The United Nations Office on Drugs & Crime reports that the estimated amount of money laundered annually is 2-5% of the global GDP. To put that in number, the losses due to money laundering are $800 billion – $2 trillion. Following the Anti-Money Laundering Act 2020 being signed into law in the US, the EU and its member states are enacting the same legislation to combat money laundering and terrorist funding. In this article, we will go over the requirements for banks and financial institutions to conduct identity checks for money laundering and terrorist financing and the Know Your Customer process.
Identity Checks for Money Laundering & Fraud Prevention in EU
Identity checks are crucial for banks and financial institutions to screen for money laundering, fraud and uncover illegal financial activities. KYC (Know Your Customer) is the process of verifying a customer’s identity to ensure the customer provides personally identifiable information. KYC is also needed to understand the past financial behavior of customers with previous institutions or other money service providers.
The Know Your Customer regulation helps in ensuring that the financial institution’s services aren’t misused for money laundering. Compliance with KYC ensures that customers with a suspicious financial background aren’t approved for an account at the bank or other institutions.
KYC Obligations in the EU
There is a major push to develop identity documents across the EU because most Member States have their own independent regulations regarding KYC and ID verification.
ID Tampering & Fraud: Security Features & Common Criminal Typologies
One of the biggest challenges with identity document verification is forgery and document tampering. EU passports, national IDs, and other identity documents are targets for regular ID thieves and criminals. A strong AML compliance program includes ID tampering and fraud prevention strategies.
Regulators and law enforcement authorities face threats every day such as:
- Falsification of documents by overprint
- Adding a laser-engraved personalization
- Simulating optical variable devices (OVD)
- Grinding to access the core of a document
- Facial spoofing during remote eKYC activities
Common methods used in document tampering are:
- Opening using heat, solvents, and tools
It is crucial for banks and financial institutions to keep their eye out for these threats and illegal activities during KYC verification processes. Banks and other institutions should focus on detecting the fraudsters in the manual and remote onboarding process.
eKYC Challenges That Banks Face
eKYC comes with a number of challenges not just in the sense of applying numerous regulations and obligations from regulators and preventing tampering of ID cards. Banks have to be able to use anti-fraud technology such as liveness detection to prevent bad actors before they access the bank’s resources for their gain.
Ever since the beginning of the Covid-19 Pandemic, banks had to switch to digital technologies. Banks all over the world are now facing challenges with online financial services.
Anti-Money Laundering & Counter-Terrorist Financing Laws and Regulations in EU
The European Union has forced a number of regulations and laws in the past two years including:
- Sixth Anti-Money Laundering Directive (AMLD6)
- Markets in Crypto Assets Regulation (MICA)
- Second Payment Services Directives (PSD2)
- General Data Protection Regulations (GDPR)
According to industry experts, financial institutions and authorities do even more in their fight against money laundering and terrorist financing. The aim should be to close gaps and loopholes in the current legislation, clarifying regulatory details and toughening criminal penalties across the EU.
The new directive brought better insights and clarification and transparency in regards to some areas:
- List of offense
- Money laundering
- Scope expanded
- Stricter persecution and punishment (4-year sentences instead of 1 year)
According to some experts, the EU Second Payment Services Directive is bringing in change and innovation in the online payment industry. The directive consists of two main elements of popular importance for e-commerce merchants: strong customer authentication and the emergence of two types of new regulated payment providers. Privacy and customer experience are among the most critical aspects that push new bank customers to complete the onboarding process.
General Data Protection Regulation (GDPR)
General Data Protection Regulation (GDPR) is a number of directives for the European Union (EU) that enhance the protection of the personal data of EU citizens. It also requires companies to comply with the latest rules and regulations that enhance the data privacy and security of every individual within the EU. These rules are strict and include many rules that increase the rights of data subjects.
Three concepts are important under the GDPR:
- Legitimate interest