Difference between KYC and AML

Difference between KYC and AML

The growing Fintech industry leads to an increased demand for KYC and AML compliance requirements. Financial institutions face high-risk frauds through the customers and financial transactions. KYC and AML compliance programs build a systematic review of the secure financial system. Customer verification procedures, Know Your Customer and Anti-money Laundering screen customers against possible fraud risks.

The need for KYC and AML compliance has become mandatory to comply with the global and local regulations. The ones who fail to do so, are subjected to harsh regulatory penalties.  To avoid fines, businesses should identify the underlying company standards and the need for KYC and AML compliance in the business framework. Before this, there should be clear understanding of how KYC and AML are different from each other.

Know Your Customer is defined as a process that verifies the identity of customers. Customers are required to provide personal information which includes name, address, contact information, id card, etc. This information is verified before they become part of a  business or company. The term KYC is commonly referred for financial institutions. This is because the finance industry is prone to high-risk frauds that vary from money laundering and terrorist financing to identity theft and data breaches. 

The scope of KYC enlarges and takes in all the Fintech companies that provide financial services to customers. Online businesses that are under threat of a large number of financial frauds also lie into this cluster. KYC compliance has become mandatory whose non-compliance can result in businesses in the hefty monetary and reputational loss.

KYC Incorporates CDD AND EDD

Know Your Customer demonstrates customer verification which ultimately refers to the processes of Customer Due Diligence (CDD). Financial institutions verify the information of clients to make sure that they are building a secure relationship with them. Financial middlemen are supposed to undergo a CDD process to authenticate customer traffic and ensure their incorruptibility. In CDD, ascertain the identity of customers and verify the name and address. After authenticating, identify the risks before making an entity part of the system.

Enhanced Due Diligence (EDD) on the other hand, gathers additional information from customers. EDD came into force with the declaration of the USA Patriot Act. The difference between CDD and EDD should be clear to map the business standards and needs accordingly. Periodic due diligence processes on the customer are highly beneficial to deter the risks that could be generated by an entity later. 

EDD regulations are more efficient because of the extra information and proof it gathers from the customer. Detailed documentation is done for the whole EDD process and regulators are provided with the gathered information. EDD information includes;

  • Geographical factors
  • Property and assets information
  • Transactions types 
  • Occupation information
  • Banking information 

AML procedures detect suspicious transactions happening in the financial system. Entities are investigated and thorough documentation takes place that reveals malevolent entity beforehand. Criminal activity is accelerated when laundered money is used. By breaking that cash flow, a large number of criminal operations can be terminated. For this, a company must first verify the identity but do not stick to it. Continuous transaction monitoring should be done to identify the risky entity before some ruinous situation takes place. 

Global and local regulators are all set up to evaluate the AML standards of businesses. Regulations are declared to which states are supposed to comply strictly. Otherwise, it could lead to heavy regulatory punishments. AML regulations intend to eliminate the incidences of money laundering and terrorist financing. Businesses across the world are evaluated with respect to in-house AML techniques and procedures. This is done to make sure that no individual is facilitated to launder money through some industry or business (knowingly or unknowingly). An overall assessment takes place by global regulators that evaluate the AML norms of countries and present amendments accordingly. 

AML Procedures

The AML framework keeps on updating with the pace of fraudulent activities. Rules and regulations change with time. Following are the steps that help businesses comply with the AML regulations and standards:

Step#1 Stay updated with the changing AML rules and regulations

On a continuous basis, keep on reviewing the company norms and improve them accordingly. 

Step#2 Know Your Customer

KYC is a part of AML compliance. It is necessary to know who you are facilitating with your services and how in return your customer will be. 

Step#3 Identify the external and internal risks

It is necessary for companies to identify the high-risks associated with the business.  Identify the vendors, third parties and customers. 

Elaboration: Difference between KYC and AML

 

Elaboration: Difference between KYC and AML

 

AML procedures contribute to avoiding money laundering and terrorist financing activities. KYC, on the other hand, is the process of gathering customer verification on the basis of gathered information. It is necessary to consider both simultaneously. A business that complies with both KYC and AML regimes is considered well-reputed and trustworthy. The reason is that the chances of fraud are reduced when a company takes in place stringent actions and steps for fraud prevention. 

Why CDD is significant for both Know Your Customer and Know your Business verification?

Customer Due Diligence: From KYC to KYB

Why CDD is significant for both Know Your Customer and Know your Business verification?

