The pandemic has accelerated pressure on financial institutions to keep pace with both emerging threats and heavy regulatory compliance in a constantly changing global business world.
Regulations like Anti-Money Laundering (AML) and Know Your Customer (KYC), and financial compliance laws cover the broad range of services financial institutions offer, from asset management to business and personal loans and everything in between. The global economy depends on the integrity of financial institutions to stabilize markets and preserve consumer confidence in the system. By maintaining financial services compliance, financial institutions protect themselves and their customers from losses that stem from fraud and other criminal actions.
AML practices are a key component of any financial compliance program in combating organized crime and terrorism. According to the United Nations, an estimated USD $800 billion to $2 trillion (2–5% of global GDP), is laundered around the world in one year. KYC verification programs support AML and provide a framework for financial institutions to keep up with the ever-evolving requirements in our increasingly digital world.
The history of AML legislation
AML initiatives took off in 1989 when countries worldwide formed the Financial Action Task Force (FATF), which develops international standards to prevent money laundering activities. After the events of 9/11, FATF expanded to include the control of terrorist financing.
The U.S. has the Financial Crimes Enforcement Network (FinCEN), which monitors financial transactions to prevent money laundering and terrorist financing. Earlier this year, the U.S. Congress enacted the FY2021 National Defense Authorization Act (NDAA), which included the Anti-Money Laundering Act of 2020 (AML Act) and the Corporate Transparency Act (CTA) — a robust update to AML rules and regulations governing one of the largest markets in the world. The NDAAs in the U.S. are annual spending bills that re-authorize U.S. military expenditures and are a major element of how government reforms are instituted in the United States, even for subject matter outside of US military policy.
The UK introduced the Anti-Money Laundering Act of 2018 to shore up their detection and prevention efforts, and the 5th Anti-Money Laundering Directive (5AMLD) is a recent update to the EU’s AML laws. European lawmakers are responding to increasing terrorist attacks and political scandals, utilizing stricter AML initiatives to prevent financial facilitation of sophisticated money laundering tactics with cryptocurrencies and cybercrime.
Developing your KYC verification program
KYC rules help provide guidelines for financial services compliance, assessing risk, and protecting your organization from fraud. Knowing who your customers are by verifying their identity, understanding where their money comes from, and better evaluating the risks they pose are all elements of an effective KYC program.
Here are a few steps to follow when you are either establishing your own KYC verification program or updating your current one to keep up with rapidly evolving digital trends.
1. Identify who you’re working with
If you have a Customer Identification Program (CIP) in place, you’ll be more likely to catch identity theft and stop crime in its tracks. The FATF recommends the mandated use of CIP, and many jurisdictions around the world require it. Generally, to open a financial account, a customer needs to provide a name, date of birth, address and an identification number — all of which must be verifiable. A corporation is required to provide company records that include information like their register number, company name, address, ownership structure and high-level management (along with all the details a customer would provide for each individual).
2. Be sure they are who they say they are
Customer Due Diligence (CDD) involves a deeper level of analysis to ensure a customer is who they say they are. This step goes beyond CIP to research and verify the records a customer has provided. Certain low-risk customers won’t require extensive due diligence, but higher-risk customers and entities (for example, anyone with a high volume of cash transactions) need a deeper dive into financial records and patterns of activity.
3. Form a system for continuous updates and monitoring
An added benefit of KYC programs is gaining a deeper understanding of your client’s financial position and risk tolerance. Beyond being able to serve your clients better, continuous updates to financial records and periodic check-ins will help with financial services compliance reporting and overall fraud prevention.
It’s up to financial institutions to monitor customer deposits and other transactions to ensure they aren’t part of a money laundering scheme. Financial institutions need to verify the origin of larger sums and report cash transactions exceeding threshold limits. In addition to compliance with AML laws, financial institutions need to make sure their clients understand them. Today, extensive records should be kept on every significant financial transaction. Few methods of detecting crime and corruption are more effective than examining the records of connected financial transactions.
Responsibilities and opportunities post-pandemic
Financial services compliance like AML and KYC are viewed as an inconvenience, but they should be seen as an opportunity. Forward-thinking organizations will view embracing KYC programs and AML efforts as a chance to take their business to the next level. Investments in financial services compliance programs and platforms will pay dividends in the form of advanced cross-team capabilities and digitalization.
New analytics and insights gathered from AML compliance initiatives can support proactive and predictive strategies in the long term. Investments in digitalization and globalized functionalities could position your business ahead of the competition. By embracing AML rules and regulations that keep your customers and your business safe, you can drive organizational innovation that future-proofs your business.