An anti-money laundering (AML) audit is an essential process for financial institutions to ensure compliance with regulations and prevent money laundering and terrorist financing. If done effectively, it can help an organization identify and mitigate risks, improve internal controls, and enhance customer due diligence practices.
What is an AML Audit?
An AML audit evaluates an organization’s adherence to AML regulations and best practices. The goal is to identify any weaknesses or gaps in an organization’s AML compliance program and to make recommendations for improvement. It tests the effectiveness of important compliance procedures like internal controls, customer due diligence processes, and transaction monitoring systems, assessing whether an organization has implemented these controls effectively and whether they are operating in accordance with current regulatory requirements.
The auditor will evaluate these processes through a variety of means, including a review of policies and procedures, interviews with employees, the review of customer files, and the evaluation of transaction monitoring and other AML compliance systems.
Who Should Conduct the Audit?
An AML audit is typically conducted by an independent third-party auditor or an internal audit team. The results of the audit are presented in a report that outlines any deficiencies or weaknesses in the organization’s AML compliance program and provides recommendations for improvement. The organization can then use this report to make changes to its AML program and improve its overall AML risk management.
While it is possible for an internal team to perform the audit, it can not effectively be completed by any individual involved in any areas where money laundering could occur.
AML Audit Checklist
An AML audit can differ from business to business based on a variety of factors, such as business size, industry, and the country the business is located in. Here is an audit checklist that covers some of the key areas that should be evaluated for most financial institutions:
1. Regulatory Compliance
- Ensure that the organization has a clear understanding of AML regulations and regularly updates its policies and procedures to reflect changes in the regulatory environment.
- Verify that the organization has a system for tracking regulatory changes and implementing these changes in a timely manner.
- Review the organization’s regulatory filings to ensure that they are accurate and up-to-date.
- Test the effectiveness of regulatory reporting systems if applicable.
2. Customer Due Diligence (CDD)
- Evaluate the organization’s CDD policies and procedures to ensure that they are risk-based and comply with regulatory requirements.
- Verify that the organization has a system for identifying and verifying customer identities and that it regularly updates customer information.
- Review the organization’s Enhanced Due Diligence (EDD) policies and procedures, particularly for high-risk customers such as politically exposed persons (PEPs).
- Verify watchlist and sanctions screening solutions’ effectiveness if applicable.
3. Transaction Monitoring
- Evaluate the organization’s transaction monitoring system to ensure that it is effective in identifying suspicious activity.
- Verify that the organization has a system for escalating suspicious activity reports to the appropriate authorities.
- Review the organization’s policies and procedures related to large transactions, cross-border transactions, and cash transactions.
4. Internal Controls
- Evaluate the organization’s internal controls related to AML compliance, including policies and procedures, training programs, and monitoring and reporting systems.
- Verify that the organization has a system for identifying and reporting internal control deficiencies and that it takes appropriate corrective action.
- Review the organization’s audit trail to ensure that it is accurate and complete.
- Evaluate the organization’s AML reporting policies and procedures to ensure that they comply with regulatory requirements.
- Verify that the organization has a system for reporting suspicious activity to the appropriate authorities.
- Review the organization’s reporting history to ensure that it has filed all required reports accurately and in a timely manner (i.e. SARs & CTRs).
- Conduct testing to ensure that the organization’s AML compliance program is effective in identifying and preventing money laundering and terrorist financing.
- Verify that the organization has a system for testing its AML compliance program and that it takes appropriate corrective action based on the results of testing.
7. AML Training
- Evaluate the organization’s AML training programs for both existing and new employees.
- Evaluate the frequency of AML trainings.
8. Past Audits
- Review the organization’s AML audit history to evaluate whether past deficiencies were acted upon and addressed.
This AML audit checklist covers some of the key areas that should be evaluated, however, it is not exhaustive and may need to be tailored to fit the specific needs of the organization being audited.
How Often Should You Audit Your AML Program?
An AML audit should be done on a regular basis to ensure that the company’s AML program is effective and up-to-date. The frequency of the audit will depend on several factors, such as the size and complexity of the company’s operations, the level of risk associated with its activities, and regulatory requirements. The Financial Crimes Enforcement Network (FinCEN) has stated that, “the scope and frequency of the testing shall be commensurate with the risks posed by the company’s products and services.”1
Generally, audits should be conducted annually or bi-annually, but in some cases, more frequent audits may be necessary. It is important to consult with legal and compliance experts to determine the appropriate frequency.
Things to Keep In Mind When Auditing Your Compliance Program
Here are some key points to keep in mind when conducting an AML audit:
- Understand the regulatory framework: The first step in conducting your audit is to understand the regulatory requirements that apply to the organization. This includes laws and regulations at the local, state, and federal levels, as well as industry-specific guidelines and best practices.
- Identify high-risk areas: AML risks can vary depending on the nature of the organization’s business, customer base, and geographic location. The audit team should evaluate the organization’s risk profile and identify high-risk areas, such as correspondent banking relationships, cash-intensive businesses, and politically exposed persons (PEPs).
- Evaluate internal controls: The audit team should evaluate the organization’s internal controls related to AML compliance. This includes policies and procedures, training programs, and monitoring and reporting systems. The team should also assess the effectiveness of these controls and identify any gaps or weaknesses.
- Review customer due diligence practices: Customer due diligence (CDD) is a critical component of AML compliance. The audit team should review the organization’s CDD practices, including the identification and verification of customers, ongoing monitoring, and risk-based assessments. The team should also evaluate the organization’s adherence to regulatory requirements related to CDD.
- Assess transaction monitoring: Transaction monitoring is another key component of AML compliance. The audit team should review the organization’s transaction monitoring systems and processes, including the identification of suspicious activity, reporting requirements, and escalation procedures.
- Report findings and recommendations: After conducting the audit, the team should prepare a report summarizing their findings, including any non-compliance in internal controls. The report should also include recommendations for improvement and a timeline for implementation.
Addressing AML Deficiencies
An AML audit is a starting point to strengthen and improve your AML program. The insights you receive should prompt action by your compliance team to address the deficiencies discovered.
A great way to strengthen your organization’s compliance program is to invest in powerful AML compliance software. You can opt to implement a comprehensive AML solution or pick and choose modules to strengthen certain areas as needed. Alessa offers an integrated solution that improves compliance processes and reduces false positives. Various solutions are also available as stand-alone modules, including:
- Identity verification and KYC capabilities
- Real-time transaction monitoring
- Watchlist and sanctions screening
- Risk scoring
- Case management
- Automated regulatory reporting
In conclusion, conducting an AML audit is a crucial step in ensuring compliance with regulatory requirements and preventing financial crime. By identifying and mitigating risks, improving internal controls, and enhancing customer due diligence practices, financial institutions can better protect themselves, their customers, and the broader financial system from the harmful effects of money laundering and terrorist financing.
To learn more about how Alessa can help you address issues found during your AML audit, or preemptively correct issues before your next audit, contact us today.