A Brief Summary of AML and KYC Compliance for Beginners

A Brief Summary of AML and KYC Compliance for Beginners

Although technology has connected businesses and consumers across the globe, it has brought along an unprecedented amount of financial crimes as well. Minimizing the risks associated with financial crimes has become more difficult for businesses, especially as criminals are using the same technologies to their advantage as well. In this sense, combating financial crimes through traditional strategies is equivalent to fighting fire with fire.

To revamp fraud prevention systems, anti-money laundering (AML) and Know Your Customer (KYC) solutions were introduced. These solutions were made specifically for the purpose of combating prevalent frauds and to streamline AML and KYC compliance. Let’s take a look at what these solutions accomplish and how they are enhancing businesses today.

What is KYC Verification?

KYC, abbreviated for Know Your Customer, refers to the set of processes that place to verify the identity of others. Verification of identity is necessary for the prevention of fraud. Without such procedures in place, fraudsters can easily manipulate online databases, leading to mega-scale data breaches.

To implement KYC verification, various methods can be utilized. Four of them are listed below:

  1. Document authentication: This method requires customers to submit their ID documents to prove their identity
  2. Face Verification: A customer’s face is verified through facial recognition technology to ensure they are who they claim to be
  3. Address verification: Customers provide a recent utility bill, bank statements or other official documents to have their address and identity verified
  4. Consent verification: A consent note is displayed by online customers to keep a record of the transaction they are about to make after verification of their identity

What is AML Verification?

AML, short for anti-money laundering, refers to all the steps taken by businesses in eliminating the threat of money laundering and terrorist financing. To conduct AML verification, companies hire third-party AML verification providers or build their own verification systems to screen every customer against global watch lists. Some screening lists against which they must be verified include criminal watch-lists, Politically Exposed Person (PEP) lists, adverse media news, and sanction lists.

Without AML verification, high-risk entities would be left unmonitored, leading to a spike in criminal activities.

What is AML and KYC Compliance?

Global regulatory authorities, such as the Financial Action Task Force (FATF), the UN, AUSTRAC, FINTRAC, among others, made AML and KYC compliance mandatory for all financial institutions. This includes banks, investment firms, brokerage companies, etc. Today, the scope of AML and KYC compliance has been extended to include all businesses that deal with financial transactions. This includes e-commerce businesses, retail stores, social media platforms, online casinos, and more. The latest addition to this list is cryptocurrency exchanges which too are liable to implement anti-money laundering compliance procedures.

Businesses that fail to comply with AML and KYC regulations are subjected to heavy fines, financial penalties, and lawsuits on top of reputational damage. Examples of businesses that have received hefty charges due to non-compliance include €3.30 billion fine on Goldman Sachs and £37.8 Million fine on Commerzbank.

Which Frauds are detected through AML and KYC Compliance?

From disastrous cybercrimes to traditional fraudulent schemes, AML and KYC compliance solutions can be utilized for all. These solutions are powered by artificial intelligence models that have the ability to detect unusual patterns and suspicious behaviors.

To launder dirty cash, criminal organizations target banks to move money across borders. AML solutions can detect the various stages of money laundering by closely monitoring customer transactions, their origin, and their end-point. By keeping a tab on the money trail, the source of dirty cash can be detected by auditors before criminals are able to make it untraceable.

On the other hand, KYC verification is widely adopted to detect criminal acts such as phishing attacks, account takeovers, fraudulent documents, and – more importantly – synthetic identity theft. Synthetic identity theft has become the fastest-growing crime worldwide, making its detection a top priority for financial institutions. By maintaining KYC compliance, identity verification is implemented on an ongoing basis, leading to timely detection of identity thieves and their illicit schemes.

Key Takeaways

  • To revamp fraud prevention systems, AML and KYC compliance solutions have been introduced
  • AML and KYC compliance has been mandated by global regulatory authorities
  • Examples of frauds detected by AML and KYC solutions include phishing scams, identity thefts, money laundering and terrorist financing

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