Banking!).Reduced Switching Costs Between Different Banks(Customers these days are constantly shopping for the betterdeal).

Increased Chances of Fraud and Risk (Law 318 on Fraud &BDL Basic Circulars 83 – Regulator’s Version of Law 318, and BDLIntermediate Circular 371 – Compliance Officer at POS; and moreLaws)

Increased the Demand for Transparency (BDL BasicCircular 134; and BCCL Circular 281)

• Less Time to Know and Influence Customers.Research shows that Customer Interest peaks and fallsrapidly especially in response to a Promotional Event.

This makes it absolutely necessary for banks tooptimally leverage all available customer touch pointsso as to be able to influence the customer (e.g., You findads and offers on ATM receipts).

Information Technology


Changing Customer Expectations andthe Power to Punish: Power has shifted to the customer asthey become more connected, more demanding and less loyal.

Instilling the vision and values needed to rebuild trust.

Harnessing big data analytics, social mediamonitoring and other new forms of insight toanticipate and respond proactively to changingcustomer demands. If you don’t Duly respond, some other Bankswill; and the Cost of ‘Switching’ is negligent.

How to gain clearer line of sight to customers, speed up decision making andovercome institutional resistance to change.

Shift from product‐push to customer solutions.

Accent on product specialization (‘depth’) gives way to broader engagement,analytical and change management skills (‘Breadth’).

Customer Expectations

More Demanding

& Less Loyal


Agility in the Digital Age

Digital Competitors and the Age of Innovation:As the pace of innovation accelerates, developments that would have taken years to impact on the marketcan now become consumer expectations in a matter of days or months.

New competitors have head start on trust. Operational barriers to entry are disappearing as tech‐enabled entrants use digital distribution and advanced

customer profiling to break into the market.

How to create a Business Model that is Flexible enough to reinvent itselfwhen better technologies or potential partners come along.

How to lead innovation – even fast following could leave your business marginalized.

How to create an adaptable workforce, unbound by hierarchy, organizational siloes orrestrictive practices.

It is about the ability to makechoices, decide and act swiftly.


Our Life Begins At the End OfOur Comfort Zone

Coping With a Rapidly Changing Banking Environment

Our Life Begins At the End OfOur Comfort Zone


Credit Risk

Market Risk

Operational RiskReputational Risk

Business RiskStrategic Risk

. . . Other Risks

Stay and Risk

Extinction

Comfort Zon

e

Coping With

Changes Today, more than ever before, ‘YOU’ need to move out of‘YOUR’ Comfort Zone.


At The 1st Point of Interface is The BranchNetwork, and Relationship Officers: Home to the Largest Number of Employees

in a Typical Banking Organization The Most Active Processor of Transactions

(i.e., Traffic) in a Typical BankingOrganization

Intense Utilization of IT Systems in a TypicalBanking Organization

… there is moreThey Represent Critical ‘Points of Interface’with Clients. . . . Sources of Operational Risk.We MUST NOT Remove AML Compliance RiskFrom Under the Umbrella of Operational Risk.


Operational Risk& BCBS

PRIMARY SECONDARY

PEOPLE

Employee Fraud / Malice (Criminal)

PROCESSES

Payment / settlement / delivery risk

SYSTEMS

Technology investment risk

EXTERNAL

Legal / Regulatory Risk / Public Liability

Unauthorized activity / Employee misdeed (Willful) Employment LawWorkforce disruption Loss or lack of key personnel

Documentation or contract riskValuation / Pricing Internal / External reporting and complianceProject risk / Change management Selling Risks

System development and implementationSystems failuresSystems security breachSystems capacity

Criminal Activities Out‐sourcing / Supplier RiskIn‐sourcing RisksDisaster and Infrastructural utilities FailuresPolitical and Government Risks


Risk Management and Compliance MUST NOTBe Competing Tasks Inside the Hallowed Halls of Banking Institutions

RiskManagement is a Decision & a Choice.

ComplianceWith AML Rules & Sanctions & LawsCompliance is a Task intended for Risk Control

You are suited to follow a well defined track!

You are gearedup and equippedto travel throughuncharteredterritories andbe creative inavoiding danger(not Risk)



AML Non-Compliance is a Real Threat

Be Pragmatic With AML Compliance or Face The Consequences

Loss DataLoss Data


Internalfraud

Externalfraud

Employment Practices &Workplace Safety

Clients, Products & Business Practices

Damage to Physical Assets

Business Disruption and systems failures

Execution, Delivery & Process

Management

Corporate Finance

Trading & Sales

Retail Banking

Commercial Banking

Payment & Settlements

Agency ServicesAsset

Management

Retail Brokerage

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How To Be Pragmatic About Compliance?Pragmatic &

Loss Data

Collect Data at the Point ofInterface (Prior toEngagement) so you KnowYour Client)

And Collect Date DuringEngagement (Loss‐Data)

Both help the Bankunderstand the Client andthe Business Environment,and material changes incircumstances. … AllNecessary to Identify,Measure and Manage Risk.


