Rather than revisit the sine qua non elements of an anti-money-laundering program or propose a one-size-fits-all AML risk model, this article examines operational perspectives of managing money-laundering risk that are not commonly addressed in conventional AML literature. A mini case study is used to stimulate thought about lessons to be learned.

Money laundering--filtering illegal proceeds through the financial system to disguise their origin--is big business, accounting for 2-5% of the global gross domestic product. Today's players include bankers, brokers, lawyers, and accountants. They take advantage of the increasing complexity of financial services and integration of world financial markets through electronic interfaces to effect a maze that thwarts the tracing of illicit funds.

Be it a case of heightened regulations or a genuine concern for enterprise-wide risk management, the immediate response of most financial institutions has focused on formalizing anti-money-laundering (AML) policies and procedures. The standard drill includes detailed written policies and procedures for knowing the customer; escalated processing and resolution of inconsistent findings; staff awareness, training, and education; and realization of the importance of management support. The goals are to demonstrate compliance with regulatory and legislative guidelines as well as protect the bank. The problem that arises is a focus on form (procedural framework) rather than substance, which can result in a prescriptive AML framework that lacks the operational capabilities necessary in identifying, tracking, and reporting suspicious activities.

Case Study

D10, a small trading company purported to specialize in sourcing and reselling products to ultimate buyers, went to a banking branch for import letters of credit (LCs). Typical of trading companies, D10 had a very thin balance sheet. To provide assurance of performance, the owners agreed to partially cash collateralize the LCs (a cash deposit was calculated as a percentage of the LG amount). Like most credit proposals, D10's credit application was approved by local bank management. D10 was an active user of LCs and promptly paid off monies owed. With the company's proven repayment record, the bank gradually increased the LC limits to support increased demand for LG issuance. Sounds like a decent deal? Following a tip-off of alleged improper practices, an investigation revealed the following: