"Financial Institutions in Saudi Arabia: Compliance with Domestic and International Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) Regulations"

Abstract

ABSTRACT AML/CFT breaches impose potentially high financial, reputational and criminal liabilities upon individual banks, and indeed the entire banking system. Full compliance by banks with the increasingly complex AML/CFT regulations and legislation in Saudi Arabia, and elsewhere, remains the principal objective when combatting ML and terrorist financing, despite evidence suggesting such compliance has a negligible effect on illicit flows of finance. The aim of this study is to investigate the nature, extent, and effectiveness of compliance by banking institutions in Saudi Arabia, referencing the domestic and international AML/CFT regulations, barriers and obstacles to such compliance, and the means by which these can be mitigated or overcome. This study has employed a mixed methods methodology comprising a survey based and multi-case study strategy. Quantitative and qualitative data was collected using selfadministered questionnaires and interview strategies, respectively. The survey included 300 respondents (including frontline staff, branch managers, internal auditors and compliance officers) drawn from 25 licensed banking institutions in Saudi Arabia. The survey and interview respondents were selected based on random and purposive sampling respectively. The findings indicate that banking institutions in Saudi Arabia have complied materially with existing AML/CFT regulations and legislation. While there is room for improvement, the overall degree of awareness of AML/CFT and red flags remains strong, but statistically significant variances have been observed among employees a This study adopts both deductive and inductive approaches. The first phase of the study seeks to ascertain the nature and extent of adoption and implementation of AML/CFT among banking institutions in Saudi Arabia. This is achieved by way of a structured questionnaire testing different aspects of compliance and the effectiveness of AML/CFT frameworks based on the letter of the law. This phase of the study utilises the deductive approach. However, in order to gather richer data about compliance and effectiveness and identify gaps between formal and actual compliance, inductive methods are preferable. Using both deduction and induction permits combining theory generation and hypothesis-testing in the same study, increasing its productivity (Jogulu & Pansiri 2011; Creswell et al. 2011). Saudi anti-money laundering legislation is limited in practical effect and offers a narrow solution to what is a sophisticated and expansive problem. Consistent with regulations, the evidence presented in this study supports the conclusion that Saudi banks apply enhanced scrutiny to Politically Exposed Persons (PEPs), albeit that such scrutiny is equally potentially ineffective as it depends upon information volunteered by clients. The data and information necessary for banking staff and banks to obtain reasonable assurance with regard to the legality of their clients’ practices, and concerning the transactions through their facilities, must also be legally obtained in an appropriate manner.