The “Three Lines of Defense” is a widely used phrase for describing how organizations should manage their anti-money laundering (“AML”) risk. As the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) regulations has applicability outside U.S. borders, all individuals and entities are required to comply when conducting transactions in U.S. dollars. OFAC requires that institutions must block the accounts and property of specified countries, entities, and individuals. Furthermore, it prohibits the rejecting of unlicensed business with sanctions countries, entities, and people.
The Five Pillars
Four pillars of an AML/Counter-Terrorist Financing (“CFT”) program include a system of internal policies, procedures and controls (the first line of defense), a designated compliance function with a compliance officer (the second line of defense), an independent audit function to test the overall effectiveness of the AML program (the third line of defense), and an ongoing employee training program. The fifth pillar, established by the Financial Crimes Enforcement Network in 2016, requires appropriate risk-based procedures for conducting ongoing customer due diligence. These procedures include understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile, conducting ongoing monitoring to identify and report suspicious transactions, and maintaining and updating customer information.
The First Line of Defense
Policies and procedures should be specified in writing and communicated to all personnel in order to keep organizations in compliance with regulations. Guidelines should be clearly established for detecting and reporting suspicious activity. Customer-facing staff need the deepest practical understanding of AML/CFT efforts, and need to know how to handle cash transactions and establish loans and accounts while complying with regulatory requirements. Operations personnel should not be overlooked in the training process, as they are often in position to recognize illegal activities.
The Second Line of Defense
A designated compliance officer should oversee the coordination and monitoring of the organizations compliance program, and hold responsibility for reporting suspicious transactions. Advanced, ongoing training is recommended in order to stay on top of requirements and emerging trends. This includes attending conferences and industry training events. The compliance officer’s duties should be kept separate from business line responsibilities in order to avoid conflicts of interest, and they should have a direct line of contact to senior management.
The Third Line of Defense
Independent testing staff is required in order to maintain the third line of defense. This staff should receive its own training and act apart from the rest of the organization in assessing the adequacy of the AML/CFT compliance program, the effectiveness of its procedures, and compliance oversight and training. It is senior management’s responsibility to ensure audit functions are designated to qualified staff.
Complying with OFAC
The board of directors has responsibility for an organization’s AML/CFT compliance program. Leadership must actively support and understand compliance efforts, and seek to manage and mitigate any deficiencies identified. Adequate resources must be devoted to the compliance function, and ensuring an independent, competent party tests the program is one way to assess effectiveness.
Partnering with a third party due diligence provider is a proven way of ensuring comprehensive compliance with strict OFAC regulations. The first line of defense is responsible for onboarding customers, and assessing their source of wealth, account activity, and ownership structure. It is vital that these customers are vetted in order to prevent exposure and risk of processing a transaction on behalf of a sanctioned interest. Business activities, political ties, and geographic exposure can all be investigated as part of this process.
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FAQs
The three lines of defence, viz., Employees, Compliance Officer, and Independent AML Audit, serve as a safeguard for the business to fight against money laundering and terrorist financing risks. In this infographic, we will discuss the three lines of defence. Employees are the first line of defence.
What is the 1st, 2nd, and 3rd line of defense in banking? ›
Implementing the Three Lines of Defense model involves several key steps: Establish Clear Roles and Responsibilities: Define and communicate the roles of each line – operational management (1st line), risk management/compliance (2nd line), and internal audit (3rd line).
What are the three lines of AML? ›
In essence, the 3 LoD in AML/CTF ensures that responsibilities for preventing, detecting, and reporting money laundering and terrorist financing are clearly defined and that there are checks and balances in place to protect the integrity of the financial system.
How do you explain the three lines of defense? ›
Individuals in the first line own and manage risk directly. The second line oversees the first line, setting policies, defining risk tolerances, and ensuring they are met. The third line, consisting of internal audit, provides independent assurance of the first two lines.
What are the 3 stages of anti money laundering? ›
It involves three distinct stages: placement, layering, and integration. Common techniques include cash smuggling, shell companies, and real estate investments. Anti Money Laundering (AML) regulations are essential for effective prevention with Know Your Customer checks being critical to comply with these rules.
What is the 1st, 2nd, and 3rd line of defense immune system? ›
These are three lines of defense, the first being outer barriers like skin, the second being non-specific immune cells like macrophages and dendritic cells, and the third line of defense being the specific immune system made of lymphocytes like B- and T-cells, which are activated mostly by dendritic cells, which ...
What is the 2nd line of defense? ›
Second Line of Defense – Risk Management and Compliance
The second line supports management to help ensure risk and controls are effectively managed. Management establishes various risk management and compliance functions to help build and/or monitor the first line-of-defense controls.
What are the 1st second and 2nd lines of defense? ›
The first line of defense against infection are the surface barriers that prevent the entry of pathogens into the body. The second line of defense are the non-specific phagocytes and other internal mechanisms that comprise innate immunity.
What is the first line of defense in anti money laundering? ›
As a 1st line of AML defense, the employees must ensure that no financial criminals can penetrate the business to misuse the entity for laundering funds or executing any other financial crime.
What is the second line of defense in AML? ›
Typically, in terms of AML, the Second Line of Defense is responsible for risks. A company's risk and compliance professionals have to become familiar with applicable industry regulations, including for AML.
The WHO system divides AML into several groups:
- AML with certain genetic abnormalities (gene or chromosome changes)
- AML with myelodysplasia-related changes.
- AML related to previous chemotherapy or radiation.
In patients with AML, the blood factories in the bone marrow produce blasts of large, malignant white blood cells, which crowd out healthy blood cells. Occurring with terrifying speed, the disease can progress very quickly.
What is the difference between the 2 and 3 line of defense? ›
First line of defense: Owns and manages risks/risk owners/managers. Second line of defense: Oversees risks/risk control and compliance. Third line of defense: Provides independent assurance/risk assurance.
What are the 3 categories of the first line of defense? ›
Nonspecific innate immunity can be characterized as a multifaceted system of defenses that targets invading pathogens in a nonspecific manner.
What are the new three lines of defense? ›
What are the Three Lines of Defence?
- First – Operational Management control of organisational risks.
- Second – Risk management and compliance functions, reporting to senior management.
- Third – Internal audit to provide assurance.
Four pillars of an AML/Counter-Terrorist Financing (“CFT”) program include a system of internal policies, procedures and controls (the first line of defense), a designated compliance function with a compliance officer (the second line of defense), an independent audit function to test the overall effectiveness of the ...
What are the three rules of money laundering? ›
Typically, it involves three steps: placement, layering and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts.
What is a Defence against money laundering? ›
Defence Against Money Laundering (DAML) is a critical aspect of compliance for financial services organisations. It involves implementing a robust framework of policies, procedures, and controls designed to identify, monitor, and report potential money laundering activities.
