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Fintech 2021: KYC/AML Bringing New Innovation to the Table

Richard Marley
January 14, 2021
6 minutes read
4771

2020 was all about surviving the pandemic, but it has also kickstarted a new wave of innovation. As we enter the new year, there is an influx of businesses shifting to the digital space to survive market competition. Even smart payment solutions like Google Pay and Apple Pay which allow performing transactions on a smartphone have become old news. 2021 has come with an increased drive for digital-only systems to replace conventional banking and financial norms which are in practice for a long time now.

The finance sector was quick in adopting recent advances in technology. Fintech companies are now trusted partners of more than 60% of the financial institutions out there in the market. Fintech services incorporate Know Your Customer (KYC) standards which are essential for any business entity to fulfil Anti Money Laundering (AML) obligations.

What is KYC/AML Compliance?

KYC/AML compliance is a set of legal requirements to verify the true identity of a business’ clients. It takes into account an authentic proof of identity such as a government-issued document, to assess customer credibility, and the risk involved in onboarding, to prevent potential cybercrime.

Current Landmark of Fintech and KYC

The fintech sector has matured with new technologies driving innovation. Possible instances of cybercrime can now be prevented by systems powered by artificial intelligence. In 2018, a staggering $218 billion in fintech investments were recorded, which laid the foundation of better and improved financial systems in the coming years. Government bodies, online businesses and service providers of financial technology make up the most part of the market.

Institutional players like banks are investing a good deal of money in Regulatory Technology (RegTech) to make sure they live up to the global KYC standards. Investors have shifted their targeted audience from B2C to B2B considering the opportunities financial technology has to offer. Moreover, the need for increased compliance and change in consumer behaviours has forced online businesses to practice secure customer onboarding.

The fintech market is prone to a lot of changes and technology is one of the reasons. Due to the constantly evolving nature, it allows enterprises to verify customers with confidence. The traditional KYC measures, which were once used by organizations to verify customer identity, have now made their way in the digital landscape. KYC verification is now performed in real-time over the internet, regardless of where an individual is present. Since KYC is an obligatory requirement for financial firms to mitigate fraud and money laundering, fintech solutions address the problem in light of regulatory compliance.

Lack of KYC/AML Infrastructure

Since financial businesses involve a good deal of monetary activities in daily operations, they need to perform proper KYC and AML checks. Fraudsters associate ties with business entities to launder dirty money through their platforms and conduct a series of cybercrime.

KYC/AML regulations are a good bet when it comes to preventing the illicit flow of money.

Regulatory authorities have been imposing heavy penalties to financial firms who fail to meet KYC/AML requirements in the recent years. A study by Thomas Reuters lists instances highlighting the importance of KYC and AML requirements:

The national fintech charter by the Office of the Comptroller of Currency (OCC) of the U.S. imposed stringent regulations on companies providing digital-only full banking services in 2017.
A digital currency operator in 2015 was fined $700,000 by FinCEN for not investing in an adequate AML screening program.
A fintech for consumer lending services was penalized $6 million by the Consumer Financial Protection Bureau (CFPB) for not following proper KYC standards while onboarding external borrowers.

Fintech’s Role in Customer Onboarding

Today, with advances in technology, associating ties with customers and other businesses has become secure and smooth. Gone are the days when a manual verification was mandatory to complete a customer onboarding process.

Artificial Intelligence

Banks and fintech businesses are moving towards AI-powered solutions to speed up their customer onboarding procedures. In this COVID-struck time, financial firms are banking on new and improved technology to maximize their sales. With the power of machine learning and AI, fintechs can monitor suspicious transactions, and effortlessly engage with new prospects at the same time through digital KYC.

Biometric Security

Financial services have seen a surge in demand over the past few years. This calls for digital advances that empower KYC to better assess customers and take down identity fraud. In 2021, fintech firms are adopting biometric authentication technology like facial and fingerprint recognition as a more accurate and reliable means of meeting KYC standards.

Regulatory Technology

The growth in fintech has enabled global regulators to develop regulatory technology for the better compliance. To better practice AML compliance, Regulatory Technology (RegTech) has become essential for online businesses, and fintechs are no exception. Undoubtedly, technology brings innovations, but it creates a new avenue for cybercrime as well. Regulatory service providers are striving to combat potential threats and risks by creating reliable solutions. 2021 could prove to be a year of collaborations between fintech providers and regulatory bodies, as they look forward to making the financial industry a safer place.

