The Importance of an AML Audit: How to Prepare

An AML audit evaluates a business’s preparedness for money laundering attempts. AML programs must be compliant and ready to safeguard the business, clients, and stakeholders.
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Anton Vedešin, Founder and CTO of Vespia

May 3, 2024

Financial institutions are required to follow anti-money laundering (AML) laws and regulations. Businesses are regularly subject to an AML audit to ensure compliance.

Regulatory requirements can be updated, and ensuring that organizations are able to adapt to these changes can help protect the safety and security of their business and clients.

Read on to understand the scope of an AML audit, what to expect, and how to prepare for the evaluation.

What is an AML audit?

An AML audit or compliance audit examines a business's policies, procedures, and controls created to detect and prevent money laundering. The external review evaluates how well the existing compliance program adheres to anti-money laundering regulations.

How it works

While specific procedures might vary based on the regulatory environment, the nature of the business, and the jurisdiction, a typical AML audit process follows several stages. Here's a better look at the general flow.

Pre-audit preparation

At this stage, an organization will be notified about the audit. The organization and auditors must meet to discuss the audit's scope, objectives, and timeline to ensure all parties are aligned.

Auditors will also request relevant documentation for the AML compliance program. The following documents are reviewed to better understand the AML framework already in place:

  • AML policies
  • Procedures
  • Risk assessments
  • Past audit reports
  • Training records
  • Evidence of monitoring and reporting

Opening meeting

Key stakeholders will then have an opening meeting to discuss the audit's objectives, scope, and process. This will help establish communication protocols and clarify preliminary findings from the document review phase. The organization can then plan out any next steps to prepare for the actual audit.

On-site examination or remote review

There are two ways to conduct AML audits. This can be done onsite or remotely. Auditors will thoroughly examine AML policies, procedures, and controls. This involves interviewing staff, observing processes, and conducting transaction reviews to assess AML compliance.

Transaction testing will also be done for auditors to evaluate unusual or suspicious activity. This can verify if the right diligence, monitoring, and reporting procedures are in place.

Identifying findings and issues

Auditors will compile any findings, noting areas of improvement for non-compliance and weaknesses in the AML program. Best practices will also be listed in the findings.

Risks associated with findings are also considered as the potential impact on the organization's compliance and risk exposure.

Exit meeting

The exit meeting is held with the organization's management to discuss findings and main areas of concern, from non-compliance to opportunities for improvement.

The exit meeting also allows the organization to clarify the findings before issuing the final audit report.

Audit report

A detailed audit report outlining the methodology, findings, risk assessments, and recommendations is prepared by the auditor. The organization can review and provide feedback.

After factoring responses and additional information the organization shares, the auditor issues the final audit report.

Follow-up and corrective actions

Organizations are expected to prepare action plans to address audit findings. These plans must indicate corrective actions to be taken, the representative responsible, and implementation timelines.

An agreement or regulatory requirements can stipulate a follow-up review or audit. This can help assess whether or not the corrective actions are implemented and effective.

AML audit vs. Financial audit

An AML audit and a financial audit are both required examinations conducted within organizations. Each is essential for establishing integrity and ensuring compliance. However, they have different objectives.

Let's take a closer look at the differences.

AML audit

An AML audit assesses the effectiveness of an organization's efforts to prevent money laundering activities. The objective is to ensure compliance with AML laws and regulations. This includes factoring:

  • Risk assessments
  • Customer due diligence
  • Know Your Business (KYB) and Know Your Customer (KYC) procedures
  • Transaction monitoring
  • Launching suspicious activity reports

Financial audit

Financial audits focus on verifying the accuracy and completeness of an organization's financial statements and records. This reviews the following:

  • Balance sheets
  • Income statements
  • Cash flow statements
  • Other supporting documentation

AML audit checklist

When preparing for your organization's AML audit, you can use an AML audit checklist. Your AML audit checklist is a comprehensive tool for evaluating an organization's compliance with AML regulations and the effectiveness of its AML program.

While specific requirements can vary by jurisdiction and industry, here are some items normally considered for AML audit requirements.

1. Review your AML compliance program

Conducting an overall review of your AML compliance program is necessary. This should cover three key areas: AML policies, risk assessment, and governance.

Reviewing written AML policies, procedures, and controls will ensure your AML program is comprehensive, up-to-date, and, most importantly, compliant with current laws and regulatory requirements.

Examining your organization's AML risk assessment processes will help you determine the quality of your program. It should effectively identify the risk detection, assessment, and mitigation process.

Governance and oversight are important factors in your AML program. Assess the roles and responsibilities of the board of directors and senior management in overseeing and implementing the AML compliance program.

