KYC checks KYC solutions KYC and AML

Winter is Coming: With a Storm of KYC and AML Regulations

The ever-evolving regulations are creating challenges and complexities for the financial institutes, both in national and international markets. Financial sector deals approximately with 200 regulatory changes per day and these numbers are rising. Most of the time, businesses fail to concede these regulatory requirements and face heavy fines. Since 2008, global banks have been fined more than $321 billion collectively for not following Know Your Customer (KYC) and Anti Money Laundering (AML) regulations

Even with a compliance cost of almost $100 billion globally in a single year, crimes like money laundering, terrorist financing, and cyber frauds are increasing. Financial Institutes (FI) do not only find it challenging to comply with KYC and AML regulations but increased fraudulent activities make these things even worse. Financial institutes often fail to identify fraudsters and face fines and even get banned.

Fraudsters and money launderers are exploring new ways of carrying illegal activities. An undercover agent who infiltrated Pablo Escobar’s drug cartel responds, “You can launder money in so many different ways, it is as unique as snowflakes.” To counter these challenges, regulatory authorities are making updates in regulations almost every day.

Changing Regulations with the Changing World

 

In the aftermath of the 2008 financial crisis, regulatory authorities put forth several noticeable amounts of regulations, but now almost after a decade, some regulators and lawmakers think it is time to analyze what is working and what is not and make necessary amendments accordingly.

Banks and financial institutes are the protectors of the financial systems and the responsibility to prevent financial crimes lies with them. In the last decade, these institutions have worked tirelessly to establish reliable KYC and AML procedures and systems. However, changes created by technology and globalization demands modifications in regulations. 

For instance, high demand for virtual currency has made regulators reassess in place regulations and make amendments to regularise cryptocurrency. As most of the cryptocurrencies are not backed up by any central governments the potential of its use in illegal activities, especially terror financing and money laundering, already threatens the authorities and businesses. 

The authorities are making amendments and the newest laws to regulate all these advances in financial systems. Here are some recent changes by notable global regulatory authorities: 

FATF

Financial Action Task Force (FATF) is an intergovernmental organization, which strives to eliminate money laundering and terrorist financing globally. The organization has been very keen on recommending necessary changes required to comprehensively deal with financial crimes.

Noticing the recent trends of money laundering (ML) and terrorist financing (TF), FATF recommends member states to perform legal screening of Ultimate Beneficial Owners (UBOs) of every business. Owing to the exploitation of virtual currency by criminals, FATF also recommends regulating cryptocurrencies. According to a report, $4.26 billion worth of cryptocurrencies were stolen by cybercriminals, only in 2019. FATF expects members to implement these regulative reforms in their respective states for combating ML and TF. 

European Commission’s AMLD5 and AMLD6

As a part of an action plan against money laundering and terrorism, the European Commission has introduced new regulations in the 5th and 6th AML directives. Every European country is required to implement these regulations as a part of its national action plan on AML and CFT.

AMLD5

 

The most prominent law in AMLD5 is the regulation of cryptocurrency exchanges and service providers. Before this directive, e-wallet providers and crypto exchanges were not covered under the financial regulations. AMLD5 made it compulsory for crypto businesses to perform KYC for identity verification. Furthermore, member states are required to maintain a central register for Ultimate Beneficial Ownership (UBOs) of the crypto businesses.

AMLD5 also lowers the threshold for the prepaid cards to decrease the risks of money laundering through these cards. According to the U.S Federal Bureau of Investigation (FBI), drug cartels use prepaid cards as a source to launder money earned from illegal drug sales in the USA. European countries are required to implement AMLD5 by January 10, 2020.

AMLD6

 

While the European Union’s member nations are striving to implement AMLD5, the European Commission published a new directive i.e. AMLD6 in their journal. This new directive will make AML and KYC regulations more stringent. By setting a clearer definition of money laundering and increasing the minimum liability for predicate offences, the EU aims to make AML and KYC more robust. 

The key elements of AMLD6 are: 

 

  • Addition of Cyber Crimes in Predicate offences. Predicate offences are crimes underlying money laundering and terrorist financing. Initially, cybercrimes including online identity theft, credit card frauds were not included in predicate offences. Once AMLD6 is implemented the businesses will require more enhanced KYC checks to avoid indulging in unlawful activities.
  • Inclusion of the entities that are aiding criminals to launder money in money laundering crimes. The addition of ‘enablers’ can make money laundering tracking easier.
  • The punishment for money laundering and terrorist financing is increased for up to four years including other penalties.

RegTech: A useful KYC solution  

 

While the aforementioned are major regulatory changes in the world, many countries are also regulating businesses to perform enhanced due diligence and KYC at national levels. Financial Sector is obliged to follow these regulations.

