financial crime compliance

Financial Crime Compliance: How KYC Helps Banks Fight Financial Crimes?

Did you know, 91.1% of individuals convicted of money laundering are sentenced to prison; yet, 90% of money laundering incidents go undetected? Usually, banks and credit card firms are the battlegrounds for flagging the possibility of money laundering. However, one of the proven measures to tackle this rise of such illicit financial activities is to identify and eliminate anonymous accounts and keep track of suspicious activities. For this purpose, several financial institutions strive to meet KYC compliance requirements to keep their businesses growing. Well the objective of KYC and AML is to assist these financial organisations in recognising their susceptibility to implement in financing terrorism and other relevant crimes. Yet banks and financial institutions play a key role in fighting financial crime compliance due to the high volume of transactions they process daily.

Importance of KYC in the Finance Industry

KYC is mandatory for financial organisations to verify the identity of their customers and detect potential risks. These procedures assist in preventing identity fraud, money laundering, financial scams, terrorism financing and other financial offences. If KYC requirements are not fulfilled, significant fines and penalties may be imposed.

AML compliance was introduced in 1970 to take steps against money laundering and other global financial crime compliance. However, after the 9/11 attacks, the United States became more rigid concerning KYC compliance and brought some modifications for a couple of years.

Nonetheless, two central components of KYC compliance were made: Customer Due Diligence and Customer Identification Program. On the other hand, the existing KYC compliance acquires a risk based approach AML to fight back crimes like identity theft, financial terrorism, money laundering, and so on.

KYC Challenges Faced by Financial Institutions

While conducting KYC analysis, it has been observed that a lot of financial companies encounter some common AML risks. However, these pain points have been found during several processes such as transaction processes, gathering consumer information, and recognising sources of wealth.

   i. Transaction Process Evaluation

Approximately half of the time spent on KYC investigation is focused on analysing transactions. The reasons for this significant allocation of time can vary, such as an unclear scope of the review that can take between six months to three years. Additionally, the need for appropriate tools like raw Excel data that need manual analysis and the absence of descriptive statistics that provide an overview of customer transaction profiles and raise red flags can also contribute to the excessive time spent. 

   ii. Customer Data Collection

In numerous financial organisations, the procedure of gathering and analysing crucial customer information is executed by outsourcing through emails or physical documents. Further, the information is entered into KYC workflow tools. These tasks are often considered low-value and as a result, are not given much attention, which can lead to an increase in AML risks.

   iii. Identifying Sources of Wealth

Recognising the sources of a customer's wealth is yet another reason for adopting a risk based approach AML by financial institutions. Case handlers often struggle with identifying specific types of income such as salary, investment, or rental income, and lack access to descriptive statistics for transaction groups. Furthermore, the guidelines for the scope of investigation and documentation requirements are often not specific enough.

Banks can alleviate these challenges by implementing a clear, sequential workflow, differentiating requirements based on risk, standardising their processes and automating as much as possible. The average handling time is determined by how much they have already done. Many banks have started automating individual process steps but only a few have implemented end-to-end Straight Through Processing solutions.

3 Measures to Reduce Financial Crimes and Terrorism

By considering the above challenges, these financial institutions obtain several risk based approaches to observe KYC comprehensively. However, KYC helps these businesses against fraud, war, money laundering, and other financial crime compliance in numerous ways.

   i. Continuous Transaction Monitoring

Effective management of KYC involves constant monitoring and compliance evaluations. By keeping track of and reporting any suspicious customer transactions, such as large money transfers, financial institutions can prevent terrorist financing and money laundering. This helps to block the entry of illegal funds into the system and stops the flow of money to terrorist groups.

However, taking these measures helps to build trust in the financial system, and encourages members of the public to report any instances of AML risks or other crimes.

   ii. Tracking Tax Evaders

On the other hand, tax evasion is a type of fraud in which individuals or entities deceive their government by not paying the taxes they owe. High-income individuals may use banks to hide their true income to avoid paying high taxes. AML and KYC procedures help to prevent this by verifying and confirming the identities of customers. These procedures require customers to provide documents and comply with checks, which results in the gathering and storing of referential data. This information can be used by authorities in case of a future investigation.

   iii. Executing Background Checks

Background checks enable financial institutions to evaluate a potential customer's risk level and check if they are on any government watchlists. This reduces the risk of the organisation becoming involved in financial crimes unintentionally.

Implementing strict KYC procedures is beneficial for businesses as it decreases the number of fraud cases and improves trust. By adhering to these procedures, a financial institution demonstrates its commitment to conducting lawful business, which leads to a positive reputation and increased trust from customers and regulators.

Final Words

Thus, powerful KYC practices can help financial organisations to adopt several risk based approaches and sustain their KYC compliance with global standards. Yet, the employees or other members of the institution must work as a team to integrate the culture and productivity. 

In addition to this, transparent guidelines and intelligible culture are tremendously important to get rid of indecisive conditions and lack of assurance. Fortunately, such circumstances discourage AML criminals from misusing financial organisations and build trust amongst customers.

An appropriate KYC implementation enables these firms to deliver outstanding services to their consumers while reducing the events of money laundering and other financial crime compliance. Such risk based approaches also help these businesses remain stable.

Leave a Comment

Your email address will not be published. Required fields are marked *