Auditing BSA/AML Incentive Structures

Richard Ricot

Post-mortem reviews of corporate scandals and enforcement actions indicate a clear linkage between incentive structures and compliance failures at financial institutions. However, there is limited published guidance available to financial institution AML auditors to assist in:

  1. Identifying both the monetary and non-monetary components of BSA/AML incentive structures
  2. Performing a risk assessment of BSA/AML incentive structures covering the three lines of defense
  3. Developing an audit approach for BSA/AML incentive structures

I define incentive structure in its broadest sense to include any intentional decision or failure to act by a financial institution’s Senior Management which incentivizes a particular response or behavior, or creates a disincentive to unwanted behaviors by staff members with AML responsibilities in any of the three lines of defense. These incentives and disincentives can either strengthen or weaken a financial institution’s AML Compliance Program, depending on Senior Management’s risk appetite and prioritization of corporate profit vs. internal control / regulatory compliance goals (i.e. the tone from the top). I exclude Board level incentive decisions relevant to Executive Management from the scope of this white paper, such as the granting and withholding of stock options, golden parachutes, and sign-on bonuses to top level executives. While these decisions will inform the tone from the top, I start my analysis at the point where the Board and Senior Management’s risk appetite is translated into staff level incentive structures with a direct impact on AML Compliance.

Download PDF