According to a report by the UN, the total amount of money laundered worldwide makes up 2-5% of the total GDP. In another report by the FCA (Financial Conduct Authority), it was found that cash worth approximately £100 billion has been laundered in the UK. These statistics reinforce the need for adopting a robust AML and KYC compliance program to eliminate the disruptive act of money laundering.
What is Anti-money Laundering Compliance?
The process involved for anti-money laundering compliance involves making background checks and thorough screening, as well as ongoing monitoring of individuals to accurately identify and eliminate any attempts of laundering “dirty” cash. Typically, customers in a bank are screened against criminal watch lists, PEP (Politically Exposed Persons) lists, and global sanctions.
AML Verification is a part of the KYC process. Compliance with both of these processes has been declared mandatory for financial institutions, such as banks, insurance companies, brokerage firms, and now, cryptocurrency exchanges, to eliminate fraudulent activities such as the financing of terrorist activities or organizations and money laundering.
5 Components of the AML/KYC Compliance Regime
Major regulatory authorities such as the global Financial Action Task Force, Financial Crimes Enforcement Network in the United States, the Financial Transactions and Reports Analysis Center in Canada, etc. have stated 5 major components that must be found in the compliance program of a business:
1. Controls, Policies, and Procedures
The controls, policies, and procedures within a financial institution must be aligned with global AML verification regulations. Generally, it involves implementing customer due diligence, ongoing customer authentication, maintaining transaction records, customer risk assessment, and reporting of suspicious activities. Since the year 2019, AML regulations have been updated, making it the responsibility of businesses to align their compliance methods respective to the updated regulations.
It is highly necessary for a company to train its employees to make them aware of global AML and KYC compliance standards. Once compliance procedures become a part of day-to-day operations, higher levels of accountability can be maintained. Numerous companies in the past have experienced massive fines due to a lack of accountability at the higher levels of management. An example of this is that of the Danske bank in 2018, where an amount of €200 billion was considered suspicious. The scandal came about due to a lack of accountability in the company’s compliance framework.
To devise an efficient AML compliance program, it is crucial to educate the employees about the changes being made in the regulatory framework and to let them know of the procedure that must be followed in case suspicious transactions have been detected.
3. Record Keeping
To eliminate fraudulent activities from a company, a proper record of customer transactions and behaviors must be maintained. Typically, banks implement record-keeping on an ongoing basis starting from when the customer has been onboarded. In some jurisdictions, maintenance of customer records is mandatory for up to 5 years after a relationship with the client has been ceased. With the help of important customer details, financial institutions can efficiently predict future transactions of the customer through repeated patterns. This also allows them to assign a rating to high-risk customers and enables them to identify the exact individual behind suspicious transactions that may be linked to money laundering.
4. Customer Due Diligence
Continuous verification of individual customers and business entities makes up a major part of the AML/KYC compliance program. Implementation of customer due diligence involves the identity verification and AML screening of every customer being onboarded. During this process, sensitive customer data is collected and the customers are screened against global watch lists and sanctions.
Reporting suspicious activities is a mandatory part of AML compliance. Under this law, financial institutions must report unusual transaction patterns made by high-risk customers. This helps firms in minimizing threats of financial crimes and increases the credibility of the company.
AML and KYC compliance procedures can be automated by creating in-house identity verification systems or by hiring an expert KYC or AML provider for the same purpose.
What Makes AML and KYC Compliance Beneficial?
– Fraud is on the rise
Technological advancements, a rise in online payments, and an increasing amount of data available on social networking sites have caused fraud to escalate. Money launderers exploit vulnerable companies by targeting loopholes in their AML KYC compliance framework. By transferring the dirty cash through a series of transactions from numerous bank branches in various regions, fraudsters are able to make the source of their illegally obtained money untraceable.
Amidst the COVID-19 pandemic, cybercrime and fraudulent activities reached an all-time high, with the main targets being financial institutions and the healthcare sector. In order to combat acts such as money laundering, false chargebacks, and fake insurance applications, efficient KYC and AML compliance programs must be devised by businesses at a high priority.