1Effective AML Model Risk Management for Financial Institutions.pdf

Effective AML Model Risk Management for Financial Institutions: The Six Critical Components A White Paper by John A. Epperson, Arjun Kalra, and Brookton N. Behm August 2012 Audit | Tax | Advisory | Risk | Performance As more banks and other financial institutions adapt their AML programs to meet more stringent regulatory guidelines, a new industry standard for model risk management is developing. Outlined here are the critical components of an effective AML model risk management program1 that complies with the more stringent requirements. 3 Effective AML Model Risk Management for Financial Institutions: The Six Critical Components Bank regulators are resolved to punish banks and other financial institutions that fall behind in the struggle to stay current with anti-money-laundering (AML) regulations. This hardline approach is evident in several recent high-profile enforcement actions, fines, and penalties assessed by regulators against financial organizations with lax controls over money laundering. Some of these actions were the result of a bank’s failure to appropriately apply the concepts of a model risk management framework to design, execute, and maintain the models it deployed to manage AML risk. As the financial institutions industry has evolved – offering new high-risk products, acquiring new types of customers, and adapting to frequently changing money laundering requirements – banks increasingly rely on complex models to meet the challenges of AML compliance. The Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board issued “Supervisory Guidance on Model Risk Management,” important regulatory guidance, on April 4, 2011. According to the guidance, the term “model” refers to “a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates.”2 Financial institutions that rely