Banking is a profitable sector but is risky at the same time. Frauds, as well as compliance risks, are often complicated and intricate. The banks and financial institutes are spending a high amount of capital on KYC compliance, which surpassed $100 billion in the year 2019. Even with this much investment, global banks have been fined $321 billion since the global crisis in 2008. Further complicating these risks is the fact that financial crimes such as money laundering, terrorist financing, and cyber frauds are increasing.

On the other hand, regulatory authorities are striving hard to enforce measures that could lead to the eradication of financial crimes. One of the first regulations that were enacted amidst the Vietnam war back in the 1970s was BSA. US regulatory authorities issued the Bank Secrecy Act of 1970 (BSA).

The purpose of this law was to counter money laundering activities emerging from illicit drug trafficking. Under this provision, banks are obliged to report any customer activity that seems suspicious such as transaction above $10,000 to the Federal Financial Crimes Enforcement Network (FinCEN).

The regulations aimed to make it difficult for the drug cartels, terrorists, and other lucrative criminal enterprises to launder money by making their transactions more visible to law enforcement agencies.

Introduction of Customer Due Diligence as Know Your Customer (KYC) regulations

 

The Banking Act of 1970, laid the foundation for the Anti Money laundering (AML) regulations later in US patriot Act, 2001, after the tragic incident of 9/11. Customer due diligence (CDD) was declared necessary for the financial sector. The term coined for performing CDD is Know Your Customer or KYC.

The KYC regulations were fortified to restrain the flow of money to the terrorists. It requires financial institutes to verify the customer to ensure that they are, who they claim to be. These regulations led to the adoption of various approaches to comply with CDD and KYC laws. Since the US regulatory changes affect the landscapes of the global financial sectors, these regulatory changes were accepted by the banking sector worldwide.

Financial Sectors adopted several ID verification controls to respond to these regulations. These ID verification controls include:

  • Maintaining a thorough Customer Identification Program (CIP).
  • Verifying customers against the list released by Law enforcement agencies.
  • Predicting, customer’s behavior and criminal risks associated with a particular entity, based on the statistical data.
  • Ongoing screening of the transactional activities of suspected customers.

It continues to be the main line of defense for the financial sector against financial crimes, with minor amendments. For a simple person, this law appears comprehensive. However, in June 2016, a loophole was identified in KYC compliance regulations. 

The banks weren’t required to verify the identity of stakeholders and beneficiaries of the businesses they provide services. It was after Panama Papers Scandal the world realized that apparently, legitimate businesses could hide the identities of bad actors and perform illegal activities on their behalf. The regulatory authorities identified the risk and issued a fix as Know Your Business (KYB).

Tying up Loose Ends with KYC Verification

 

This fix made by regulatory authorities in the KYC checks includes the Customer Due Diligence for the financial institutes. Under the new provision, Financial institutes are now required to perform stringent verification checks. KYB regulations are aimed to identify the shell companies that are involved in money laundering and other illicit financial crimes. 

Firms are required to verify the person who owns the business legally as well as, the identity of stakeholders owning a minimum of 25% share in the business. European Commission also introduced the same legislation in its 4th AML Directive (4AMLD). This process of business verification was improved, with new regulatory changes in AMLD5 and AMLD6, which are aimed to make due diligence transparent.

However, KYB compliance is not easy to achieve as it seems. The major problem in KYB verification is the identification of shareholders in the businesses. Most of the time, no record of these entities is available and to make things worse, the disclosure requirements in each jurisdiction varies. This sometimes makes it impossible to identify the stakeholders in the business. It is a recipe for disaster, for the firms who want to stay in compliance.

Turning towards Technology for Solution 

 

Emerging from the ashes of the global financial crisis in 2008, the new regulatory technologies are helping to ease the burden of compliance by reducing the operational costs as well as mitigating the risks for financial crimes. At the crux of these technologies, is the use of new technologies such as Identity verification and KYC identification, to help financial institutes to monitor, comply and regulate. The RegTech solutions are already assisting financial institutes to meet KYC and AML regulations.

Businesses need to stay one step ahead of the fraudsters. With a comprehensive approach to global risk mitigation, businesses could easily prevent fraudulent activities and stay in compliance with regulatory authorities. 

RegTech industry is rendering efficient AI-based solutions for Business verification solutions that can eliminate the inefficiencies and risks involved in onboarding new customers. For instance, automation of official document checking process and verification against the government issued registries. 

The future of RegTech is expected to see great adoption in the financial sector in the future. Owing to the changes in regulatory compliance, performing KYC and KYB verification parallelly will enhance the customer due diligence process and businesses to stay compliant.

