The Wolfsberg Group and Effectiveness in AML Compliance

Château Wolfsberg

The Wolfsberg Group is a private initiative of thirteen global banks aimed at developing frameworks and guidance for the management of financial crime risks, particularly with respect to Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies.

As a private sector initiative, it is a supplement to the main multilateral initiatives of organisations such as the Financial Action Task Force, Basel Committee on Banking Supervision, etc. The Group, established in 2000, is named after the Château Wolfsberg in north-eastern Switzerland, in the company of representatives from Transparency International, including Stanley Morris, and Professor Mark Pieth of the University of Basel, to work on drafting anti-money laundering guidelines for Private Banking.

After its first set of AML principles, the group has been publishing several documents in the form of Principles, Guidance, Frequently Asked Questions (FAQs) or Statements. These cover a wide range of allied subjects, including Financing of Terrorism, Anti-Money Laundering Principles for Correspondent Banking, Guidance on a Risk Based Approach for Managing Money Laundering Risks, FAQs on Politically Exposed Persons (PEPs), Trade Finance Principles, and Guidance on Anti-Bribery & Corruption Compliance Programmes. These are aimed at providing financial institutions with an industry perspective on effective financial crime risk management.

Taking forward the global initiative focussing on effectiveness outcomes in AML/CTF, the Group had, in December 2019, laid down the key elements for an effective AML/CTF programme. These included the following:

1. Complying with AML/CTF laws and regulations

2. Providing highly useful information to relevant government agencies in defined priority areas

3. Establishing a reasonable and risk-based set of controls to mitigate the risks of an FI being used to facilitate illicit activity

The Group hoped that these steps would to “optimise the detection and deterrence of illicit activity, while at the same time reducing friction on innocent customers and helping governments achieve their financial inclusion objectives.”

Encouraged by the move towards more effectiveness-focused AML/CTF regimes in several jurisdictions, the Group has suggested (in its guidance released on 12 August 2020) that the financial institutions take the following steps to evolve their AML/CTF programmes:

1. Assess Risk in Defined Priority Areas:

This is the starting point. Understand the risks associated with priority financial crime areas in relevant jurisdictions. The applicability of those risks. Material changes to these risks over time.

A priorities-focused AML/CTF regime is most effective when relevant government agencies specifically define a set of national priorities for the FIs. If there are no such priorities prescribed, see those in the National Risk Assessment.

2. Implement/Enhance Controls:

Assess controls against identified risks, enhancement them, or implement new ones, and associated governance.

3. Prioritise Resources:

Use a risk-based approach to reallocate time and resources from lower-risk to higher-risk areas. Assess benefits of leveraging new technology such as machine learning and artificial intelligence, and discontinue practices that do not aid an effective AML/CTF programme.

4. Engage with Law Enforcement:

Engage actively with the appropriate level of law enforcement in order to understand operational priorities, and trends and emerging threats from a more strategic perspective. The most effective engagement is through Public-Private Partnerships (PPPs).

5. Demonstrate AML/CTF Programme Effectiveness:

Assessment of effectiveness should not merely be a statistical exercise: qualitative factors may be equally, if not more, important.

Effectiveness can be enhanced when law enforcement agencies and supervisors provide feedback on what they have found to be most effective in an FI’s reporting and/or how components of the FI’s programme have been implemented.

The Group intends to publish additional materials on each of the five steps to assist FIs in developing, and continuously enhancing, their AML/CTF programmes

Comment:

As principles go, these are unexceptionable. But, there seems to be nothing new in any of these points.

Moreover, if one were to go by the record of some of the individual 13 banks which form the Wolfsberg Group, during the 20 years that it has been in existence, the result is not encouraging. Some of them notched up the biggest ever penalties for noncompliance with AML/CFT regulation. This sad situation undermines the legitimacy of the entire exercise. That leaves us with the question whether these principles are for they themselves to adopt or are they for wider acceptance among the banking fraternity.

One cannot but leave with the thought that the Group exists only for the purpose of announcing an intent of good compliance rather than seeing them through to their logical ends. Perhaps one will have to await further detailed guidelines for each of the five points. But these are not likely to throw up anything new that has not been said before.

© G Sreekumar 2021

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