The objective of money laundering is to transform illegally obtained money into legitimate funds. By providing financial services, some individuals and organizations can get benefit from the criminal activities. Gilmore (1999) stated that even though banks are taking a major role in the fight against money laundering, some banks do not seem to implement anti-money laundering processes seriously. For instance, HSBC, which is the largest banking and financial services organization in Europe, was fined $700m in 2012 for helping Mexican drugs barons to launder funds through the bank's financial department for seven years in America. HSBC's chairman apologized for the fact that the bank had had a weak anti-money laundering process for many years but failed to take action (Mazur 2012; Maggetti 2012). Additionally, some banks are supporting money launderers unconsciously (Reuter & Truman 2004). For example, wire transfers are executed instantly and anonymously between banks. Dirty money is easily masked in the banking system and is transferred at an average of $1 trillion per day through financial software, because online transfers are not supervised (Liddick 2004; D.Muralidharan 2009). Preventing and identifying money laundering is an urgent global issue in order to maintain the integrity of the global banking system. The aim of this essay is to evaluate anti-money laundering measures in the auditing processes of the banking industry, and evaluate these measures in terms of: reactive measures and proactive measures. This essay will focus on internal measures in the auditing processes. The first section will discuss the reactive auditing measures, which are related to freezing suspicious money and tracing suspicious funds can protect banks in emergency situations. The second section will evaluate the essential to implement proactive anti-money laundering measures, which include report building, staff training, and internal control monitoring.
Effective reactive auditing measure is a primary measure, which can protect the bank in the event of an emergency situation. Bank should freeze and trace suspicious money at first, then improve its internal control processes of anti-money laundering. Bank has the authority of using legislative measures to freeze and confiscate the illegal income. When banks recognize or defendant that money laundering is exists in, the internal auditing department should apply for freeze the suspicious money immediately (Committee 2009; Hopton 2006). Auditors can also request customers to open accounts or check clients' origin transactions (Chatain 2009). Stessens (2000) stated that banks should avoid carrying on transactions which they doubt or know are relating to money laundering, and all employees who found suspicious transactions in banks have responsibility to report to the Money Laundering Reporting Office without delay. For example, in Switzerland, banks are required to freeze the suspicious money, which they reported to the prosecuting authority straightway. The authority needs to give a feedback for maximum of five days after the report has been submitted. The reason why Switzerland had made great progress in anti-money laundering is that Switzerland's banking accounts are avoid to prevent illegal privacy information (Reich 1998). However, some banks keeping on execute the suspicious transactions until they informed by the responsible authority to combating money laundering (Stessens 2000). Some nations even do not have any central national office dealing with suspicious reporting. Kenya did not implement an effective AML supervision system (Lilley 2003).
Furthermore, banks need to trace the origin of dirty money after freeze suspicious transactions, even though it is difficult to trance a doubtful transaction for banks. Money launderers may use different types of transactions to laundering, for example, laundering is typically exists in electronic funds transaction and large cash transaction (Beare & Schneider 2007). Nevertheless, comparing with the legitimate clients' activities and the standard transactions, it is obvious to see that suspicious transactions are always inconstant. Internal knowledge of the customer's environment and personal information is helpful to banks to recognise whether it is unusual in transactions or not. Therefore, banks should understand each client's business in depth, for example, know the client's political situation on his or her country by visiting him or her (Odeh 2010). However, some banks' manager cannot keep independence with their clients. A good example is when people asked why private banker never asked a customer about certain transactions, the banker would respond that the client was a president of a famous company. Maude (2006) stated that private bankers are trained to satisfy clients' financial needs. Closely personal relationship between bankers and clients will enhance bank managers' loyalty to their clients for personal reasons. Additionally, closely relationship will lead bankers to neglect some warning signals, and some bankers may use banks' financial systems to assist money laundering for their clients.
