Money laundering is growing every year with the digital boom across the globe, and that's why KYC and AML compliance strategies are something you need to know with these rising fraudulent activities.
According to reports of a professional and reputed organization of fraud examiners - ACFE (Association of Certified Fraud Examiners) in 2022 claimed that 5% of corporate revenue or the global GDP is lost every year due to fraud. In other words, the annual estimated amount of money laundering is almost $800 billion. Additionally, this estimates US $4.7 trillion globally.
Therefore, it becomes essential for organizations to have a keen eye and stay updated with this ever-changing and fast-growing money laundering and regulatory developments to prevent financial crime.
This article intends to offer a detailed outlook of the significance of KYC and AML, the need for their compliance, and the tools/strategies available to ensure regulatory compliance and mitigate risks.
AML and KYC Benefits
In recent times, AML/KYC compliance strategies have offered significant benefits.
Implementing these effective measures gives your business the financial freedom it deserves and allows you to focus on higher client-value tasks and eventually improve your overall productivity.
While AML envelopes a wide range of measures, generally known as compliance programs, KYC, on the other hand, is a significant part of this program and is therefore encircled by AML.
When and Where AML & KYC are Required?
The necessity of AML and KYC compliance is not a hidden factor to consider for your fintech business; it is also required in different financial sectors, including the following:
Financial Institutions, or (FIs)
AML and KYC regulations play their pivotal part in the functioning of banks, brokerage firms, insurance companies, credit unions, and other financial institutions. These regulations license the execution of eKYC verification procedures and the implementation of robust AML programs by these institutions.
FIs are required to comply with these regulations when conducting highly valued transactions and detecting suspicious activities.
NFB (Non-Financial Businesses) and Similar Lines of Work
Non-financial businesses have a vital responsibility in fulfilling Know Your Customer (KYC) and Anti Money Laundering (AML) requirements.
These non-financial businesses expand their reach to different entities, including accountants, quality goods dealers, lawyers, and real estate agents. Moreover, these non-financial bodies themselves take the responsibility of carrying out AML and KYC measures to counter money laundering activities efficiently.
Cross-Border Transactions
Particularly, KYC and AML measures play a significant role in cross-border transactions. It also becomes important for financial institutions to maintain high-level due diligence when maintaining correspondent banking relationships, dealing with foreign customers, and conducting transactions in high-risk jurisdictions.
Now, let's forge ahead with the power of AML and KYC to prevent fraudulent activities and safeguard the financial system. To prevent illegitimate cases, you'll find various techniques used in AML and KYC compliance strategies.
AML Strategies
AML programs function to combat terrorist financing, money laundering, and other illicit activities, guaranteeing the financial system's integrity.
Have a look at several strategies to protect your organization from financial criminals and terrorists.
Improve AML Policies
When meeting AML requirements, offering a structured AML policy framework is a priority task.
Moreover, AML policies must be validated efficiently by regulators, approved by compliance analysts, and reflect upon the organization's risk tolerance and risk appetite.
Advance Process Controls
Tailored and advanced process controls, integrated with risk assessment, fraud data, and management oversight, help your organization consider and react to several risks it comes across.
Quality process control practice includes examples:
- Constant review of data patterns and processes.
- Engaging with suited cross-industry efforts
- Incorporating a solid response plan plus an investigation process
- Working on four eyes check
Utilizing AML Analytics
Making use of the augmentation platform and AML analytics involves promoting a new system into your legacy system (A system that still meets the requirements for which it was originally designed but doesn't have scope for growth) to increase its shelf life.
This plan of action bridges the gap between legacy and all-new technology. It offers 360-degree solutions that are cost-effective and less arduous. While adopting this strategy, ensure there exist no compatibility issues.
Necessity to Update AML System
Over time, upgrading the entire AML system is a must-execute process that every organization should follow.
Upskill Staff
Training your staff is important for verifying the efficient implementation of CFT (Combating the Financing of Terrorism) and AML measures. Where upskilling an organization takes time, effort, and resources, advanced training on how to identify AML risks must be involved.
KYC Strategies
KYC strategies are operated by financial institutions to take in key customer information, assess risks, verify identities, and establish credibility. A few of the strategies below will help you build and strategize an effective KYC:
Single Out Where and Why You Need KYC
It's important to regularly implement KYC for all transactions, as a KYC check is a must-follow process to identify and verify the client's identity when opening an account to prevent illicit activities.
Determine KYC methods
KYC methods help in preventing unlawful activities in banks, including terrorism funding, money laundering, and counterfeit trading.
Conduct KYC due diligence checks on every existing and new customer to thoroughly verify their identity with techniques like biometric authentication. This technique uses facial recognition, fingerprint scans, and voice recognition to verify the identities of customers. These KYC/AML methods are difficult to replicate and, thus, reduce the risk of fraudulent activities.
Apply the Crucial KYC Components
There are mainly three main components of KYC compliance strategies, and they are:
3.1 CIP - Customer Identification Program
CIP offers its support to FIs by assuring that its customers are genuine. Risk assessment is one of the most important elements of an efficiently working CIP. CIP is an advisory entity that helps you decide what the level of risk is and which policy you must apply for that specific level.
Four types of data, including name, address, ID number, and date of birth, should necessarily be collected by financial institutions.
3.2 CDD - Customer Due Diligence
Customer Due Diligence refers to a sequence of checks that help in assessing and verifying your customer's risk profiles and their identities. During the CDD verification process, businesses must identify and verify customers or carry out KYC checks. Also, at this particular stage, businesses must not forget to define customer risk profiles.
3.3. Ongoing Monitoring
Ongoing monitoring refers to a series of measures taken to regularly track and inspect transactions and adopt essential steps to lessen the risks. A key method to monitor transactions is Suspicious Activity Reporting.
SAR (Suspicious Activity Reporting): This process is mandatory for all businesses and financial institutions. Therefore, Fintech companies that function as a virtual currency industry or work as Money Services Businesses (MSBs) are subject to SAR filing requirements.
Work on an Effective Risk Mitigation Strategy
Risks can heavily hamper the financial transaction; however, if not addressed, these risks might negatively impact FIs. With the help of technological advancements and improved ID verification, it ensures a flawless onboarding process for the customers.
Considering the effective risk mitigation strategy, these measures allow FIs to skim the challenging part of the onboarding system easily.
Also, operational efficiency is heightened within the institutions because an automated KYC system helps in analyzing and processing massive amounts of data with more precision and in less time.
Join Hands With an Identity Verification Company
If you want your business to be tamper-proof and allow it to avoid any extra costs and time, financial institutions should partner with an ID verification provider to streamline the process.
Such partnering allows you to do business with or provide services to people whose identity is verified. In the majority of places across the globe, identity verification makes use of data, including address, DOB, and name, to determine whether an identity is real or fake.
Takeaways
Considering the financial landscape today, KYC and AML compliance are fundamental, serving as vital tools in withstanding terrorist funding, money laundering, and other financial crimes.
These are effective AML and KYC compliance strategies for fintech companies, banks, and other financial institutions that will protect your platforms from misuse.