2. Evaluate Customer Due Diligence and Enhanced Due Diligence

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are crucial to an AML audit checklist. They safeguard compliance by mitigating the risks of money laundering and terrorist financing.

CDD procedures should take a risk-based approach while complying with regulatory requirements. This means efficient Know Your Business (KYB) and Know Your Customer (KYC) processes should be in place to assess risks associated with individuals and entities. Ensuring EDD processes are established will also help secure high-risk customers or politically exposed persons (PEPs).

3. Employee training and awareness

The assessment of employee AML training programs should examine training frequency, coverage, and effectiveness. Employee awareness of AML obligations should also be considered.

Any updates to AML laws and regulations, as well as internal AML policies, should signal refreshers for training.

4. Suspicious Activity Reporting (SAR)

Verifying whether your organization's SAR procedures system is functioning well will go a long way. They should be able to identify, investigate, and report any suspicious activities to the relevant authorities in a timely manner.

Additionally, reviewing SAR filings for quality assurance can ensure they adhere to any crucial regulatory requirements that prevent money laundering.

5. Independent audit and compliance testing

Conducting an independent AML audit to test your AML program can assess the quality and thoroughness of existing processes. It's a good practice to build into your regular workflow to maintain peak performance at any given time.

6. Compliance with sanctions and embargoes

Reviewing processes for screening transactions and customers against sanctions lists is important for regulating foreign transactions. This means meeting restrictions maintained by the Office of Foreign Assets Control (OFAC) in the U.S., and ensuring compliance with embargo and sanctions regulations.

Preparing for your compliance audit

Preparing thoroughly for a compliance audit can significantly reduce stress and improve the outcome. It demonstrates your organization’s commitment to compliance and can uncover areas for improvement that strengthen your operations.

Best practices for AML compliance audit

Whether you're gearing up for a financial, environmental, or data privacy compliance audit, the preparation process is critical to identify and address any potential issues before the auditors arrive.

Here are some best practices you'll want to work into your AML compliance audit preparations.

  1. Review previous findings.
    When you go over a previous report's findings, you can be sure to address unresolved issues or areas where compliance was noted as weak. You can also check the status of corrective actions taken, ensuring they are fully implemented. These changes, however big or small, can affect your rating in the next audits.
  2. Conduct internal reviews.
    Make it a point to conduct these independent testing or internal audits regularly for precaution. They can help identify gaps or areas of non-compliance ahead of time. Your organization can take action to fill these gaps and keep your AML program in tip-top shape.
  3. Compile important documentation.
    Collect and organize all documents, policies, procedures, and records that auditors may request. This includes manuals, training records, compliance reports, and evidence of compliance practices. Keep them accessible and organized.
  4. Review and update your policies.
    Keep your policies and procedures updated, well-documented, and aligned with the latest regulations. You can do this by conducting an independent AML audit. This helps you stay prepared to show evidence of how they are implemented.
  5. Work with AML software.
    The best AML software will enable you to seamlessly conduct thorough steps that follow the necessary compliance laws, mitigate potential risks, and ultimately protect your financial institution.
  6. Confirm the logistics of your audit.
    Confirm the audit schedule and logistics with the auditing body. Ensure the availability of key personnel during the audit. Prepare the physical and virtual access auditors might need, such as securing document review rooms and electronic systems access.
  7. Establish your point of contact.
    Assign a knowledgeable and experienced person as the primary contact for auditors. This person will coordinate audit activities, accompany auditors, and provide them with requested information.

How often you should audit your AML program

The frequency you'll need to audit your AML program can vary depending on your business needs and risks aside from standard AML regulations. Normally, this could mean an annual AML audit or biannual schedule works for you. Some things you'll want to consider when deciding how often you should conduct internal audits include:

  • Regulatory requirements
  • Risk assessments based on the volume of high-risk customers
  • Peer benchmarking based on your industry's best practices
  • Business size and complexity
  • Recommendations from previous audits

Enhancing your AML program

Financial crime continues to pose a threat to the integrity and stability of financial institutions on a global scale. This makes it doubly necessary for AML audits to be conducted regularly. These can ensure compliance with any laws and regulations locally and internationally.

There are a number of ways you can prepare for your AML audit, from reviewing past reports to conducting internal testing and utilizing an AML software. Regular checks and upgrades are the best way to enhance your program without missing vital updates for AML laws.

Vespia offers a compliance officer services based on AI hat automates the process for in-depth data analysis, seamless risk categorization, all while ensuring you meet compliance standards. Book a demo to see how Vespia can work for your business.

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