Moreover, banks should strengthen proactive auditing measure within internal anti-money systems. Companies are required to develop appropriate internal control processes, which include build reporting system, training staffs and wariness of correspondent banks, to reduce money laundering risk (Singh 2007). On one hand, banks should build anti-money laundering reporting system for detecting and report suspicious activities to the governments. As a financial institution, bank need to be familiar with combining law items with financial regulation, and assist government to deal the money laundering problem (C.Roa 2007). According to the Bank Secrecy Act (1970), bank should provide all required specific documentation on the Currency Transaction Reports (CTRs). However, some bank still disturbed anti-money laundering rules. For example, Royal Bank of Scotland was fined £750,000 of negligence of customer identification (Singh 2007). From the reporting system, not only governments want to receive the feedback about the fraud that they had made, but banking industry can also notice what weakness the anti-money laundering system is having (Bowden & Secretariat 1997). After evaluating the probability of the suspicious transaction, and comparing with the reasonable background of the customer in an existing reporting system, bank should provide appropriate report to the Money Laundering Reporting Officer (Mwenda 2010). Bank need to update their reporting system if the report is incorrect. Nevertheless, money laundering still exists in some informal international transactions. About large cash transactions, some financial institutions are lack of reporting requirements and less monitoring of cross-border currency movements (Odeh 2010). For instance, there is no reporting requirement of cross-border currency transactions in the strong diamond market (Lilley 2003). Another major program in anti-money laundering system is the Know Your Client program (KYC). Odeh (2010) stated that Know Your Client program could identify customer's environment and information at account opening. An advancing KYC system can help bank to gather and update additional statistics in further, and protect the bank's risk assessment system rapidly in emergency cases. In addition, Hopton (2006) thought well understanding of clients can help banker to determine the time and way to report suspicious activities. The KYC program should be widely used in banks' anti-money laundering systems.
On the other hand, the Anti-Money Laundering Officer should training bankers and new staffs with anti-money laundering regulations. Not only all the staffs should be trained, but also the documents and records need be saved to show that bankers had be trained and that training were on-going (Lilley 2003). For example, training records should include the begin and end date, the topic of the training and information of the staff (Secretariat 2006). All relevant bankers should well understand the aim of anti-money laundering procedures and implement AML polices seriously. With different staffs, which may include new staff, sales staff, senior manager and staff dealing with new clients, AML training requirements should have different focuses. For example, account opening staff is in the front- line of fighting against money laundering, they should understand details of AML regulations well. To foreign exchange managers, the most important matter is to identify suspicious international transactions. As a financial instruction director, he or she cannot perform their responsibility well without an overall view of anti-money laundering polices (Chatain 2009). In order to prevent the integrity of banks' anti-money laundering system, all staffs need to be appropriately trained with the 'know your customer' program. Training should consequently deal with the requirements of knowing client's accurate identity and background. Furthermore, financial institutions need to teach bankers to know how to understand the detail information of the client well, which should include the type of client's business activity and the basic knowledge of the business (Muller, Kalin & Goldsmith 2007). With the help of staff training, bankers can understand the importance of keeping independence with their closely customers within professional service. However, according to Beare and Schneider (2007), while five banks stated that they had given lessons to their staffs with the detection of doubtful transactions and anti-money laundering procedures, it was considered that at least one bank was given low level training or might mean that no one in that bank had accept appropriate training. Banking industry should punish the employees who were found in even fairly light money laundering in bank, for instance, the staff can be fired, put into the blacklist at other banks and even be charged.
At last, in order to anti-money laundering within foreign transactions, banks can reliance on their correspondent bank unless the correspondent bank had had financial frauds. Particularly, correspondent bank tends to have no direct relationship with each part of the potential transactions. Therefore, it is hard to confirm their characteristics and identities. In addition, correspondent bank always have fewer information to prove the nature or aim of the original transactions. For example, it is convenient for launderers globally to transfer through internet, which including foreign currency exchange, processing electronic payments and importers or exporters invoice (Lilley 2003). Thus correspondent banks' non-face-to-face transactions are regarded to be high risk from a money laundering and terrorist financing view. In order to reduce the risk of money laundering, banks are required to keep every records and documentations of correspondent bank transactions. Furthermore, the location of the respondent is considered to be another key factor. Some low risk areas such as the United Kingdom and China, which are the members of the Financial Action Task Force (FATF), are having strictly monitoring environment of anti-money laundering. Conversely, other places, in which recognised globally of having poor anti-money laundering procedures, are showing highly risk of financial crime. In order to avoid the financial fraud from correspondent banks and decrease the risk of financial crime, bank directors should care of their corresponding partners (D'Souza 2011). However, some foreign banks still did not have on paper policies or measures for fighting against the threats rising from correspondent banks. Some other banks' mother companies were complying with international anti-money laundering procedures for correspondent banking, but there is no details of transactions and its accurately application date in the banks' UK business (Liddick 2004). To sum up, banking industry need to consider about the money laundering risks in correspondent banks. For instance, only few banks have report systems to deal with respondents, and priority review higher risk clients and foreign transactions. Failing to consider of risky businesses, such as money service institution and offshore bank, is another problem within correspondent banks.
In conclusion, this essay evaluated both reactive and proactive auditing measures of anti-money laundering in banking industry.
