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Rising anti-money laundering risks highlight need for three lines of defence

Rising anti-money laundering risks highlight need for three lines of defence

10 April, 2024
Global Regulatory, Compliance & Legal Anti Money Laundering Regulatory Reporting Regulatory Health Checks
  • 73% of alternative fund managers have seen the level of Anti-Money Laundering (AML) risks increase over the past two years and 88% say compliance risk is likely to increase over the next two years
  • Download new report entitled ‘Three lines of defence in AML: creating a culture of compliance’ published by Ocorian and Newgate Compliance

Rising anti-money laundering risks are increasing the pressure for alternative fund managers to have three lines of defence (3LOD) in place, a new report published today by Ocorian and Newgate Compliance warns.

However, the report Three lines of defence in AML: creating a culture of compliance warns that in many firms the AML function is stretched to breaking point with under-resourced compliance teams and not enough investment. It also highlights the importance of a cohesive, separate strategy in mitigating AML risk and how streamlining 3LOD can create efficiencies and improve protection without piling on cost. The report can now be downloaded.

This report builds on Ocorian’s international study*, carried out among senior leaders and senior compliance and risk executives at alternative fund manager firms collectively managing around US$132.25 billion, which found that almost three quarters (73%) have seen the level of AML risks increase over the past two years.

Despite almost all (99%) saying senior management and the Board already take AML management seriously, almost three quarters (70%) admit that their organisation has been subject to AML fines or sanctions in the last two years. Firms are urged to take action as financial crime becomes an increasing risk to both revenue and reputation – the research shows that almost nine in ten (88%) said compliance risk was likely to increase over the next two years.

In response 87% say that their organisation’s focus on AML management will increase over the next 24 months. Of these, almost a quarter (24%) say it will increase dramatically. Only 12% say it will stay the same.

Take three lines of defence (3LOD)

Nearly all the firms surveyed (98%) said they took a ‘three lines of defence’ approach to compliance and risk management, consisting of frontline policies and processes, oversight and intelligence and finally, auditing. But worryingly, around a third (64%) said their compliance management teams were under-resourced and the 3LOD approach only works when each line of defence is working effectively.

Joe French, Managing Director and Head of Financial Crime, at Ocorian, said: “Our findings reveal that financial crime teams are under resourced, and this is creating additional risk to firms. Particularly in a slow economy, compliance officers often struggle to make the case for greater investment, but criminals and regulators clearly don’t stand still.

“Whether it’s the numerous Dear CEO letters, the marked step up in supervisory and enforcement action or the proposed public naming and shaming, it is clear the FCA mean business on AML. It’s time for firms to stop and review what they have in place and not just assume they are getting it right. The UK government estimates £100 billion is lost each year to money laundering which suggests plenty are getting it wrong.

“As well as sharing our independent research and strategy in mitigating AML risks, our new report highlights how firms can streamline their three lines of defence to create efficiencies and improve protection without piling on costs.”

As well as having over seven years as part of Newgate Compliance, Joe French, has 13 years’ experience with HM Revenue & Customs leading intelligence teams which developed domestic and international criminal and civil cases in relation to money laundering, fraud, and cybercrime.

Ocorian’s three lines of defence approach to tackle risk and compliance challenges:

  • Line one: create clear and robust frontline processes and procedures, supplementing this with both online and face to face training programmes for staff.
  • Line two: build and empower a comprehensive compliance oversight function which monitors and assesses the processes and procedures, as well as advising and supporting staff and senior managers to comply with the firm's obligations.
  • Line three: seek review and challenge of the firm’s AML framework via annual independent audits.

Assisting with a broad range of compliance services Ocorian’s subsidiary compliance consultancy service, Newgate Compliance, delivers pragmatic and flexible solutions to help clients meet often complex, evolving and increasing regulatory obligations. The team led by industry experts and ex regulators helps clients with the submission of regulatory authorisation applications, provision of Money Laundering Reporting Officers (MLROs), the implementation of compliance frameworks and governance structures, as well as regulatory and compliance training for employees. Newgate is experienced in supporting firms globally for over ten years, whether assisting with first, second or third lines of defence.

*Ocorian commissioned independent research company PureProfile to conduct a global study (across the US, UK, Germany, Brazil, Singapore, Hong Kong, UAE, Turkey, Quatar, Saudi Arabia and Mauritius) of 101 senior executives, regulation and compliance executives working at alternative fund manager firms (including private equity, venture capital, real estate, infrastructure, private debt, renewables and hedge funds) during January 2024.