EU Contemplates New

EU Contemplates New Anti-Money Laundering Body in the Wake of Scandals

Brussels plans to pursue the strengthening of powers of the EU agencies to combat money laundering and mitigate terrorist financing following a series of high profile scandals. These scandals have given insight into Europe’s insufficiencies in addressing criminal cross-border cash flow. 

The EU is working on proposals that would enable the European Banking Authority, the EU’s banking regulator, to acquire increased enhancement powers and more resources. According to senior officials, this would help the authority to better investigate the proceedings of banks involved in illegal financing. 

In other plans, the commission wants to empower the European Public Prosecutor’s Office (EPPO), a newly established pan-EU agency, to launch inquiries into the terrorist financing activity across it member states from 2025. 

Both of the initiatives are still being finalized and are most likely to be highlighted in EU’s president, Jean-Claude Juncker’s annual “State of the Union” speech on Wednesday. These initiatives are due to be officially announced the following week.  

The push to strengthen pan-EU anti-money laundering (AML) powers comes after a major disclosure. As much as $30 billion of former-Soviet and Russian money circulated through the Estonian branch of a Danish bank, Danske, in a single year. 

Earlier this month, the Dutch bank, ING, was also fined €775 million as the penalty for failing to properly enforce anti-money laundering regulations. 

These cases are some of the most recent in a series of scandals unfolding the ways criminals exploit weak and insecure links in Europe’s banking system to launder large amounts of cash. A Latvian bank, ABLV, was also wound up by regulators this year after accusations of “institutionalized money laundering” by US authorities. These accusations even included helping finance North Korea’s nuclear program. 

European Central Bank directly supervises most of the EU’s largest banks but keeping tabs on AML regulations is not covered by that system. Instead, the obligation for ensuring that banks carry out proper customer background checks and other AML regulations as required by EU law still lies largely with national watchdogs. The recent scandals have made the enforcement of these regulations a top priority.

How is Libra Launch Changing the Cryptocurrency Landscape

How is Libra’s Launch Changing the Cryptocurrency Landscape?

Libra will have to go the extra mile to prove itself worthy of global acclaim that it aims to achieve.  

Since the news came out that Facebook is launching its own cryptocurrency there has been a lot of criticism from several entities. Regulatory authorities are giving the Libra Association a hard time before its launch. The new cryptocurrency received significant  criticism from global regulatory authorities, analysts, and lawmakers. 

Facebook will have to take major security measures for KYC/AML Screening and data security to gain the confidence of the global regulatory authorities and other stakeholders in the global financial system. 

There are several reservations of the global regulatory authorities related to Facebook’s Libra. The unconventional framework of the Libra association, its huge goals and the closely knitted stewardship of the company are some worth mentioning. Due to this not so typical cryptocurrency business model, Libra is facing huge criticism from the masses. But the founders are persistent in their goals and aim to get the regulatory authorities by their side before the launch of Libra. 

Introduction and Timeline of Libra

Libra is a cryptocurrency founded by Facebook under the supervision of Libra Association, registered in Switzerland. It is projected to be launched in 2020. Facebook shared the news with the world in 2019 and triggered the bombardment of criticism from several entities towards Facebook and Libra association. 

Libra association is a group entity, it plans to onboard 100 members and currently, it has 28 members. Some big companies like PayPal, Visa & MasterCard and Uber are some exceptional members of Libra Association. 

Libra is the first corporate cryptocurrency and it is going through a tough phase of negotiations with the regulatory authorities. Facebook is still in talks with the U.S Senate, the cryptocurrency hasn’t received a green signal from the U.S regulatory authority, as per the news. 

Libra Association aims to start its operations after receiving acceptance from major regulatory authorities but projected to launch in 2020. Ever since the news of the launch of Libra, the cryptocurrency market also experienced major fluctuations of its history. 

The reservations of regulatory authorities, lawmakers and analysts over the Launch of Libra

The regulatory authorities, analytics, and lawmakers have a list of reservations over the launch of cryptocurrency by Facebook. Below is a list of some of the major reservations that gained acclaim from the masses: 

  • Facebook’s global clientele and Libra’s success

The lawmakers are concerned over Libra’s connection with Facebook. It is expected that Libra will be the most quickly and widely accepted cryptocurrency because of the massive global clientele of Facebook. This will affect the cryptocurrency market and might make Libra the competition of global fiat currencies like dollar, etc. 

If Libra received the success projected by the analysts then it might be the substitute of fiat currency. But the co-founder of Libra, David Marcus acclaimed that Libra is not designed with the intention to compete with fiat money, it is merely a solution to ease global online payments. 

