Decoding AML: Best practices for credit union compliance

What are my risks as a credit union?

Credit unions occupy a distinct position in the financial industry, characterized by their local focus and close community ties. However, even though they are smaller than big banks, credit unions are growing and still face big risks related to financial crimes. These risks include the products and services they offer, their branch locations, and new technologies. Each of these can be areas where credit unions might be vulnerable to money laundering.

While credit unions offer similar services as traditional banks, they might not have the same resources, technical skills, and risk management systems. With smaller budgets and fewer people, your credit union might not have access to the latest technology and compliance tools.

Here are some examples of how this disparity can impact AML compliance in your credit union:

Outdated technology: Credit unions may rely on basic or outdated AML compliance systems to monitor member (or client) transactions and perform member due diligence — also known as Know Your Client or KYC programs. They may not have access to the most innovative AML compliance tools used by larger banks or other credit unions with more efficient AML systems.

Manual processes: Due to resource constraints, your credit union may rely on manual procedures to complete AML compliance tasks. These processes can be time-consuming, and prone to human error. More importantly, these manual processes might struggle to stand up to stringent audit scrutiny from AML auditors and FINTRAC examiners.

Smaller teams: Your small compliance team may do an excellent job at mitigating risks and ensuring compliance, but they may also be focused on other non-AML-related compliance tasks. This could mean limited capacity to monitor transactions, perform enhanced due diligence, investigate suspicious activity, and ensure compliance with regulatory requirements.

Training and expertise: Limited resources could also impact the level of training and expertise available for your compliance team. The teams with the most effective training regime tend to have a better understanding of their AML obligations and possess the technical expertise to implement smart and actionable solutions.

How can I make sure my credit union performs well in a FINTRAC assessment?

FINTRAC regularly raises the standards and expectations in its examinations of financial institutions due to their high inherent risks of money laundering. The regulator is very much aware that the financial ecosystem is constantly changing, with things like new products, services, transactions, and technology being developed all the time.

Therefore, it is important that your credit union’s AML program considers emerging trends and monitors any updates in legislation, so you can continue to prevent the risk of money laundering and financial crimes.

But that’s not all. Here’s a list of standards your credit union should meet — or exceed — to ensure you perform well in your FINTRAC examination.

Ongoing monitoring

Once you open an account for a member, you are automatically expected to perform ongoing monitoring of their transactional activities. Regardless of their risk level (low, moderate, or high), you will be expected to define the frequency of review and level of due diligence to be applied during these reviews. Your credit union’s ability to demonstrate an effective ongoing monitoring process will go a long way in showing your AML program is running as expected.

Customize and master your risk and compliance tool

Most credit unions employ the services of third-party risk and compliance tools to assist with real-time transaction monitoring and member risk rating. These tools often come with off-the-shelf functionalities with a need to customize them to suit your credit union’s needs based on your size, scale, and the peculiarities of your AML risk. It is imperative that your AML team has a solid understanding of your third-party risk and compliance tool to ensure it operates as intended or to identify any deficiencies, gaps, or limitations.

Invest in your workforce

Investing in an automated AML compliance tool is a worthwhile undertaking. But your strongest investment is in your people. Not only should your hiring practices ensure you are hiring the right people, but you should also provide comprehensive training to your entire workforce on how to recognize and report suspicious activity. Think of your compliance team as three lines of defense:

First line: These are your member service representatives, who have face-to-face interactions with your membership. If they see anything concerning, they are obligated to report to your compliance team to see if further investigation is required. Having the right reporting and escalation procedures in place is crucial to ensuring all unusual or suspicious activity is tracked and reviewed.

Second line: This is your compliance team, who will likely monitor and review member transactions to watch for any red flags or suspicious activities. If deemed necessary, this team will file suspicious transaction reports with FINTRAC when they determine that there are reasonable grounds to suspect that the activity is indicative of money laundering or terrorist financing. This team is also responsible for performing ongoing monitoring of business relationships, including enhanced due diligence measures for high-risk members.

Third line: This would be your credit union's internal auditor, who independently reviews the actions of the first two lines of defense. A strong third line is crucial in identifying gaps, and deficiencies in the AML program through regular testing and periodic reviews.

Collaboration is essential

Establishing effective communication channels between senior management, the compliance team, and other key stakeholders within your AML framework is vital to maintaining a robust AML compliance program. To make informed decisions, and act swiftly and appropriately, all lines of defense need to be on the same page. The teams within your credit union likely overlap, and so should the ability to understand and recognize AML risk factors.

KYC and record keeping

KYC is the practice of maintaining accurate and updated member information across your credit union. This makes sure that member identification, addresses, occupation, purpose of maintaining an account, and due diligence processes are applied consistently across multiple touchpoints and reviews.

This is important for reducing risks like money laundering, terrorist financing, and other financial crimes. It helps your team stay up to date with understanding members and assessing whether their transactions and activities are consistent with the member information on file. Always having up-to-date, real-time information is critical for your team's defense, as well as for your primary AML compliance tool. Without this data, you might wrongly assess a member's risk, miss identifying a high-risk member, or fail to detect suspicious transactions.

Engage a third-party advisor

FINTRAC guidelines allow credit unions to hire an external third-party auditor or advisor to complete their biennial effectiveness reviews. An external third-party advisor brings specialized knowledge, experience, and a fresh perspective to the table. This allows your credit union to improve its compliance capabilities without needing to invest internally.

Not only can external advisors audit your AML compliance framework, but they can also perform a gap analysis on your existing program to examine and report on its current state. Moreover, they can provide training and support to your compliance team.

This proactive approach helps your team identify areas of improvement so your credit union can face its next FINTRAC assessment with confidence.

Our advisors can help

If you’re concerned about evolving risk assessments or fulfilling FINTRAC’s next examination, please know that you don’t have to navigate it alone. MNP’s AML Services team can help your credit union identify any gaps in your compliance framework and execute a plan to improve your risk assessment.