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Banks and other financial institutions often serve financial criminals as a conduit for dirty money, facilitating the money laundering process. As the commencement of the digital age has seen paper cash overtaken by digital means, money laundering has adapted to this too and the financial industry has had to implement measures and security practices to combat this ever-growing threat.
Illegally obtained cash cannot enter the mainstream economy unless ‘cleaned’, otherwise a paper trail is left behind to lead authorities to said criminal. This can be applicable to a plethora of criminal income, ranging from gambling and drug trafficking to investment fraud. Money laundering tends to follow three main steps- placement, layering and integration, spanning across depositing cash into a bank, passing through the ‘cleaning’ process and introduction into the legal economy.
This is where KYC and AML compliance come in, as a strict set of rigid rules and regulations imposed by authorities on financial entities ensure protocol is followed and money-laundering is deterred, detected and prevented.
Arm your organisation with the right knowledge to spot the red flags for money laundering in the finance sector.
Global KYC AML Regulations
KYC policies require organisations operating within the finance industry to identify all customers and assess the potential risks they pose, alongside checking for prior involvement in financial crimes. AML, on the other hand, states that institutions are obliged to monitor and report all suspicious behaviour and activities that may allude to financial crime. This also entails appropriate maintenance of records pertaining to transactions and customer due diligence. Failure to comply with these listed regulations may incur legal and reputational risks, as well as financial penalties.
But why has the rate of money laundering increased so dramatically in recent years?
The dramatic spike in recent years can be ascribed to numerous factors. However, the ever-changing and turbulent landscape has had a knock-on effect on compliance – constantly changing in order to accommodate and mitigate the growing threats. This can prove difficult for companies, who may struggle to adhere to all regulatory requirements due to the constantly changing nature – it’s essential that you meet KYC AML criteria for your business. For advice and solutions to ensure you meet global compliance, talk to one of our KYC experts now.
Let’s take a look at some of the reasons why money laundering may be more prevalent now:
The increasing interconnectedness of global financial systems and markets has created greater ease when it comes to transfers across borders, making it simpler to launder internationally. Bringing such crimes to justice can be difficult when law enforcement and authorities must amalgamate investigations across borders and jurisdictions.
The substantial rise in online payment systems, cryptocurrencies and an array of other digital technologies have made it easier to convolute the source and destination of funds. The hit of Covid-19 in 2020, rampant across all corners of the world further facilitated this. As criminals leveraged this opportunity to exploit payment channels offered to consumers in the midst of lockdowns, such as ‘buy now, pay later’ schemes and the overall upsurge in online payment transactions – offering money launderers more means and methods, hence why this form of financial crime gained a lot of traction.
As regulation and regulatory bodies vary across countries and territories, financial crime is more prominent in areas with more lax and ineffective legislation and regulatory compliance pertaining to money laundering and other financial crimes, thus making it easier for criminals to move, disperse and clean illegally acquired cash throughout some financial systems.
Increased criminal activity
As organised crime, drug trafficking and other crimes have risen in preceding years, all of the illegal money acquired through this has to once again be ‘cleaned’ before entering the legitimate and mainstream economy. In layman’s terms – more dirty cash means more cleaning.
Often in times of political conflict and turmoil, alongside generally weak governments, money can be moved outside of the country and assets can be hidden with greater ease from authorities.
As we’ve seen more rules and regulations imposed on organisations operating in the financial sector, we’ve had a system in place to flag potential fraud and committed fraud – so more fraudulent activity is being effectively reported.
Overall, money laundering is a multifaceted and complex challenge and requires ongoing cooperation between law enforcement, governments, regulative bodies, financial institutions and other authorities to corroborate efforts for effective fraud prevention – hence why strict KYC AML regulations are necessary. If something is in violation of national or international regulations or a suspicious transaction occurs, having a stringent and decisive set of rules and protocols streamlines efforts to quickly and effectively flag and deter money laundering.
Common Types of Fraud in the Financial Industry
Before we delve into the most common types of fraud that occur within the financial sector, it’s critical that organisations understand the motive behind such crimes, in order to take proper steps for mitigation.
Clients and investors of financial institutions are the most common source of fraud and threaten the functionality and integrity of financial institutions and the wider financial ecosystem. The anonymity widely associated with financial crime is highly appealing to perpetrators, as identification is often a skewed process due to the use of stolen or fake identities. This further highlights the necessity of KYC AML checks, ensuring that all customers adhere and pass the required onboarding checks and identity verification – all of which fall within the realm of obligatory practices enforced by KYC and AML compliance. Verification of all clients and stakeholders is crucial in flagging possible high-risk clientele and fraudulent activities.
