Money laundering conceals crimes that range from tax evasion to drug trafficking and even terrorist funding. According to a panel formed by the United Nations, money laundering schemes amount to flows of as much as $1.6 trillion (or 2.7% of the global GDP) every year. Anti-money laundering (often referred to as AML) is the nexus of laws, regulations and processes that aim to curb money laundering across the globe, including Know Your Customer checks and filing and reporting requirements. Financial institutions around the globe, including fintech organizations and binance platforms, need to familiarize themselves with the regulations applicable to their businesses and regions in order to avoid harsh penalties and reputational damage.
AML and KYC in the US and Europe
Financial institutions in the United States are bound by the Bank Secrecy Act, administered by the Financial Crimes Enforcement Network (FinCEN), which hopes to curb financial crimes like money laundering. Per the Act, these companies must develop and implement anti-money laundering programs suited to their profiles, which include reporting and filing obligations, the appointment of a compliance officer, and the adoption risk-based approach to customer onboarding and transacting. Companies that fail to comply risk fines of up to $250,000 or even imprisonment.
The EU has harmonized and unified member states’ anti-money laundering directives under the Fifth and Sixth Anti-Money Laundering Directives (sometimes called 5AMLD and 6AMLD) which focus on elements that include the regulation of cryptocurrencies, high-value transactions, beneficial ownership, customers from high-risk third countries and featured on Politically Exposed Persons (PEP lists), and more. Harsh fines are imposed on companies who fail to conduct their due diligence with regard to internal AML frameworks.
What Is a Know Your Customer (KYC) Check?
Know Your Customer or KYC checks are mandatory procedures used to assess the level of risk of each customer and are a legal requirement of AML laws. The process involves verifying a customer or prospective customer’s identity and monitoring their financial activities, both when opening an account and periodically over time. Financial institutions may refuse to open an account or end a business relationship if they believe a customer fails to meet the minimum KYC requirements. This procedure is one of the most effective ways of identifying and preventing money laundering and the funding of terrorist activities.
In 2021, more than 80 financial institutions from around the globe were issued fines related to AML failures, up from 24 in 2020. The total fines amounted to nearly $2.7 billion. The average fine issued was $34,151,237.
Who Performs KYC Checks?
While KYC checks are often associated with financial institutions (particularly banks), virtually all businesses that make payments or hire companies to make payments on their behalf need to implement a KYC process. Brokers, private payment platforms, fintech tools, or wire transfers need to ensure that KYC forms part of their onboarding and monitoring processes.
The Role of the European Commission
The European Commission is a member of the global Financial Action Task Force (or FATF), an international body concerned with combatting money laundering as well as the funding of terrorist activities. FATF sets international standards and creates policies in order to generate political power and legislative reforms in these areas and creates a platform for various countries to exchange their expertise and financial intelligence. The commission has recently proposed a new legislative package of robust AML directives, which will include the creation of a new EU authority known as AMLA (Anti-Money Laundering Authority) that will enforce the consistent and correct application of EU anti-money laundering rules.
Why Implementing a KYC Process Is Important
Financial institutions are required to implement KYC processes by law, but these procedures are rarely as simple and straightforward as they seem. Many firms rely on the manual input of information between systems, which may mean that customers are required to provide the same information repeatedly, leading to frustration and even abandonment. KYC requests are often duplicated – and expensive. Companies often find that they have to hire additional staff to process the information required manually and to keep their customer profiles up to date and accurate, per KYC compliance requirements. This not only increases the cost but the likelihood of errors, leading to inaccuracies and potential fines or delays in the onboarding process. Companies that cannot find qualified and knowledgeable staff to carry out these procedures may find that upper management becomes tied to KYC processes instead of applying themselves to more profitable ventures.
The entire KYC process is further complicated by the legislative environment. KYC regulations are continually changing, and standards are constantly shifting, making it difficult for firms to respond and implement new processes to remain compliant and informed.
By utilizing automated AML screening software, companies can leverage agile and flexible technology to onboard and approve customers and lower the risk of non-compliance with AML legislation. These tools often utilize artificial intelligence that is far more efficient and accurate than manual transactions and customer checks while reducing the manpower and expertise required. The right tools can reduce onboarding time through the rapid verification of customer information, monitor ongoing transactions against Sanctions lists, eliminate manual errors and remove unnecessary manual tasks during the customer lifecycle while adapting to fast-changing regulations or internal procedures as they arise.
KYC and Anti-Money Laundering (AML) requirements are not just a compliance hoop that all organizations must jump through to avoid fines. If the correct KYC and AML tools are implemented, they can cut down labor costs, improve client retention and protect the organization’s profit margins and reputation for years to come.