No matter the type of bank, KYC and AML activity will be a legal requirement. So, read on to find out about the role of KYC and AML in banking.
The big wide world of banking
The world of banking is huge: global, offering hundreds of products, and it can be complex. There’s retail banking; digital, commercial; investment; online, and everything in between. This world of financial services comes with its own language - acronyms and initials at every turn. KYC and AML are part of that bank of vocabulary (pardon the pun), and both play a major role in the fight against fraud, money laundering, and other financial crime.
According to Europol - "The scale of money laundering is difficult to assess, but it is considered to be significant. The United Nations Office on Drugs and Crime (UNODC) estimates that between 2% and 5% of global GDP is laundered each year. That's between EUR 715 billion and 1.87 trillion each year."
The amount of money and the risks involved in financial crime are huge and they are significant to all financial institutions - not just banks. So, no matter what type or manner of bank, KYC and AML activity will be a legal requirement, a moral duty, and good for business.
But what are AML and KYC? What do the terms mean? And how do banks use KYC and AML in their operations? This article explains more about the role of KYC and AML in banking, and why these little acronyms are a big deal in the fight against financial crime.
Anti-money laundering (AML)
AML stands for "anti-money laundering" and is an umbrella term for all of the regulatory processes that a financial firm has to go through to ensure their customers are who they claim to be, and all the transactions they make are legitimate.
Anti-money laundering procedures in banks need to be as comprehensive and as efficient as possible to prevent perpetration of financial crime. AML procedures are most likely to flag up issues when there are:
- Large cash transactions
- Multiple unexplained transactions
- Transactions to or from countries or people that are perceived as high-risk
- Transactions that have no reasonable explanation
AML checks involve ensuring that all documentation relevant to people, accounts, or transactions “make sense” and are legitimate. Checks mean completing ID verification before onboarding a customer, and monitoring or auditing transactions and customer information on an ongoing basis to ensure legitimacy.
AML compliance can be incredibly difficult to ensure, but with initial and ongoing AML checks using automation to complete the work, it can become easier to spot money laundering and those attempting to carry it out. When banks are able to spot potential money laundering, they can take measures to investigate and stop it. They are also able to report suspicious activity to the correct authorities - another area important to compliance with AML regulations.
Know Your Customer (KYC)
KYC stands for know your customer and is based on financial firms, such as banks, knowing who their customers are and therefore understanding what risks they may pose to their business. KYC processes help financial institutions establish trust i.e. whether or not specific people, organisations, or transactions can be trusted.
While KYC related procedures enable banks to better understand their customers to help them manage risks in a well-judged manner, they also help make the difference in terms of customer experience. For example, are compliance journeys digital, simple to complete, and transparent thereby creating a good experience of choosing the bank.
A KYC process is most successful when banks build a holistic profile of an applicant during onboarding. Completing effective customer due diligence is one of the best ways to prevent money laundering from taking place in the first place. Then that profile can be honed, refined, and developed overtime throughout the customer lifecycle.
A series of KYC checks might seem like they wouldn't do much to stop criminals opening accounts fraudulently or carrying out illegal financial transactions, but in fact they can be extremely effective in stopping bad actors or illicit organisations from getting a foothold in legitimate financial institutions and using them as part of their criminal operations. KYC is therefore a crucial part of any bank's approach to anti-money laundering and compliance.
Using regtech for AML & KYC processes
If your organisation is struggling to digitally transform compliance processes; get a handle on its AML tasks; and falling behind when it comes to KYC, then using regulatory technology or regtech solutions, such as PassFort, a Moody's Analytics company, could be ideal for you.
Our SaaS solutions make it much easier to see which customers pose the highest risk, and those who may be trying to break money laundering laws. PassFort allows you to automate compliance processes and integrate a series of KYC and AML checks. You can keep track of your customer information and risk profiles on an ongoing basis – no matter what type of bank you are or the types of customer you serve. You might work with individuals or organisations, but PassFort is able to automate your KYC and AML processes and bring in compliance professionals from within your organisation where they add most value i.e. when decision making, judgement, or analysis are needed.
KYC and AML are some of the most important compliance requirements for any bank, so make sure you get them right with the help of PassFort. Please get in touch anytime to discuss your compliance challenges and how we might be able to help you solve them.