It all comes down to Shufti Pro…

An effective KYC verification process is the need of every fintech business in the industry. In order to meet the constantly evolving regulatory requirements, financial businesses need a solution that can facilitate them to meet KYC and AML obligations in the best possible way. Shufti Pro offers digital KYC verification to onboard customers by verifying their true identity, in light of global AML compliance. With a global support of more than 3000 documents and 150 languages, we offer real-time KYC services. Shufti Pro incorporates reliable and quick data protection to provide fintech companies with a safe and secure channel for customer onboarding.

Disclaimer: No warranty is herein provided that the information contained in this document is accurate, up-to-date, and/or complete. In no circumstance(s), does such information constitute legal or any other advice. Any person who intends to use, rely, pass-on, or re-publish the information contained herein in any way is solely responsible for the same. We suggest to verify the information and/or obtain expert advice independently if required.

Latest News

News
Increasing Incidents of Fraud Becoming a Threat to UK’s National Security: UK Finance
What is KYC/AML Compliance?
Current Landmark of Fintech and KYC
Lack of KYC/AML Infrastructure
Fintech’s Role in Customer Onboarding
It all comes down to Shufti Pro…
Automated systems prevented approximately 736 million pounds ($1 billion) from being stolen through fraudulent means in the first half of 2021.

According to a Reuters report published on Wednesday (Sept. 22), UK Finance has stated that the rising incidents of fraud observed in the e-commerce and online banking sector since the start of the COVID-19 pandemic are slowly becoming “a national security threat”.

The banking industry lobby group UK Finance said that government-backed schemes have become a need of the hour to counter the rising financial crime threats.

Government-coordinated action is needed as criminals have shifted their focus to exploit weaknesses outside the banking system, according to UK Finance’s latest fraud report which covers the first half of 2021.

Read more here: https://t.co/kiWNaBxmjt pic.twitter.com/8b4N6xgafS

— UK Finance (@UKFtweets) September 22, 2021

In the first half of 2021, criminals stole nearly 754 million pounds ($1.03 billion) through bank fraud. This amount represents a 30% rise in bank-related fraud compared to the same time period in 2020, reveals a UK Finance report.

Among the rising fraud schemes was Authorized Push Payment (APP) fraud, whereby customers make payments to criminals, thinking they are legitimate entities. APP fraud went up by 71% in 2021, the report said, moving ahead of card-based fraud for the first time.

Additionally, the UK Finance’s report shows 70% of APP scams were based online and highlighted a rise in the number of online ads that seek individuals as young as 14 to turn them into so-called “money mules” for illegal activities.

The banking group asserted the need for government action through a planned Online Safety Bill, which currently does not include online ads.

“The level of fraud in the U.K. is such that it is now a national security threat,” said Katy Worobec, Managing Director for economic crime at UK Finance, in the report. “The banking sector cannot solve this on its own.”

The report further encouraged the use of automated solutions for combating financial crime, stating that bank security systems prevented approximately 736 million pounds ($1 billion) from being stolen through fraudulent means in the first half of 2021.

Last week, the Financial Conduct Authority stated that the UK lost about 570 million pounds ($778 million) in investment fraud through April 2021, an amount that makes three times the 2018 total.

Suggested Read: UK Exposed to Significant Trade-based Money Laundering Risks Post-Brexit

Recent Posts

Blog
A Brief Overview of 2021 AML Trends
What is KYC/AML Compliance?
Current Landmark of Fintech and KYC
Lack of KYC/AML Infrastructure
Fintech’s Role in Customer Onboarding
It all comes down to Shufti Pro…
Over the last decade, regulatory scrutiny on Anti-Money Laundering (AML) compliance has remained a key area of focus. Well into 2021, the AML landscape has substantially transformed owing to the introduction of new regulatory regimes, unexpected fraud statistics, adoption of regtech technologies, and binding standards set by the global money laundering/terrorist financing watchdog, Financial Action Task Force (FATF).

As such, financial institutions can no longer afford to lose focus on the critical responsibility of detecting, preventing, and reporting suspicious activities. At the same time, institutions are being pushed towards exploring the adoption of robust technologies for keeping pace with fraudsters and money launderers.

