As of April 2019, an average of $6.6 trillion is traded on foreign exchange markets every day. With that amount of volume and the simple fact that it is money being traded, the risk for money laundering activities is high, and strict Anti-Money Laundering (AML) procedures are a requirement for forex companies. For foreign exchange operators, how can they ensure that forex compliance measures are met in a manner that is cost effective, efficient and customer friendly?
For any specific foreign exchange company, regulatory requirements will differ as there are numerous jurisdictions and industry segments. However, there are best practices and procedures that can guide a money services business (MSB) to help make sure it’s not increasing its fraud and risk profile or enabling illicit activities.
As with any institution dealing with money, forex brokers must have:
- Careful controls on account creation, transaction monitoring, reporting and overall system management and security
- Appropriate licenses to ensure the public has protections and the market is fair and regulated
- Reliable financial control systems and methods to protect funds (such as insurance)
- Procedures for audits and reviews
Many of the regulations focus on protecting the consumer, and rightfully so. Beyond those requirements, legitimate forex organizations must also protect their operations.
The critical first encounter, account creation
The account creation process, the first step of onboarding, is a crucial point in the customer journey. If the experience is secure, reasonably quick and seamless, the prospect can be onboarded efficiently and become a long-term customer. However, if the process is unsophisticated, difficult or slow, the prospect often abandons the process and moves on to other options.
For forex operators, account creation is the first opportunity to perform due diligence on the prospective customer. They can examine the profile of the customer, determine the risk and decide whether an account should be opened. Stopping a bad actor from entering the system is the best way to avoid problematic activities.
Balancing the desires of the customer for a good account opening experience with the requirements of effective customer due diligence is the sweet spot that will help drive customer acquisition and ensure compliance. Fortunately, modern digital systems can deliver on both aspects simultaneously.
Proper identity verification is key; knowing who the customer is becomes the first step in determining if the individual is legitimate or has any connections to potential money laundering or other criminal activities. Without properly identifying the individual through Know Your Customer (KYC) processes, fraud checks, risk checks and watchlist checks, other due diligence procedures are ineffective.
Often, the exact identity requirements are stated by regulators. However, simply ticking off minimum requirements generally doesn’t meet the standards of best practices. Regulations can change, requiring an extensive rescreening process. New fraud and money laundering techniques can emerge and do damage before any regulatory notice occurs. Having systems that are dynamic, robust and scalable is a better alternative, allowing the appropriate level of verification to be deployed to the specific circumstance.
The risk-based approach, balancing the risk profile with the risk controls, provides a model for varying the level of friction in an appropriate manner; not all accounts pose the same risk, so not all accounts should require the same level of scrutiny.
- What jurisdiction are they in?
- What types of transactions are involved?
- What volume of transactions?
- What is the value of transactions?
- Who is the beneficial owner of the account?
Having automated, digital onboarding systems enables customers to onboard when and where they want, while allowing back-end workflows to deliver appropriate identity verification measures. Combining carefully thought-out compliance strategies with effective tools helps deliver the front-end experience and the back-end governance to create bottom-line success.
Keeping the books
Once an account begins trading, proper monitoring and accounting of transaction is essential. What might start as legitimate behavior can quickly turn questionable and, without proper oversight, can cause reputational and financial damage.
The New York Fed offers some foreign exchange operational guidelines, including these:
- Details of each trading transaction should be accurately recorded
- Payment instructions should be correctly exchanged and executed
- Timely information should be provided to management and traders
- Underlying results of transactions should be properly evaluated and accounts quickly reconciled
- Open issues and discrepancies should be resolved in a timely manner
Event-based or pattern-based triggers can be put in place to indicate unusual activity requiring further investigation or the filing of a Suspicious Activity Report (SAR). Some triggers include:
- Significant and unexplained changes in account activity
- Changes in employment or business operation
- Changes in ownership of a business entity
- Red flags identified through suspicious activity monitoring
- Results of negative media search programs
- Length of time since customer information was gathered and the customer risk profile assessed
- Large cash transactions
An ethical operation
No matter how sophisticated the technology system is, compliance requires people to act studiously and ethically; many financial crimes are a result of neglect or outright fraud by internal staff. Having effective hiring practices, clear policies and procedures, ongoing training and internal audits goes a long way to ensuring that the operations are secure and compliant.
Forex compliance starts at the top, with an organizational attitude that promotes ethical behavior. If an organization puts the time and effort into deploying solid and scalable systems, the risk of fraud and the fear of audits will be minimized. As the forex market grows and more opportunities are created, the companies that demonstrate that they are trustworthy players and care about the customer experience are best positioned to reap the rewards.