However, the financial sector is not lagging and is taking measures to remain compliant with rules. Since the finance sector always remains one step ahead in adopting innovative technology. One of the latest addition to the finance sector’s arsenal is Artificial Intelligence (AI). The finance sector can adopt AI to make KYC/AML screening more robust, cost-effective, and time-efficient.

RegTech (Regulatory Technology) refers to the use of technology-based solutions to help in compliance with financial regulations. RegTech is enabling rapid development in the financial sector regarding compliance. AI-based identity verification and AML screening solution are both cost-effective and time-efficient. Businesses should adopt AI-based KYC and customers due to diligence solutions (CDD) when onboarding customers to remain compliant with regulatory changes and avoid any offence.  

Conclusion

 

KYC laws are continually modified to catch up with the latest techniques for perpetrating financial crimes. A recent example is AMLD6 by European Commission, which intends to make KYC and AML compliance stricter. The financial sector must adopt effective measures to maintain the integrity of the institutions as well as meet the regulatory requirements. They are the first line of defence against money laundering and need to act accordingly. To ensure that businesses remain in compliance with these changes, RegTech industry is rendering efficient AI-based solutions for KYC checks.   

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Why KYC Solutions are becoming a norm in Cryptocurrency?

KYC Solutions provide a great opportunity for crypto exchanges and virtual currency enthusiasts to earn credibility and legitimate status. These kinds of solutions are rapidly becoming important tools to regulate the cryptocurrency space. With virtual currency becoming host to billions of dollars in investments from a diverse range of sources, it is becoming more and more binding on the regulators and the crypto enthusiasts to adopt strategies and business methods that invite greater trust over the entire operating mechanism of cryptocurrencies. Some traditionalists believe that KYC Solutions tend to undermine the basic philosophy behind virtual currencies that is least regulations and better anonymity in financial sector. However, if cryptocurrencies and crypto exchanges resist such regulatory moves, it will be very hard to get international recognition for this blockchain based financial system. In order to earn legitimate status and witness a continuous boom in the fortunes of virtual currency floaters, KYC Solutions are a must have.

KYC solutions are not some artificial tools that undermine the functional aspects of virtual currencies or crypto exchanges but they will ensure greater transparency and will help to eradicate inherent financial risk attached with cryptocurrencies. As every cryptocurrency enthusiast is aware of the fact that the anonymity of virtual currencies is leading criminal elements from all over the globe, to use this virtual financial system to conduct money laundering activities in addition to risks of terror funding. Efficient and trustworthy KYC solutions help to solve the puzzle of anonymity in virtual currencies without compromising on the technological aspects of this state of the art financial phenomenon.

KYC Solutions and Territorial Borders

Each regulator and nation state follow a unique economic system and each respond differently to the anonymity of cryptocurrencies. Some regulators demand greater checks on crypto exchanges while others have a liberal standing towards crypto exchanges and virtual currencies. But as more and more cases are coming out where crypto exchanges or even regular banking institutions have been found as accomplice to money laundering and terror financing activities carried out by virtual bandits, the most liberal regulators have ordered crypto exchanges to mend their operations by introducing measures that encourage greater transparency.

KYC Solutions are considered to be the best means to the achieve the goal of greater transparency but the demand of KYC differs from country to country and regulator to regulator. As you know that major crypto exchanges have a global market outreach. It means that people from different countries can be trading virtual currencies using the services of a crypto exchange. Regulators are not much concerned in trading or buying/selling of any particular cryptocurrency. They demand from crypto exchanges to install KYC Solutions that don’t only collect personal information of users from authentic documents but that also verify those credentials. Regulators are forcing crypto exchanges to perform these KYC procedures long before a person starts trading on these exchanges. It means that customer onboarding process can be compromised because of not-so-efficient KYC solutions. Users don’t like to wait for hours, if not days, to get their credentials validated before they start trading. So there is always a risk of losing customers in order to comply with  regulators’ demands for greater KYC compliance.

Greater Productivity With Efficient KYC Solutions

With increasing pressures from international financial watchdogs and greater zeal to counter money laundering activities and terror financing, regulators are either forcing crypto exchanges or will start tightening regulations in coming months that will drive crypto exchanges to install more proactive Digital KYC solutions.

Shufti Pro is an ideal solution for crypto exchanges that are in need of fast yet efficient KYC Solutions. This artificial intelligence KYC Solution can verify identity documents issued by every country of the globe. This smart KYC solution can read documents in every language of the world which is just perfect for crypto exchanges whose business model encourages a global client base. Each verification and credential is verified within 30-60 seconds processing time by Shufti Pro which is just perfect for crypto exchanges and their customers who don’t want to waste unnecessary time on verification of identity documents. So with a changing world order that favours KYC solutions, Shufti Pro is perfect choice for crypto exchanges and virtual currency enthusiasts. It has already been used by several world renowned exchanges to verify the identity of their future users.

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