Here are the most common types of fraud that occur within the financial industry:
Money laundering & terrorist financing
Dirty money acquired by criminals must be cleaned and is often used to fund terrorist groups. Banks are not allowed to extend services to money launderers, in the event of a bank found to be involved with such illegal transactions they are fined as per AML regulations.
Account takeovers are unfortunately extremely common within the finance sector. This is when a criminal takes control of a customer’s account via stolen credentials (passwords, PINs, etc.) and use it to steal money or make transactions through this account. The growing trend of biometric verification is largely attributed to this.
Phishing scams are extremely common and refer to cyber-attacks executed through fake emails often sent to employees within financial institutions. If an employee falls prey to this scam, the cybercriminal will be able to gain access to confidential information and more. In light of this, it is critical that all organisations provide staff with adequate training in how to spot and avoid such scams, alongside robust firewalls.
Criminals use fake identities to open accounts at financial institutions to conduct illegal activities, holding extremely negative consequences in store for any and all organisations involved.
Research from the Insurance Information Institute found that 3 million identities were stolen in 2018 and 1.4 million of those stolen identities were fraud-related, 50% of those identities were stolen to conduct credit card fraud with banks and businesses.
Our 2022 ID Fraud Report reveals more alarming statistics pertaining to the current state of the fraud landscape within finance.
- The rate of ID fraud increased by almost 48% in 2022 – an all time high.
- UK Finance declared bank fraud “a national threat to security”.
- The first 6 months of 2022 alone saw the UK lose £609.8 million to digital banking fraud.
- 2022 marked the highest increase in ID document forgery at 24%.
- The most forged document was passports, followed by ID cards.
Download Shufti Pro’s 2022 ID Fraud Report here for more information on the nature of the fraud landscape and arm your business with the right tools and knowledge for effective fraud prevention.
Recent trends in global KYC and AML
Regulations have evolved rapidly in recent years, so being knowledgeable in the ongoing trends can help your organisation make informed and effective decisions when conducting business operations, alongside choosing the right IDV providers to ensure compliance depending on your industry and location.
Here are some recent KYC & AML trends provided by Shufti Pro’s compliance experts:
Increasing use of technology
Many banks and other financial institutions are adopting new and innovative technology like AI and blockchain to enhance KYC and AML process. This also entails machine learning, often employed to analyse customer data and flag suspicious transactions.
Shifting focus on a risk-based approach
Regulators across the world are stressing the importance of a risk-based approach to KYC and AML, advising financial institutions to identify and prioritise highest risk customers and transactions and subject them to more thorough screening.
Enhanced due diligence
Increasing scrutiny from regulators
KYC and AML procedures within financial institutions have been hit with increasing scrutiny from regulatory authorities, conducting more thorough and frequent inspections, alongside harsher non-compliance penalties.
There has been a greater call and requirement for collaboration between financial institutions to combat financial crime. Sharing of data, practices, reports, knowledge and resources in some cases.
For example, Sweden has taken this into stride with the incorporation of a centralised database:
Nordic KYC Utility is a centralised database for digital KYC, created by 5 major Nordic banks. The database was successful in contriving greater transparency, identifying and tracking financial risks; and causing a notable reduction in development costs and decreasing maintenance charges for each banking organisation. Pooling their data together proved most effective in stopping financial crime- if you’re dabbling in financial crime at one bank, it makes it tremendously difficult to jump ship.
Individual KYC services provided by each bank was stated to be more strenuous due to time consumption, expenses, general maintenance and upkeep. Customers also reported multi-formatted KYC services provided by different banks to be an inconvenience, Nordic KYC Utility completely eradicates this with its robust and uniformed layout for all participating financial institutions.
Businesses need real-time KYC and AML verification solutions
As per the global AML and KYC regulations, financial institutions must perform KYC AML process in line with compliance standards. The institutions that are liable for compliance under the KYC and AML regimes are banks, brokerage houses, insurance companies, forex exchanges, non-banks mortgage lenders, money transmitters, cryptocurrency facilitators, etc.
How is online KYC and AML verification performed?