  • Libra will be a fully fiat-backed cryptocurrency

Libra will be backed by fiat reserves on a ratio of 1:1, and this is one of the major concerns of regulatory authorities. If Libra will receive the expected growth it will gain tremendous economic power which will affect the fiat currencies and governments. 

Although this feature of fully fiat-backed cryptocurrency makes Libra worthwhile for the investors, as most of the investors prefer to invest in currencies with low risk. 

  • The stewardship of Libra raising concerns

Libra has raised a huge chunk of investment from diverse industries. The Libra Association has members from telecommunications, non-profit organizations, payments, and venture capital. The members infer that they joined the Libra association because it is a revolutionary project.  

The analysts are raising questions on the credibility of Libra due to the closely knitted board of the association. A few major investors like Peter Thiel, Fredric Court, Mark Zuckerberg, David Marcus, and a Venture capital firm Andreessen Horowitz, are somehow related to Facebook or were related to it in the past. 

This closely related stewardship of Facebook is raising suspicion. It is inferred that Facebook is a high-authority member of Libra and will exercise control over the Libra Association. 

Although the cryptocurrency market showed good progress since the news of Libra’s launch. It is expected that Libra will form a hegemony in the cryptocurrency industry. The crypto wallets and other cryptocurrencies might face downfall because the companies that invested in Libra will guide their customers to pool in Libra. This reservation is still in an ambiguous state until the launch of Libra. 

  • Data security and tinted background of Facebook

Facebook was charged with heavy fines in the past due to misuse of the personal data of its users. It was fined $ 5 billion over violations of consumer data protection. The company was fined for giving access to Yahoo and Amazon to the personal data of its users. Also, FB claimed that it saved $3 billion in its budget for non-compliance penalties. 

The past of Facebook is raising suspicion among the regulators, it is expected that if Facebook’s Libra did this once to the financial confidential data of its users, it will wreak havoc in the global economies. 

How is Libra Association Coping with this Barrage of Criticism?

Facebook will be a separate entity

Facebook infers that the Libra Association is a separate entity and will not affect the operations or the interest of the Libra Association. 

Libra is a combination of companies and non-profit organizations and plans to onboard only 100 members who will have to invest at least $10 million in it, with the exemption of non-profit organizations. So, Libra Association will work independently and Facebook will just be a member. 

It is a cryptocurrency and not an investment vehicle

The reservations of the regulatory authorities are answered with the unconventional model of Libra Association. The association is aiming to create ease in global payments and to decrease dependence on banks. The new cryptocurrency aims at creating ease in payments and developing a decentralized payment solution for the people around the world and not the creation of global speculation opportunities in cryptocurrency exchanges. Libra association has clearly declared that its primary aim is to provide a global payment solution and not the investment vehicle. 

Libra is striving for the approval of the global regulatory authorities

Libra Association is planning to start operations in 2020, and is registered in Switzerland, but plans to get the approval of major regulatory authorities like the U.S. and the UK. The association needs the approval for two reasons; to gain a positive image in the eyes of the regulatory authorities and to grab market share around the globe. Regulatory approval will help it in gain customer value. 

David Marcus the co-founder of Libra expressed his commitment and said, “I agree with you that this needs to be analyzed understood and the proper oversight needs to be set up before Libra can launch. This is my commitment to you: we will take the time to get this right.”

What might be the impact of Libra on money laundering and terrorist financing?

Global regulatory authorities are working hard to enhance the security practices of cryptocurrency facilitators. KYC and AML screening of investors and users is necessary for several global regimes, like FATF, etc. The launch of Libra might be exploited by money launderers and terrorist financiers as the cryptocurrency will provide easily accessible payment solutions. To eliminate this risk, Libra Association will have to implement stringent security measures like in-depth screening of its customers, record keeping of all transactions, etc. 

Libra will have to invest a lot in identity verification and KYC/AML screening of its stakeholders. With the tinted past that the company has with regard to information security, it will have to take huge steps to go the extra mile in preventing its misuse. 

Outsourced KYC and AML screening solutions can be a feasible solution for Libra Association because many criminals and speculators have seen opportunities in it. Online KYC/AML screening of all the concerned entities – investors, customers, partners, employees, etc – will help the association in gaining a global risk cover for its global project.