Flying From “Beirut” To “Paris” Is a ‘Service’; Just Like Opening a Bank Account. DescentBelow Safe Altitude (Overlooking something of Potential Importance) is an Incident (With Zero Lossesthis time). …. BUT . . .

Minimum Safe Altitude (MSA)

IncidentAccident

Pragmatic &

Loss Data YOU MUST Report ALL Incidents

irrespective of Current Consequences/Impact

Collection of Loss Data Starts even whenthere are NO LOSSES.

Tax Evasion; Cross‐Border Cash Declaration, etc.


Brilliant Surgery!

Well Done!Shame the

patient died.

Do Outcomes Matter?Pragmatic &

Loss Data


Acquisition/ Credit Specific Customer Service

Collect And Review Data

CreditReview

Assess Collateral And Risk

DocumentApproval

& Pricing

Sales: Bank-Client Interface Financial & Risk Analysis: Understanding Risks Processing

Establishing Contact

Evaluate first customer info

Customer Meetings

Debriefing

Request documents

Obtain data & information

Completeness/ plausibility review

Follow up

Monitor, Follow up [in CaseThere is a Change ofCircumstances] & Report

Loan/Asset Life Cycle

Credit Approval Process

Implement On the Credit

Decision

AML Compliance STARTSHere…and Decisions Matterwhile Aiming for Best Outcomes:In Full Compliance

Pragmatic &

Loss Data


Consequences: Losses

Risk Event: Loan

Default

• Kick off Loan Workout andRecovery ‐ Beware of shortcuts:Accepting Cash in settlement of anagging Bad Debt

• Recovery is a Function of theQuality of the Credit File and theLegality of AccompanyingDocuments

• Losses (Total or Partial)

Dried up Cash Flow Sources: Client’s businessreceived a bad hit.

Collaboration between the Bank Employeeand the Client in the provision of inflatedfigures (Sales, Revenues, Cash Flows, …)leading to a false‐favorable credit decision.

Over‐worked, and Under‐Staffed Business Unitleading to overlooking some critical changes inbusiness circumstances of the Client.

Incompetent Bank Employee Gave FalseRecommendation which led to a False‐favorable Credit Decision.

Poor/Inadequate Follow‐up and Reviewsrendering the process weak in capturing“Warning Signals”

Could there be Violations to AML Rules?

Causes

Pragmatic &

Loss Data

…and Potentially

NON‐Compliant


Customer Satisfaction

EmployeeSatisfaction

Subject to Risk & Compliance

Service Excellence Growth

Feedback Process!

A Matter of Service Quality, Taste & Preferences

A Matter of Perception! A Matter of Commitment!

Risk‐Based PerformanceHow Is That

Related To Risk & Compliance?

Em

ployeesC

ustomers

Bank

EmployeeAt the Point of

Interface with the Client

Supports & Challenges to Secure the Attainment of Objectives subject to Risk

& Compliance

Unit Manager Compliance Officer

Provides Advice and Tools, …


OBJECTIVES ALLOCATION of Bonus PAYMENT of Bonus toDeserving staff

Key Performance Areas_Reduction in Costof Fund_Volume in Interest-based Products_Traffic: More Clients,More Transactions_Work Environment inthe Branch_Identification of KeyRisk Indicators_Risk Reporting_Effective Risk Control_AML Compliance

Based on each function’sContribution to businessDevelopment_Unit Manager_Deputy Unit Manager_Clearing_Office Boy_Etc.

Based on each staff’sPerformance Appraisal Review System_“A” Performers_“B” Performers_“C” Performers_”D” and “E” do notreceive any bonus irrespective of how theSpecific Business Unit Performs

PILLAR 1: Reflects theBank’s Strategy, and KeyPerformance Areas

PILLAR 2: Reflects thecontribution of every functionto the branch’s Bottom Line

PILLAR 3: Reflects theperformance of every staff in theBranch

Risk‐Based Performance


Risk & Compliance

Sustainable

Custom

ers Ban

k &

B

ank

Sta

ff

Risk‐Based Performance

Service & Service Excellenceis subject to:RiskComplianceAnd Non‐Compliance is ProhibitivelyCostly.