The API is integrated with the financial institutions existing systems. Every time a new user is onboarded or an end-user accesses their account verification is performed. Real-time identity verification is performed through in-depth screening of ID documents and face verification or biometric verification. Furthermore, documents and addresses are verified in real-time before onboarding a new client. Once the verification has been completed the end-user is granted access to the system of the financial institution.
In the case of AML verification, the information of the end-user is screened against regularly updated databases that consist of global sanction lists, watchlists, and PEP lists.
What are the benefits of online KYC and AML verification solutions?
Online KYC and AML solutions help the financial institutions in preventing the risk that comes from a diverse clientele. Identity thieves and money launderers can be identified at the very first stage and help the businesses in serving only legitimate clients that pose a low risk.
Online KYC, such as e-IDV and AML verification solution helps financial institutions in catering to regulatory compliance. Correctly done, your organisation can diminish the risk of non-compliance penalties and uphold the integrity of your business. For example, Swedbank was recently fined for non-compliance and lost its market value, alongside its credit rating.
Online KYC and AML verification solutions help the financial institutions in onboarding clients with good credibility. Fast verification provides a seamless onboarding experience for customers and helps retain more happy clients.
Here at Shufti Pro, we onboard customers in as little as 30 seconds, whilst ensuring your industry requirements are met, alongside easy global compliance. Find out more on our award-winning KYC solution here.
What happens when organisations fail to comply with KYC and AML regulations?
This may vary depending on the type of financial crime and the scale of the crime committed, but several outcomes are assured if an organisation is found to be affiliated with financial criminals. Here’s what could happen:
- Reputational damage
- Customers may leave and take their business elsewhere
- Investors may pull funding and become exceptionally wary of investing in the future
- Non- compliance fines & penalties
- Banks may be required to pay restitution to victims of the crime committed
- If the bank or its employees are found to have knowingly participated, this will lead to hefty fines, court and potential imprisonment
- Revocation of the banks licence to operate
As regulations have become more stringent, we’ve seen many cases brought to the attention of the public eye, in regards to failure to comply. Let’s take a look at some of these cases:
HSBC: Faced a fine of $1.9 billion for failure of preventing money laundering committed by terrorist organisations and drug trafficking. HSBC also faced further investigations and fines for violation of sanctions against Iran and numerous other countries, alongside a number of other non-compliance issues.
Standard Chartered: Similarly to HSBC, faced fines for violating sanctions against Iran and other countries, costing them $667 million for this disregard of AML regulatory requirements.
JPMorgan Chase: The failure to prevent Bernie Madoff’s Ponzi scheme landed JPMorgan with an astronomical fine of $2.6 billion. They also faced further investigation and fines for violating sanctions against other countries and other non-compliance issues.
Wells Fargo: Faced with a fine of $186 million for the creation of 2 million credit card accounts and deposits. They were investigated for an array of other issues, including non-compliance.
Goldman Sachs: Fined $2.9 billion for the part it played in the 1MDB scandal, helping raise money for the Malaysian government which was later found to be linked with corruption and money laundering.
Wells Fargo: Fraudulent sales practices led to a £3 billion, as employees facilitated the creation of millions of unauthorised accounts to ensure sales quotas were met.
Danske Bank: Fined $130 million for involvement in Saudi Arabia bribery scheme and Italy, whereby improper payments were made to win over certain businesses. The bank was also fined $150 million for involvement in a money laundering scandal, enabling billions of dollars to be moved from 2007 and 2015 via its Estonian branch.
Capital One: Fined $390 million for failure to report suspicious transactions.
NatWest: Plead guilty to three counts of failure to conduct adequate monitoring over a £365 million deposit paid into an account, majority of which was in cash, by a gold dealer. They were fined £265 million.
Santander: Fined £108 million for numerous issues relating to the risk of financial crime.
Metro Bank: Fined £10 million for misleading investors and misreporting assets
KYC and AML compliance is inevitable for global financial institutions. To summarise, these are the key points of KYC AML compliance regulations that every organisation in the financial factor should be well versed with:
- Conduct identity verification on your customers before serving them
- Customers should be screened against international sanction lists, terrorist lists, high-risk countries and PEPs (Politically exposed people)
- On-going AML screening of clients
- Proper record-keeping for the AML practices within the organisation
- Any transaction above the “minimum cash transaction threshold” must be reported to the concerned authorities
- Employee training and an integrated AML compliance program
- Non-compliance fines and penalties
Whilst this can be precarious ground to navigate, Shufti Pro is here to help.