Financial institutions have to comply with various AML, CFT, and KYC regulations while onboarding customers. Businesses operating in the financial industry have to provide a risk assessment to their new customers. The reason why these compliances are vital is to enable companies to identify the level of risk a customer poses to the business. They can then apply appropriate fraud prevention methods to mitigate the level of risk each customer possesses.
The AML regulation is made up of a variety of factors to fight against money laundering and terrorist financing in banking. Banks spend millions upon millions to develop measures that can help in fraud detection and prevention during the initial stages of customer onboarding. Financial institutions and banks that fail to comply with these regulations have to face huge fines imposed by regulatory bodies. One of the biggest examples of this is the $5 billion fine faced by Facebook for not having measures that protect customers against data breaches.
AML (Anti-Money Laundering) regulation is set in place to ensure stability in the financial system and prevent financial crimes including money laundering, terrorist financing, and so on. The losses due to money laundering are equal to 2-5% of global GDP. Every year, a global bribe of almost $1 trillion is given. The money that is laundered helps the growth of illegal businesses such as drugs, human trafficking, and so on. Therefore, regulatory bodies ensure that AML compliance is followed strictly by companies during the onboarding process to prevent financial crimes.
Most financial crimes happen because of the financial institution’s inability to detect fraudsters in the early stages of onboarding. When financial institutions fail to prevent fraud, the financial stability of an economy is impacted.
Regulatory bodies do their best to prevent financial crimes by setting down a strict set of rules and instructions. Companies are legally obligated to perform customer due diligence checks and KYC checks to assess the risk level. Companies that perform robust due diligence checks comply with KYC requirements.
Companies have the authority of building their own unique verification process for complying with KYC and AML regulations as long as it yields results. Businesses need to hire compliance officers to fulfill and conduct the liabilities of the companies during compliance. Identifying and verifying customer ID is the most critical part of the KYC process. If a company fails to build a proper customer and ID verification process during onboarding, it could lead to huge fines imposed by the regulatory bodies.
The next step involves the company investigating the customer’s history. Based on the previous transaction history, any previous suspicious transaction is investigated and a risk profile is created. Based on the profile created by financial institutions, businesses choose a transaction monitoring pattern for the customer. Having too many high-risk customers can be risky for a business as monitoring can take up a lot of time.
The risk assessment part of the compliance contains Customer Due Diligence procedures including checking sanction lists, PEP lists, and adverse media screenings. These lists are created by regulatory bodies and they contain high-risk customer profiles for companies. Companies should determine customer risks during customer onboarding and proceed accordingly. Some things that FIs should consider while determining the risk level are:
If the customer is identified as a high-risk customer, enhanced due diligence (EDD) methods are applied. If there aren’t any suspicious activities during this period, the customer’s account is opened. To ensure that no illegal activities happen, continuous monitoring is required. To comply with regulations, companies need to control the financial transactions of the customer and analyze them.
Banks, financial institutions, payment providers, and others that provide financial services have to comply with KYC and AML regulations. The guidelines that they have to follow are seemingly endless. Financial service providers, such as banks, should ensure that they uphold a good customer experience while performing strict checks. Using manual methods of verification to combat financial fraud is outdated and ineffective. With the rise of the latest FinTechs, companies can comply with regulations all the while providing the best possible customer experience.
DIRO’s online document verification software can assist businesses in verifying customer documents like proof of address documents, bank statements, Income tax return documents, and so on. Document verification is instantaneous with DIRO, and it also provides a stronger proof of authentication with each verified document.