AML & Identity Verification: How it Works

As regulatory pressure rises, regulated businesses face growing pressure to ensure that they are actively complying with the latest Anti-Money Laundering (AML) regulation whilst providing a seamless customer experience.

As the risks of financial crime escalates, AML identity verification has become a critical process to protect financial systems and prevent illicit activities. But what exactly is AML, and why is identity verification (ID&V) so essential in this process? In this blog, we’ll break down the core components of AML identity verification, its challenges, and future trends.

What is AML and identity verification?

Anti-Money Laundering (AML) refers to the regulations, processes and procedures implemented by regulated businesses to prevent criminals from disguising illegally obtained funds as legitimate income.

These regulations are designed to identify, track, and report suspicious activities that could be linked to money laundering or other financial crimes. Customers are typically screened against Politically Exposed Persons (PEP), sanctions, and adverse media lists to gain an understand of their risk profile.

Identity verification is the process by which businesses, particularly in financial services, verify the identity of individuals who are attempting to open bank accounts, access services or conduct financial transactions.

IDV involves collecting personally identifiable information such as name, address, date of birth, and Government issued identification documents. Once the information is received, businesses will verify the information against data sources such as Credit Reference Agencies (CRAs), electoral information, telco, and other premium data providers to find a match.

AML and identity verification work hand-in-hand as part of Customer Due Diligence (CDD) regulation, and verifying the identity of customers is a foundational element in AML compliance.

When regulated businesses perform electronic AML and identity verification, they aim to ensure that the individual engaging with their services is who they claim to be, and not someone attempting to commit fraud or engage in money laundering.

By following an AML identity verification code or practice, otherwise known as a risk-based approach, companies can avoid hefty fines and protect their reputation while meeting legal requirements.

Why is AML and identity verification important?

AML and identity verification play a vital role in safeguarding regulated businesses and the broader financial ecosystem from misuse. Without proper identity checks, money laundering becomes easier, which can have a ripple effect on economies, from funding terrorist activities to destabilising businesses.

Mitigating financial crime

The main goal of AML checks is to prevent money laundering and other financial crimes. By implementing stringent AML and identity verification measures, companies can reduce the risk of their platforms being exploited by bad actors.

In 2023 alone, banks, gambling operators, and cryptocurrency exchanges were fined a combined $7.1billion for money laundering failures, further demonstrating not only the risk to a business if correct protocols aren’t followed, but also that many businesses are still not fully compliant.

Ensuring compliance with regulation

Authorities like BSA (Bank Secrecy Act), the FCA (Financial Conduct Authority), and other AML regulators require regulated businesses to follow strict guidelines, including money laundering and identity verification regulations. Failing to comply with these regulations can result in penalties, reputational damage, and even the closure of the business.

Enhancing customer trust

Customers want to feel secure when using financial services. A strong AML identity verification process reassures users that their accounts and transactions are being monitored for suspicious activities, and that correct verification has taken place at the point of account opening, fostering trust in the institution.

What challenges are involved in AML and identity verification?

Although AML verification is critical, the process is not without its challenges. Regulated businesses often face a balancing act between maintaining a strict compliance and providing a smooth onboarding process for legitimate customers. Some of the main challenges include:

1. Evolving regulations: AML and Know Your Customer (KYC) regulations are continuously evolving, making it difficult for financial institutions to stay up to date with the latest requirements. Different countries have varying money laundering and verification of identity standards, which further adds to the complexity.
2. Technological barriers: Although digital verification tools are on the rise, not all customers have access to the necessary digital identification resources. This can delay the onboarding process and create frustration for customers.
3. False positives: Stringent AML systems sometimes generate false positives, flagging legitimate customers as suspicious due to minor discrepancies in data. These errors can lead to unnecessary delays in onboarding and negatively impacting customer satisfaction.
4. Privacy concerns: Verifying customer identities often requires accessing sensitive personal information. Ensuring data security while complying with strict Anti-Money Laundering requirements is another hurdle regulated businesses must navigate.

The importance of combining AML and identity verification

Incorporating electronic AML and identity verification into the customer onboarding process is no longer just about meeting legal requirements, it’s a crucial factor in enhancing customer satisfaction.

Recent research from FullCircl discovered that 70% of consumers would consider abandoning the account opening process if it took longer than 10 minutes. Long and cumbersome identity verification processes can lead to customer frustration, damaging relationships and increasing churn rates.

By combining AML verification with cutting-edge technologies like artificial intelligence and machine learning, institutions can streamline the onboarding process, reduce errors, and ensure compliance without sacrificing user experience. For example, automated systems can quickly cross-reference customer information with databases in real-time, flagging high-risk individuals while fast-tracking low-risk ones.

Additionally, improving AML verification of identity procedures allows institutions to onboard customers more efficiently while maintaining a robust risk assessment framework. Faster customer KYC processes mean quicker access to services, which not only enhances satisfaction but also strengthens the company’s reputation for being both compliant and customer focused.

Future trends for AML and identity verification

The future of AML identity verification is dynamic, with several emerging trends shaping the way financial institutions approach compliance and customer identification. Some of the most impactful trends include:

1. Increased use of AI and machine learning: Artificial intelligence is revolutionising the way AML anti-money laundering systems detect suspicious activities. By analysing patterns in customer behaviour and transactions, AI-powered systems can improve the accuracy of risk assessment and reduce the number of false positives.
2. Blockchain technology: As blockchain technology continues to evolve, its decentralised and transparent nature could transform how institutions conduct identity verification. Blockchain’s secure, immutable records could provide a more reliable means of verifying identities while reducing fraud.
3. Biometric verification: The use of biometrics like facial recognition, fingerprint scanning, and even voice recognition is becoming more prevalent in AML verification processes. Biometric data provides a more secure, efficient, and user-friendly way to confirm identities.
4. RegTech solutions: Regulatory technology (RegTech) is a fast-growing industry that focuses on automating and improving AML compliance. These solutions can help financial institutions stay ahead of changing money laundering regulations and identity verification standards, reducing the need for manual intervention and enhancing efficiency.
5. Global collaboration: As financial crime becomes increasingly global, there’s a growing need for cross-border collaboration among regulatory authorities. Financial institutions will need to adopt standardised AML identity verification practices that are recognised internationally to stay compliant and prevent fraud on a larger scale.

How FullCircl can help

FullCircl works with 500+ regulated businesses including tier 1 banks, gambling operators, neo-banks, and challenger brands to help them start smarter, to grow faster with compliance solved.

FullCircl’s clients benefit from combining AML software, KYC software, and identity verification software through a market leading orchestration platform, ensuring that compliance and customer satisfaction remains a competitive advantage and regulation headaches are avoided.

Want to learn more? Book a demo here.