Performing Background Checks on Employees for AML Compliance
Anti-Money Laundering (AML) Regulations and Background Checks of Employees
- Determining whether the prospective employee must be screened
- Determining the manner in which screening must be conducted for a prospective employee
- Determining if and when re-screening must be conducted for employees
- Managing employees who fail to comply with the reporting entity’s policies, systems, controls, and procedures without any reasonable excuse
Current Employees:- When employees are considered for promotion to take a higher position or get transferred, they must be screened if they may be in a position to facilitate Money Laundering or Terrorism Financing (ML/TF) activities to know if there has been any significant change in their status. Some professional licenses expire with time. The validity of such licenses can be determined by background checks. This allows a reporting entity to promote the right people. It is good practice to periodically screen the existing employees.
Potential Employees:- As part of the hiring process, background checks on potential candidates should be done to see if they may be in a position to facilitate ML/TF activities if they are hired. Whether done by external agencies or internal staff, these checks should be performed vigilantly as per the role. By doing so, reporting entities stay compliant with the regulatory requirements.
To implement the mandate of the Employee Due Diligence Program, a checklist should be created, which can be customised depending on the role of a candidate.
Employee Background Checklist for Anti-Money Laundering (AML) Compliance
What points should form part of the background screening depends on the role of an individual. Some roles have a higher influence on internal control systems and exposure to ML/TF risks than others. For example, broader enhanced screening is required for an individual at the board/top management level as compared to an entry-level employee in a junior role. The candidate’s consent must be obtained before initiating screening.
Here is an employee background checklist for reporting entities to refer to for the purpose of AML compliance:
Identity Verification: This is a check on the identity of a person to confirm they are who they say they are. Undertake to Know Your Employee (KYE) procedures just as you undertake to Know Your Compliance (KYC) procedures. This includes verifying personal details such as name, date of birth, and place of birth and verifying them against reliable and independent documentation.
Name Screening: A name screening involves screening a person’s name against various global watchlists to identify persons having negative media attention, criminals, PEPs (local or international) and sanctioned individuals.
Reporting entities should adopt a risk-based approach when screening and re-screening customers.
National Police Check/ National Police Certificate (NPC): A police check provides information on whether an individual is or has been a criminal in Australia. In Australia, this can be taken from the Australian Federal Police.
Employment & Educational Background Check: To verify the information given by a candidate on a resume, checks on employment history and educational qualifications must be performed.
For employment checks, official documents from previous employers, such as employment and experience letters, can be obtained.
Degrees & certificates can be collected to verify the educational background of a candidate.
These official, original, and certified documents can be further verified with written references, referee reports or by contacting universities or training institutions to know about the time of education, degree received, year of completion, grade and scores obtained and by getting official degrees and passing certificates sealed and signed by the institution.
Self-Disclosure & Attestation: It may not be practically feasible for reporting entities to update their employee’s information on a real-time basis based on changing circumstances due to the lack of availability of accurate information. Hence, some employers get signed and attested disclosures from potential and existing employees to update the reporting entity on changes in the material information provided.
Background Check through Social Media Platforms: Social media platforms like LinkedIn provide a great deal of information about a person, such as their employment history, education, and professional certificates. To know about employability and work ethics, reporting entities can check recommendations given by people they have worked with in the past.
Additional Checks: For positions where the risk of M/TF activities is high, employers perform credit checks and obtain the history of the geographic location where the candidate has lived. This is to verify the employee’s creditworthiness and to confirm if the employee is from any high-risk jurisdiction. It is also important to know if the employee has an interest in another business/company to mitigate the risk of conflict of interest. Further, checks on financial standing help ascertain whether the candidate is or has been declared bankrupt or has a poor credit history.
Importance of Employee Due Diligence in Anti-Money Laundering (AML)
When doing business with a customer, a reporting entity wants to understand the customer before entering into a business relationship. Having knowledge about customers and their businesses helps in identifying high-risk customers, unusual transactions and activities.
Similarly, when a reporting entity hires an employee, it is important to understand the background of the employee to see if the person is a good fit for the role as well as the reporting entity and does not pose any ML/TF risks to the reporting entity. Hiring the wrong candidate can be costly for a reporting entity. This is because, as per the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, reporting entities are vicariously liable for the actions of their employees or agents.
This can cause significant legal and reputational damage to the said entity.
Moreover, as employees have access to confidential data about the reporting entity and customers, it is important to ensure that the data does not go into unwanted hands. It helps in preventing risks of fraud and creates a safer work environment. Background checks help identify illicit actors and prevent the risks of hiring them.
Best Practices for Employee Background Checks
- All the observations and decisions made during the employee due diligence process must be recorded and maintained throughout the period of employment and for a period of 7 years after the record is no longer relevant
- Adopting a Risk-Based Approach in Employee Due Diligence, i.e. subjecting persons holding high-risk positions to Enhanced Due Diligence
- Setting up an internal system to deal with employees who fail to comply with the reporting entity’s AML/CTF program
- Using emerging technologies for automating due diligence processes, such as KYE and name screening
- When outsourcing hiring processes, reporting entities should ensure that the agency to whom they outsource hiring conducts employee due diligence.
AML Australia’s Key Takeaways on Performing Background Checks on Employees for AML Compliance
About the Author
Pathik Shah
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.
