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As regulation and customer expectations grow, regulated entities face numerous challenges in maintaining compliance and security. One of the primary tools in preventing financial crime is the implementation of an effective Know Your Customer (KYC) checklist.
KYC and Anti-Money Laundering (AML) are essential in the prevention of financial crime, ensuring that financial institutions and other regulated industries can operate within regulatory guidance, keeping their customers and business operations secure.
According to the National Crime Agency, fraud accounts for over 40% of crimes in the UK, with an estimated 3.5million incidents of fraud experienced per year. Additionally, The United Nations Office on Drugs and Crime estimates that between 3 and 5% of global GDP is laundered each year.
These statistics prove that financial crime continues to plague businesses and markets globally, so implementing an effective KYC and AML framework to identify money laundering and fraud is critical.
What is KYC and financial crime?
KYC, or Know Your Customer, is a fundamental process for regulated industries aimed at verifying the identity of customers and assessing the potential risks of money laundering, fraud, or financial crime.
By implementing AML software and KYC checks at the point of account opening, businesses that are required to actively prevent financial crime can help mitigate these risks and protect their business from illicit activities.
KYC plays an integral role in the prevention of financial crime by confirming the identity of the customer is correct. This is achieved by matching personally identifiable information such as name, address, and date of birth against trusted data sources such as Credit Reference Agencies, or by using services such as document verification.
Whilst the KYC process itself is a key driver in preventing financial crime by confirming that the person attempting to open an account is who they claim to be, it is also a deterrent for fraud; potential fraudsters are much less likely to attempt to infiltrate businesses using effective KYC procedures and will instead seek businesses with less secure controls.
Financial Crime Regulatory Requirements
Regulatory bodies globally have established stringent financial crime and KYC requirements to ensure that businesses have clear guidelines on the prevention of financial crime and due diligence.
In the UK, the Financial Conduct Authority (FCA) plays a critical role in reducing and preventing financial crime through robust regulatory frameworks. Compliance with KYC regulations in the UK involves implementing comprehensive customer identity verification processes, transaction monitoring, and detailed Customer Due Diligence (CDD) requirements.
Other regulatory bodies involved in KYC and prevention crime include the Financial Action Task Force (FATF), the European Union who enforce Anti-Money Laundering Directives (with the latest being 6AMLD), The Bank Secrecy Act (BSA) in the United States, the Australian Transaction Report and Analysis Center (AUSTRAC), and more.
For global businesses, not only are they posed numerous challenges to prevent financial crime due to increasingly sophisticated techniques and more attacks than ever, but they also need to navigate the complexity of regulation and nuances between global regulators.
KYC processes and how they work with financial crime prevention
The KYC process typically involves three key steps:
Customer Identification Program (CIP)
The first step to KYC and financial crime prevention involves financial institutions having processes in place to collect and verify the personal information of their clients. The data collected during this phase includes name, address, date of birth, identification documents, and any other relevant information.
At account opening, most regulated businesses will require this information before the account can be opened. This can be done in several ways including integrating to automated solutions, building an in-house solution, or manually collecting information from customers. As digitisation increases, more businesses are turning to automation to ensure that the information can be collected in real-time.
Once the information has been collected, businesses must assess the risk profile of each customer. This includes understanding any discrepancies in information provided against data sources, assessing if the customer is sanctioned or politically exposed, and identifying any potential indicators of fraud.
The benefit of automated solutions is that CIP and CDD can both be completed automatically and in real-time, only alerting the compliance team of any potential errors or risk flags and therefore, saving time and improving the efficiency of onboarding for any customers who don't pose a risk.
Ongoing monitoring
The KYC process doesn’t end with initial identity verification. Regulated entities are required to continuously monitor their customer base to be alerted to any changes that might impact financial crime infiltration. This includes re-screening customers against PEP & sanction lists, transaction monitoring to identify any indicators of fraud, and keeping all customer data secure for auditing purposes.
Best practices for effective KYC for crime prevention
To maximise the effectiveness of KYC in preventing financial crime, institutions should adhere to best practices including:
Regular training
Ensuring that MLRO’s and compliance teams are regularly trained of the latest KYC and AML regulations is crucial. This helps maintain a high level of awareness and competence in identifying emerging threats and leads to increased effectiveness of mitigating risks.
Use of advanced KYC solutions
Leveraging sophisticated Know Your Customer (KYC) software can streamline processes, making it more efficient and effective. With increased digitisation, manual verification is no longer fit for purpose in many cases. This means that businesses are under more pressure than ever to identify financial crime whilst offering customers with an efficient account opening experience.
Enhanced Due Diligence (EDD)
For high-risk customers, more rigorous scrutiny is required. Enhanced Due Diligence (EDD) involves a deeper, and in many cases more manual investigation into the customer’s background information and the source of their funds. For those customers marked as high-risk, businesses may decide to also increase the frequency of ongoing monitoring protocols.
How to maximise KYC processes with automation and technology
The increased use of technology to achieve growth has revolutionized the way financial institutions manage their KYC processes. Automation and emerging technologies such as AI and machine learning can significantly enhance the efficiency and accuracy of KYC operations.
KYC-as-a-service
Outsourcing KYC to specialist service providers can be an option to reduce the burden of managing and maintaining a KYC framework, allowing businesses to focus on their core business activities while ensuring compliance. However, pure outsourcing can lead to a lack of control so businesses should be wary of how much KYC control they relinquish if choosing this method.
KYC software
One of the more popular choices in the last decade is the implementation of KYC software. The global KYC software market is expected to grow at a compound annual growth rate of 20.8% from 2022 to 2023 to reach $15.81 billion by 2030. There’s a reason this is a popular choice as it offers both more control over KYC onboarding processes by providing customers with a real-time experience, but it also takes full onus away from businesses developing and maintaining their own systems.
Blockchain and AI
An emerging method of providing a secure and transparent way to manage KYC data is blockchain technology and artificial intelligence. Although this method is still untested at large scale, new businesses are emerging to try and use the very technology posing more threats through fraud advancements such as deepfakes, to prevent fraud and money laundering.
Future of KYC and financial crime trends
As financial crime continues to become more sophisticated, the future of KYC and AML practices is beginning to take shape.
Additionally, AI and machine learning will continue to evolve, providing not only further threats to businesses but also they may lead to potentially improving detection and identification.
There is also a growing appetite for global standardisation of KYC regulations. This would facilitate better cooperation and information sharing between jurisdictions. Not only would standardisation potentially lead to more effective regulatory guidance but would also make it easier for global corporations to navigate cross-border operations.
The final key trend to look out for is increased focus on privacy. Since the introduction of GDPR (General Data Protection Regulation) in 2018, more focus has been placed on keeping customer data secure to prevent threats online. Businesses will further have to ensure all data is secure to not only remain compliant but to keep their customers safe from new threats.
How FullCircl can help
FullCircl exists to remove the regulatory and verification roadblocks to drive revenue growth. Our suite of KYC, financial crime prevention, AML, and document verification software is trusted by 700+ clients to remain compliant and offer customers a seamless onboarding experience.
Want to learn more about how FullCircl can transform your approach to compliance? Book a demo here.
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