Five questions with Mizuho Financial Group

Currently he is the chief compliance and AML officer of Mizuho Saudi Arabia, part of Mizuho Financial Group, one of the largest financial institutions in the world. Prior to this he was compliance head of Al Bilad Bank, a Shariah-based bank that launched its operations in 2005. He spoke to deputy editor Aarti Maharaj about the growing importance of AML compliance and the steps Saudi Arabia has been taking to tackle this issue.

1. Why is AML compliance becoming such a major issue, especially in Saudi Arabia?

In November 1995, the Saudi Arabian Monetary Agency (SAMA) issued its first set of guidelines relating to AML activities at banks operating in Saudi Arabia. In recognition of the international legal supervisory efforts to combat the spread of money laundering and terrorist financing, SAMA further updated the initial 1995 AML Guidelines. Following this, in May 2003 SAMA issued a more extensive set of Rules Governing Anti-Money Laundering & Combating Terrorist Financing.

The update issued in May 2003 provided a substantial improvement to the initial regulations and included mandates relating to combating terrorist financing. It provided basic measures and actions that companies can use in order to prevent, detect, control and report money laundering and terrorist financing activities. Since then, SAMA has continued its efforts to further improve and refine regulations. The second update was issued in December 2008. To cope with local, regional and global developments, SAMA has issued its third update and as the regulatory setting changes, SAMA’s updates are reflecting this.

2. What are the general steps a company should take when designing a comprehensive AML compliance monitoring program?

An effective AML compliance program consists of forming a task force, choosing a management mechanism, determining the functions, communication and training of staff, supervision and monitoring, and reporting. Many companies spend great efforts establishing a comprehensive compliance monitoring program but fail to have it implemented due to the following reasons:

•    Lack of acceptance and support from abroad and top management

•    Compliance department is staffed poorly

•    Compliance officer lacks seniority, qualifications or experience, or is not assigned on a full-time basis to compliance matters

•    Complete reliance is placed on the compliance officer and compliance department to carry out the monitoring

•    Failure to identify and manage conflicts of interest.

3. A recent Deloitte poll reveals that in 2012, many foreign and local financial institutions will spend a lot of time ramping up their AML compliance efforts. Why do you think this is so?

As the old saying goes, criminals are always one step ahead. In every changing geopolitical environment, AML is getting more sophisticated by the day. The regulators are now getting tougher and tougher when it comes to AML and countering terrorist financing. This is true not only for Saudi Arabia, but for the whole world. Hence, it is incumbent on financial institutions to always be prepared for what lies ahead.

Also, there are direct as well as indirect costs of non-compliance. The direct costs are losses and expenses occurred due to non-compliance or breach of laws and regulations. These include company failure such as incurring losses, fines and penalties; fines and hidden results from inspections, litigation and legal proceedings; bankruptcy of individuals and companies; and systemic failure in the market, which can occur at the regional or global level.

The indirect costs of non-compliance include loss of good standing and good reputation in the market, which will lead to low morale among employees and resignation of good staff. Customers and clients may also divert their business to other companies.

4. What are some common challenges that the chief compliance officer faces when it comes to AML compliance?
Management:

• Board members understanding and providing the support needed for AML compliance

• Senior management support

• Business support, when it comes to clarifying and addressing AML system red flags.

AML system:

• Financial institution, banking/capital market-related AML scenarios: banks are known for placement of money laundering and  the capital markets side is known for layering

• The need for continuous updates

• Fine-tuning of AML scenarios, which will bring accurate identification of red flags – otherwise you will end up with a backlog, which may seem never-ending.

Staff:

• Management approval for staff training budget

• Retention of knowledgeable staff

• Hiring of additional knowledgeable staff.
 

5. Recently, the Middle East and North Africa Financial Action Task Force (MENAFATF) has acknowledged that Saudi Arabia has hit a major milestone by supporting 40 AML resolutions and nine anti-terror-funding resolutions. What should compliance professionals know about MENAFATF and its objectives?

MENAFATF is voluntary and cooperative in nature and is established by agreement between its members. It does not derive from an international treaty. It is independent of any other international body or organization and sets its own work, rules and procedures, which are determined by consensus between its members. It will cooperate with other international bodies, notably the Financial Action Task Force (FATF), to achieve its objectives. Saudi Arabia is a member of both the FATF and MENAFATF.
Member countries of MENAFATF agree on the following objectives and will work towards achieving them:

•    To adopt and implement the 40 FATF recommendations against money laundering.

•    To adopt and implement the FATF’s special recommendations against terrorist financing.

• To implement the relevant UN treaties and agreements and UN Security Council resolutions dealing with countering money laundering and terrorist funding.

• To cooperate in order to raise compliance with these standards and measures within the Middle East and North Africa region and to work with other international organizations to raise compliance standards worldwide.

• To work together to identify money laundering and terrorist financing issues of a regional nature, to share experiences of these problems and to develop regional solutions for dealing with them.

• To build effective arrangements throughout the region in order to combat money laundering and terrorist financing in accordance with the particular cultural values, constitutional frameworks and legal systems of the member countries.

Saudi Arabia’s legal system is a unique one. The Quran and Sunnah – the Prophet Muhammad’s teachings and traditions – represent the core of the legal and ruling systems. According to Islamic law (Shariah) and legal theorists, there are general laws standing in many cases, but some of the statutory laws are silent on some issues.

The MENAFATF plenary elects from amongst its members. The president and vice president, with expertise in the areas of combating money laundering and terrorist financing, will remain in the position for one year, provided they are not from the same country. The current president for 2012 is HE Dr Abdulrahman Bin Abdulmohsin Al-Khalaf, deputy governor for technical affairs of SAMA, who is responsible for overseeing the efforts of the group. The vice president is HE Esam Eddin Abdul GadIr Al-Zain, undersecretary of the Ministry of Justice and president of the administrative committee for combating money laundering in Sudan, a country that has been making active strides towards legislating and cracking down on money laundering.