AML KYC Compliance Discussed

Melissa IN Team | AML, KYC | , ,

Today, customer convenience is the differentiating factor that matters most. It’s why banks allow customers to apply for loans online, it’s the reason customers can now open savings accounts without having to visit the bank.

That said, convenience must be balanced with security. Banks are already finding it hard to keep up with Card Not Present (CNP) transactions.

According to a Nilson report, payment card-related fraud could amount to $34.66 billion. Increasing efforts in fraud prevention are key to fighting this. This is where AML and KYC compliance comes in.

What are AML and KYC? How are they related?

Anti-money laundering (AML) is a set of practices that protects companies against money laundering, criminal infiltration, human trafficking, terrorism financing and more. It rose to prominence in the last 1900s following the formation of the Financial Action Task Force (FATF).

AML strategies start by verifying the customer’s identity and then move on to assessing their risk and understanding their typical financial habits. This data allows them to spot abnormalities and eliminate risks if they should appear.

As mentioned above, Know your customer (KYC) is a part of AML practices. The main aim of KYC processes is to verify a customer’s identity. Financial institutions are required to complete KYC processing before customers can use their services. This includes verifying the individual’s name, address and in certain cases, credit history by comparing documentation submitted by the individual with reliable third-party databases.

Apart from complying with AML standards, KYC policies also give the organization a better picture of the customer’s demographics and requirements. This can then be used to mitigate risks.

What Are The 3 KYC Components?

Banks and other financial organizations deal with hundreds of thousands of individuals. At this scale, ensuring KYC compliance at every stage is critical to the success of an AML program. To streamline this, KYC policies are structured into three components.

1. Customer Identification Program (CIP)

This is the first key component of a KYC compliance policy. CIP came into being under the USA Patriot Act in 2001 after the September 11 attacks. The aim here is to give the world’s financial systems more protection. Banks now must have written CIPs based on their size and customer base. A copy of the customer’s documents verifying their details such as name, address, date of birth and social security number must be available to the bank. This must be integrated into the organization’s AML policies.

2. Customer Due Diligence (CDD)

Once the documentation has been collected, it must be verified to evaluate the customer’s risk profile. This is known as Customer Due Diligence (CDD).  There are two tiers to CDD;

  • Simplified Due Diligence (SDD)

This is used for typical bank accounts or bank accounts with a low valuation. It is directed towards assessing the account holder’s risk of fraud such as money laundering and terrorism funding.

  • Enhanced Due Diligence (EDD)

EDD comes into action in cases where the customer is believed to have a higher risk of fraud. This could be money laundering, terrorism funding, infiltration, etc. Additional documentation is then required to monitor transactions. By keeping track of the average frequency and amounts being transacted it becomes easier for banks to spot abnormalities.

Determining whether a customer’s risk profile deems SDD or EDD necessary is the bank’s responsibility.

3. Monitoring

KYC is often misunderstood as a process that occurs only at the time of onboarding. To ensure security, this needs to be a continuing process with constant monitoring. Financial organizations must regularly check account activity and reassess the customer’s risk profile. For example, when a customer created the account, the average value of each transaction may have been $100 but in a few years, this may change to $500. Thus, the customer’s profile would need to be changed accordingly.

Why Is KYC So Important For Financial Institutions?

KYC compliance protects both customers and financial institutions. Verifying the identity of customers lowers the risk of having fraudsters use the organization to launder money or carry out any other kind of fraudulent activity. This protects the reputation of the bank. Customers are more confident and feel more secure dealing with such financial organizations. It also cuts down on the risk of unauthorized access to data stored in the bank and keeps customers protected from phishing attacks and identity theft.

KYC Tools That Work

Automating and using technology to verify customer identities makes KYC compliance quicker and simpler. It also reduces the risk of manual error and makes databases more reliable. Today, there are AI-driven tools available to verify incoming and existing data against third party databases to ensure that it is correct and valid without inconveniencing the customer or slowing down the onboarding process. The steps you take today towards making your organization KYC and AML compliant will show rewards for years to come.