Brief Summary of AML Trends in 2021

New AML Guidelines

On January 1, 2021, the Anti-Money Laundering Act of 2020 (AMLA 2020) officially became law, following the US Congress’ vote in favour of the National Defense Authorization Act for Fiscal Year 2021 (NDAA). The new AML law has made some sweeping changes to the Bank Secrecy Act and other AML rules, such as the introduction of new beneficial ownership requirements, the addition of virtual currencies in the AML framework, mandatory Suspicious Activity Reporting (SAR) requirements, and expanded civil penalties for the violators of the AMLA.

UAE

The United Arab Emirates has been at the forefront of the battle against money laundering and terrorist financing threats in 2021. In June 2021, the UAE Central Bank mandated the reporting of suspicious activities and the development of robust AML programs to minimize the risks of money laundering and terrorist financing.

Following this move, Dubai set up a specialized court for combating money laundering challenges, while the National Committee for Combatting Money-Laundering and Financing of Terrorism and Illegal Organisations (NAMLCFTC) introduced new regulatory requirements for virtual asset providers in September 2021. Under the new AML framework, all virtual currency providers including cryptocurrencies have been obligated to comply with the FATF’s travel rule.
Singapore

Singapore is among the few countries that are effectively combating financial crimes such as money laundering and financing terrorism. The country has successfully developed strong AML policies to comply with international AML standards. Additionally, Singapore is also one of the founding members of the Asia/Pacific Group on Money Laundering – the intergovernmental body that ensures the implementation of AML strategies.

In July, the Monetary Authority of Singapore (MAS) proposed to expand the scope of AML requirements. This proposal was made to deter financial crimes taking place in financial institutions that deal with precious stones, metals and products (abbreviated to PSM).

Hong Kong

As part of Hong Kong’s two-year roadmap to promote regtech adoption in banking, the Monetary Authority of Hong Kong (HKMA) published new anti-money laundering guidelines in April, emphasizing the benefits of merging data from internal and external sources, proactive data analysis and information sharing for tackling emerging AML risks.

Philippines

In January, the government of Philippine expanded the scope of the Anti-Money Laundering Act (AMLA), bringing offshore gaming operators, real estate developers and brokers into the AML framework. Later, in February, the country’s central bank revised its AML/CFT risk assessment framework and introduced a four-point rating scale to facilitate companies in evaluating risks and the quality of their anti-money laundering and counter-terrorism financing program.

The Philippines had managed to make adequate progress of strengthening the effectiveness of its AML/CFT regime to be removed from FATF’s grey list in 2017. However, it has been placed in the grey list following the FATF’s “Jurisdictions under Increased Monitoring” report of 2021.

Financial Institutions are Investing in AI for AML Compliance

Traditional mechanisms of ensuring KYC and AML compliance have proven to be inadequate given today’s robust regulatory landscape. Thus, an increasing number of organizations are moving towards AI and ML-backed technologies. Not only do such technologies allow companies to cut down costs, but it also enhances the due diligence processes necessary for effective fraud prevention.

Based on research by SAS, KPMG and the Association of Certified Anti-Money Laundering Specialists (ACAMS), more than a third of financial institutions deem AI and ML technologies crucial for streamlining AML compliance. Over half (57%) of surveyed respondents stated that they had either already deployed AI/ML into their AML compliance processes, are currently piloting AI solutions, or plan to implement them within the next 12-18 months. According to the survey by SAS, KPMG, and ACAMS, the following two factors have been identified as the primary drivers behind AI and ML adoption:

They improve the quality of investigations and regulatory filings (40%)

They reduce false positives and resulting operational costs (38%)

Suggested Read: AI a Blessing – AML compliance cost reduced by $217 billion

Regulators Urge the Use of Tech for AML Compliance

In January 2021, the Hong Kong Monetary Authority published case studies that highlighted the benefits of adopting RegTech solutions, particularly for meeting Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) compliance targets.

The new guidance encouraged the adoption of regtech solutions in the area of customer identity verification and transaction monitoring – a mandatory task performed by banks to comply with AML/CFT regulations.