AML Checks

AML Checks: An Emerging Frontier in RegTech Revolution

The Anti Money Laundering (AML) landscape has been around since the signing of BSA (Bank Secrecy Act) in 1970. Financial institutions have been battling with compliance regulations since forever. Over the years the financial services industry has confronted $26 billion by way of non-compliance fines. To enable the banking sector to fulfil its compliance obligations, the RegTech industry has come up with some of the most technologically advanced solutions. They are able to enhance the capability and output of compliance teams in banks and financial service firms. From advanced analytical tools to anti money laundering checks, banks are now able to fight fire with fire.

Overspending on AML Compliance

The risk of money laundering has increased significantly due to the fact that overseas transaction volumes have increased making the financial system more vulnerable to financial crimes. The constantly changing AML regulations and the increase in non-cash payments have added to this risk infinitely as well. But the banking sector has been dealing with all these challenges by investing heavily in the expansion of their compliance teams. This has not only increased their annual spending on AML compliance – $3.5 Billion – but has made the process, if anything, more complicated than ever before. In the US compliance staff in banks has increased exponentially.

The Drawbacks of Prevailing AML Systems

For the moment, AML systems currently resemble operational units that have huge overheads and still employ manual procedures to manage client profiles. The cost of such compliance teams would have been acceptable if only they were as effective. Some of the major drawbacks of these AML systems include;

  • Large amounts of unstructured data make it difficult for different teams to accumulate and organise information. This ultimately causes operations to slow down, creating friction in onboarding procedures. Banks still resort to calling each customer individually to update their documents for KYC (Know Your Customer) procedures. Simple tasks such as these can be easily automated.
  • The systems in use for analysing client data are outdated and slow. Such legacy systems use fixed rules for analysing customer data and are unable to account for unforeseen scenarios. This rule-based approach generates a large number of false positives, that ends up wasting a significant amount of time and money to be wasted towards investigating bogus leads.
  • Outdated systems also result in erratic reporting of suspicious activity. As financial institutions deal with a large number of customer data, the system can produce an equal amount of false positives, thereby causing the compliance team to overlook legitimately high-risk cases.
  • Due diligence procedures in banks are still manual. They rely on manual identification, verification and screening of clients, which are both slow and have a higher rate of inaccuracy.
  • The complexity in financial transactions and the proliferation of faster services has made it difficult for financial companies to monitor client activity. Online payments and anonymous fund transfers also lack adequate KYC and AML procedures.

As prevailing systems are becoming more and more inefficient and costly, banks are exploring new avenues to perform AML compliance. An emerging avenue in this regard is regulatory technology or RegTech that is enabling the financial sector to implement advanced tech solutions to aid their AML compliance functions. More than anything, these systems have the ability to reduce costs and enhance the onboarding process. All such tools can make compliance systems in banks more feasible and cost-effective.

 

AML Compliance Systems and Tools

The RegTech space is now leveraging technologies like AI and big data to make streamline compliance procedures in banks and financial institutions. One such system is advanced analytics that can intelligently analyse client data and process it within minutes. The current analytical models being implemented are rather tuned to explicit regulatory and anti-money laundering requirements. Therefore, nearly 90% of the warning signals generated by them are false positives.

However, advanced analytical tools are now allowing banks to venture beyond such legacy systems. They primarily operate based on machine learning algorithms that can learn from past behaviour and issue alerts using predictive analytics. They sift through past data to look for patterns and determine legitimate and suspicious transactions. Such analytical models require large data sets to work with that financial companies can provide easily. ML algorithms help reduce the number of false results significantly, thereby saving ample time for compliance teams to investigate legitimate alerts. The manual work in such cases can be reduced by at least 50%.

The Fintech industry is still working on developing more advanced systems. They are using deep learning which is a step further from machine learning. It can be used for image processing and to imitate human speech. In short, it is able to mimic human cognition and implement intelligence towards the investigation of financial crimes like humans do. Efforts are being made to refine such processes and bring them into the mainstream.

Anti Money Laundering Checks

Another simple yet highly effective tool for improving AML compliance is AML screening. Anti Money Laundering checks also use AI to perform background checks of individuals by screening them through global sanction lists and databases. AML & CTF checks enable banks to screen out money launderers, financial criminals and Politically Exposed Persons (PEPs). Financial institutions can choose whether or not to take on a flagged person as a client or to at least classify them as a higher risk client and thus charge higher premiums accordingly.

Shufti Pro is an anti-fraud solution that uses AI and Human Intelligence to provide KYC and AML verification services to businesses. It can effectively help prevent your business from financial crime laundering through anti money laundering checks. Shufti Pro is providing ongoing PEP screening for clients wherein banking institutions can execute ongoing screening for a specific list of clients or even their entire clientele. They can also implement batch screening which allows them to screen existing customers through AML sanction lists.

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