Mastering AML and KYC Compliance Programs
Increasingly stringent anti-money laundering (AML) and know your customer (KYC) regulations are sweeping the globe, forcing many organizations to navigate complex and varied regulations for banks and other credit and financial institutions in order to be considered compliant. As global economies continue to emerge from the COVID-19 pandemic, compliance departments also face regulators that are cracking down on non-compliance and enforcing penalties: In fact, AML fines have already reached $1.9 billion in 2021.
And it’s not expected to get any easier. These fines will only worsen as new regulations—such as AMLA in the EU—roll out to address growing digital banking challenges spurred by the pandemic and legacy, outdated systems continue to add complexity for organizations that fail to keep pace with quickly evolving compliance guidelines.
As a result, it has never been more critical for organizations to stay on top of their local KYC and AML regulations, taking the time to fully understand the ins and outs of their respective programs to avoid being hit with large fines and reputational damage. Here are some key considerations that organizations should keep in mind to avoid being subjected to a range of different regulatory penalties.
Avoid Confusing the Terms
This one may seem obvious, but KYC and AML are commonly used interchangeably. At a high level, KYC refers to a specific process used to identify and screen customers, while AML is a larger umbrella term that refers to a set of procedures aimed at combating money laundering and terrorist financing which can include KYC processes. In other words, KYC systems are used by companies to ensure that those obligated under AML regulations have enough knowledge to confirm their customers are who they say they are and do not pose a risk to their business. This is just one of the steps that fall under AML guidelines that are designed to stop money laundering and fraud.
In addition to preventing financial crime, KYC processes are used by banks and other financial institutions to further understand their customers and therefore improve their services and manage other risks. As a result, it is critical for organizations to have a deep understanding of KYC procedures so they can effectively implement these processes to both advance their business and mitigate the risk of aiding any unlawful financial activities.
Taking this one step further, the AML framework is much more complex and involves numerous steps including the risk assessment of clients, risk management systems, customer due diligence programs and extensive reporting. These systems must be well-planned, agile, detailed and regulation-specific, which requires a deep understanding of AML policies.
Cater Compliance Programs to Unique Regulations
This brings us to the importance of organizations fully understanding their unique requirements and regulations, and developing their compliance programs to meet these needs. Different countries have a range of AML and KYC regulations for banks and other financial institutions to be considered compliant, and these continue to evolve over time to stay ahead of criminals and fraud. Financial institutions must continuously stay on top of these changing regulations and update their compliance programs accordingly, or risk facing severe fines and penalties.
There are many tools available to help organizations continue to build and adjust their compliance programs. Most will need to include an identity verification solution to help confirm the identity of their customers and ward off fraudsters. It is critical for businesses to ensure they have an effective identity verification system in place that is capable of verifying users based on ID documents to keep track of potentially high-risk customers and enable organizations to take action when needed.
Other programs typically include tools for monitoring financial transactions, reporting suspicious behavior and record keeping. Organizations are also increasingly leveraging artificial intelligence and machine learning to help adapt to changing behaviors and respond better to emerging risks. These technologies can help financial institutions make automated and accurate decisions in a matter of seconds for more seamless operations, ultimately reducing the risk of financial crime or regulatory penalties.
Keep a Close Eye on High-Growth Sectors Like Crypto
Cryptocurrency is known for enabling less expensive and faster digital transactions around the world, but its anonymous nature has also left room for criminals to launder money and enable terrorist financing at a large scale. As a result, regulatory bodies have recently been on a mission to address these issues while not limiting the digital benefits of the service.
Historically, only custodian wallet providers and crypto-asset exchanges were subject to certain anti-money laundering regulations. However, with the promise of more AML regulations in the future, especially in the EU, more countries are requiring all crypto-asset service providers to follow AML provisions. It is clear that digital-first industries like crypto are setting the tone for future KYC and AML regulations, and other financial institutions must take note of these developments as they will likely impact their business and compliance programs moving forward.
While the exact future of AML and KYC regulations remains to be seen, one thing is certain: They will only continue to become more complex as digital banking activity increases and fraudsters become more sophisticated. In order to avoid costly fines and penalties from regulators, financial institutions must take action now to stay on top of their local KYC and AML regulations, adjust their compliance programs accordingly, and take advantage of the right tools to not only avoid these fines but ultimately prevent damaging financial exploitation.