AML seen as biggest regulatory issue this year

Regulators' global clampdown on illicit fund flows has given compliance officers nightmares in 2014 and resulted in a limited supply of experts in anti-money laundering.
AML seen as biggest regulatory issue this year

Anti-money laundering regulations have given compliance experts some of their biggest headaches this year, with Hong Kong at the centre of several scandals.

The imposition of heavy fines on financial institutions has illustrated how anti-money laundering has become many regulators’ top priority, said Daniel Lam, Hong Kong-based director of compliance at Principal Global Investors. 

“If they do inspections, you can be almost certain that this is one of the areas they will be looking at," he told AsianInvestor

Recent headlines linking the city to money-laundering risk have kept regulators and financial institutions on their toes. Standard Chartered was fined $300 million in August by the New York State Department of Financial Services for failing to detect a large number of potentially high-risk transactions originating from Hong Kong and the United Arab Emirates.

And Hong Kong is seen as increasingly at risk of money-laundering given its proximity to China, the world’s largest source of illicit financial outflows. Suspect outflows from the mainland totalled $1.25 trillion between 2003 and 2012, according to a report released on Monday by research group Global Financial Integrity.

The retail market poses particularly big laundering risks for fund houses, given that many of the know-your-client procedures are conducted by distributors. Hence the need for asset managers to conduct due diligence on distributors to ensure the latter can perform adequate checks.

One red flag when it comes to spotting suspicious transactions is an investor who frequently subscribes to and redeems from funds, as such products are usually seen as medium- to long-term investments, Lam said.

In contrast, institutional clients are seen as a lower laundering risk, since fund houses have direct contact with them and so are better able to understand their background and source of funds.

Given soaring demand for their services, the supply of compliance experts has become tighter in recent years, especially as large firms – often those that have been hit with fines – hire heavily. Standard Chartered has said it is boosting its legal and compliance headcount by 30%, including doubling the size of its financial crimes team.

“It’s getting harder to find experienced people, particularly for anti-money laundering,” said Lam, who joined Principal GI from Axa Investment Managers in September. “After the severe fines that financial institutions were hit with, they had severe recruitment drives.”

He noted that tight labour supply in compliance has led to average pay rising by 20% in the past year.

Principal GI itself has added to its regional compliance headcount since last year, with Lam one of the most senior recent hires. The firm now has a four-person compliance team, including two in Japan and one in Singapore.

¬ Haymarket Media Limited. All rights reserved.