Additionally, the FATF examined the use of automated technologies in a report published in June, stating that with the fusion of a risk-based approach and innovative technologies, financial inclusion can be promoted. Other benefits of using automated technologies for AML compliance highlighted by the FATF include secure payments and transactions, enhanced due diligence on high-risk entities, and ongoing transaction monitoring.

“They can help financial institutions and supervisors, assess these risks in ways that are more accurate, timely and comprehensive.” – FATF

Trade-based Money Laundering on the Rise

Trade-based money laundering refers to the process of moving funds through trade transactions in an attempt to disguise its source and reintroduce the money into the legal financial system. The FATF’s president, Marcus Pleyer, declared trade-based money laundering a new kind of fraud that enabled criminal organizations to launder over $400 million in recent years. In March, the Financial Action Task Force (FATF) and Egmont group published a new report on risk-indicators of Trade-based Money Laundering. The report was issued to assist the private and public sector in recognizing suspicious activities that occur in overseas trade.

Additionally, research published in the latest “Journal of Money Laundering Control” states that in the post-Brexit landscape, the UK is at a high risk of trade-based money laundering owing to a rise in illicit outflows and unpreparedness of enforcement bodies.

The EU’s AML Proposal

To revamp the EU’s AML and CFT regime, the European Commission published a new AML proposal in July 2021. The EU AML draft consists of four legislative proposals that suggest the formation of a new AML authority (AMLA), a single EU rulebook for AML/CFT compliance, imposition of AML/CFT rules on the crypto sector, and the adoption of a 6AMLD which revokes 4AMLD.

These proposals seek to combat the challenges associated with the detection of suspicious activities and transactions, and the shortcomings of AML policies that criminals currently exploit. As stated in the EU’s Security Union Strategy for 2020-2025, enhancing the country’s AML/CFT framework will provide Europeans with better prospects of protecting themselves against terrorism, money laundering, and other organized crimes.

Suggested Read: The EU’s New AML Proposal, What’s in Store?

Growing List of Countries Support AML Regulations on Crypto

To prevent the misuse of cryptocurrencies for money laundering and terrorism financing, the Financial Action Task Force introduced the Travel Rule in June 2019. However, only 58 out of the 128 reporting jurisdictions had implemented the revised FATF standards by June 2021.
In the first half of 2021, Ireland undertook serious measures to regulate crypto-based firms by mandating all Irish VASPs (Virtual Asset Service Providers) to register with the country’s Central Bank within a deadline of three months. South Korea’s Financial Intelligence Unit (KoFiu) also imposed similar registration requirements on all crypto providers and stated, “any local crypto platform that fails to comply with the new rule will face an outright ban on operating in South Korea”.

In September, Ukraine officially adopted the Draft Law On Virtual Assets. Prior to that, Cuba passed a law to recognize and regulate cryptocurrencies, while Panama is currently in the planning phase for new cryptocurrency regulations. Other countries that support AML regulations on crypto include the UK, UAE, France, Switzerland, Germany, Netherlands, Thailand, Japan, and Australia.

Key Takeaways

Despite the rising incidents of money laundering, economies worldwide are implementing strategic programs to effectively minimize associated risks. On one end, regulators are introducing new guidelines to diminish ML/TF threats, while on the other, financial institutions are deploying fully automated technologies to streamline customer risk assessments, ensure continuous transaction monitoring, and screen all clients against global watchlists.

To perform AML screening in real-time with global coverage of PEP, Sanctions, and criminal watchlists, talk to our experts right away!

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Fintech 2021: KYC/AML Bringing New Innovation to the Table

What is KYC/AML Compliance?

Current Landmark of Fintech and KYC

Lack of KYC/AML Infrastructure

Fintech’s Role in Customer Onboarding

Artificial Intelligence

Biometric Security

Regulatory Technology

It all comes down to Shufti Pro…

Brief Summary of AML Trends in 2021

New AML Guidelines

UAE

Singapore

Hong Kong

Philippines

Financial Institutions are Investing in AI for AML Compliance

Regulators Urge the Use of Tech for AML Compliance

Trade-based Money Laundering on the Rise

The EU’s AML Proposal

Growing List of Countries Support AML Regulations on Crypto

Key Takeaways

Let’s prove your

customer’s identity

with Shuftipro.

Let’s prove your customer’s

identity with Shuftipro.