Companies turning to software to comply with AML rules

Charles Jennings

Throughout their careers in the financial services industry, former Maples managing partner Charles Jennings and compliance officer Kimberly Smith had to deal with an everchanging landscape of anti-money laundering rules and regulations.

Every time they thought their firm was up to date with all their due diligence and compliance checks, a new law would be passed, a sanctions list would be updated, or something else would change that required an update to the system.

“I remember when [Hosni] Mubarak was deposed in Egypt and suddenly the tides turned politically,” Smith said. “And suddenly one jurisdiction one day is fine, and now I have to find all the customers from that jurisdiction and reassess them because the political tides had turned.”

Such changes would take dozens of man hours to adjust to, and compiling data took even longer. For example, when Smith wanted to find out what percentage of Maples clients were deemed high risk, she had to have the company’s IT staff pull raw data, and then it took her another week to analyze the data and come up with a figure.

And all this was for a prominent law firm that devoted ample resources to complying with the law. When Smith started looking at what other, smaller firms were doing, she was startled to see that they were far from being in compliance with the law.

“Some firms are relying on everything in a filing cabinet with nothing done digitally,” she said.

That’s why Smith and Jennings partnered to create SILO Compliance, a software designed to streamline companies’ anti-money laundering and counter-terrorist financing systems.

Streamlining is crucial in an industry where regulators are becoming increasingly strict, said Smith.

PEP risks

Indeed, regulators in offshore jurisdictions are cracking down on firms that don’t follow compliance rules to the letter of the law, even when those firms are doing business with locals. In the British Virgin Islands, for instance, the High Court there upheld a regulatory fine against a Harneys subsidiary insurance company for failing to identify one of its clients – the brother-in-law of former BVI Premier Orlando Smith – as a politically exposed person (PEP).

In that case, Harneys Insurance Management Services argued that their PEP client operated a well-known medical practice in the BVI, and that the company viewed him as low risk because he had a pre-existing relationship with the private client department of Harneys.

Even though there was no suggestion of any nefarious intent, and the Harneys client was known island-wide, the court sided with the regulator. High Court Justice Vicki Ann Ellis ruled that if a company “fails to employ appropriate risk-based policies, processes and procedures for determining whether a customer is a PEP, or if it … does not take reasonable measures to establish the PEPs source of funds of wealth, or if it fails to ensure a process of regular monitoring of the business relationship with a PEP, then it makes perfect sense that such entity should be prosecuted ….”

Four pillars

Smith and Jennings did not address that particular case, but they said the SILO software essentially centralizes compliance data and serves as a checklist for what Smith called the “four pillars” of what anti-money laundering officers need to do. Those pillars are “due diligence,” which is compiling documents such as copies of passports, utility bills, and doing a basic search to make sure a client is not on any sanctions list; “risk rating,” which is grading a client’s risk based on the data; “monitoring,” which is periodically reviewing the data; and “training,” which is making sure that a firm’s compliance officers are up to speed with the latest rules.

SILO constantly keeps track of all these elements of compliance. And while there are other software that do similar things, Smith and Jennings said SILO is likely the most user-friendly because it is designed by people with a background in compliance.

“This is one of the strengths I think SILO has over systems that were designed by software people,” said Smith.

One of the user-friendly designs of the system is pie charts that break down percentages of different aspects of compliance, including how many clients have expired documents on file, who has monitoring due, and what staff have their training complete.

Regulator feedback

The feedback from regulators and clients has been positive, according to Jennings and Smith.

“We’ve showed [SILO] to several different regulators. They obviously can’t endorse products, but we showed the software to them in the early days so they can see what we’re missing,” Smith said. “From that feedback, we were able to make SILO even better.”

Clients that started using the software several years ago have been audited recently, and have been passing “very easily,” Smith added. From the regulator’s perspective, SILO also makes those audits easier, she said.

“One license just gave inspector a login and password to SILO, and said, ‘Here you go,’” she said. “They didn’t have to go pull all the files and get everything ready. They just showed them how SILO works and told them to go to town.”

However, Jennings cautioned that the software is meant to complement – not replace – professional anti-money laundering officers. SILO does not do things like authenticate documents, because such tasks need human judgment.

Even the most advanced algorithms can’t catch everything, he explained.

Jennings told a story about his bank account as a personal example.

He said he looked at his statement and found that there were dozens of transactions in Delhi for about $25 apiece. His bank’s algorithm did not pick up those transactions because they were so small, but a competent human could easily look at the statement and see something fishy, he said.

“They still have to rely on intuition and professional ability,” Jennings said of compliance officers.