The Significance of Know-Your-Customer and Anti-Money Laundering Requirements
By Davina Myburgh, Director of Digital Onboarding Solutions Enablement at TransUnion Africa
Know your customer (KYC) and anti-money laundering (AML) are two pillars supporting trust, security and safe transacting in business.
These pillars used to be the domain of financial institutions which had to deploy enormous resources to collect and verify a myriad of documents and other information, as well as conduct in-person interviews to confirm identities and match them with information supplied. This process was expensive, time-consuming, and prone to errors.
Three major factors have altered the landscape for both KYC and AML.
Firstly, digital transformation has taken both pillars online, increasing the speed at which they can be verified but also changing the risk landscape.
The second factor is both tasks have moved beyond the realm of financial institutions — due to a new trading landscape and increasingly stringent regulatory demands.
Thirdly, non-compliance would not only increase risk, it will also attract increased regulatory sanctions.
KYC
KYC checks are the cornerstone of all financial transactions. They are the foundation that protects against financial crime and provides regulatory compliance.1
The trading environment today means all businesses that transact are required to conduct KYC checks, not just financial institutions as in the past.
Digital identity verification and customer onboarding now happen in real time. Technology has increased efficiency, enhanced security, and vitally, improved customer experience. Technologies like AI, machine learning, big data and automation enable effective KYC at significantly lower costs and much greater scale.
Additionally, as KYC happens digitally, it eliminates the risk of human error in data entries and document verification, leading to robust compliance and reduced risk of fraud.
Challenges of digital KYC
Digital KYC also poses challenges for organizations. Ensuring real-world identities and digital identities are the same leads to the sharing of sensitive information. Data security and privacy become essential when customer information is shared digitally.
The digital trading environment offers significant opportunities and these drive fraudsters to continually evolve their methods.2
Organizations seeking effective KYC require robust cybersecurity to guard against data breaches and better ensure the accuracy and authenticity of digital documents and identities. This requires access to technology, such as encryption, multi-factor authentication and secure cloud storage.
The reliability and validity of digital documents and identities are not negotiable. Biometric authentication, such as facial and voice recognition, coupled with liveness detection are vital tools to prevent bad actors from impersonating genuine customers.
Shared resources and responsibilities
The blight of fraud is both invasive and broad. It affects society at large — locally, nationally and globally. The battle against the scourge has to be robust and involve all stakeholders. Regulators must set and enforce the parameters within which businesses operate. Technology companies have to supply the expertise and infrastructure to make this broad fight viable.
An effective KYC campaign will not only provide a defense against financial and reputational losses for businesses but also create a space where their customers can transact with trust and security.
KYC is one of the most important weapons in the war on money laundering.
Money laundering
Money laundering is the process of making illegally gained profits appear legal. AML involves the identification of suspicious transactions, assessing customer risk, and reporting possible occurrences to authorities.
AML requirements used to reside mainly within the financial sector, but as criminal entities broadened the scope of their work, authorities worldwide intensified their efforts to combat this, including expanding the categories of organizations that must comply with AML.
Money launderers only need one unquestioned transaction to clear the legal burden.
Depending on the jurisdiction, AML requirements now include diverse areas of enterprise. In addition to financial institutions, this could also include law firms, casinos, estate agents/realtors, insurance providers, crypto and digital assets dealers, or anyone who can transfer money into another account or convert money into another form of asset.
A business that allows money laundering usually does not suffer any immediate physical loss, but it will eventually lead to reputational damage, loss of customer trust and severe penalties. If left unchecked, its cumulative, invasive effect will eventually erode the business environment as a whole.
Money laundering underpins crimes like drug trafficking, human trafficking, terrorism and organized crime. The nature of the criminals and amount of money involved can infiltrate businesses, distort economic systems, and even affect the finances and politics of nations. The effects stretch beyond the financial to include social, security and political implications.
How to prevent money laundering
A business’s first defense against money laundering is a system of reliable AML checks. These would allow a business to identify suspicious activities, assess customer risk and create a mechanism to report potential incidents to relevant authorities.
AML checks use processes and technology that will allow client identification and verification according to strict onboarding requirements, as well as robust transaction monitoring.
One way to carry out effective AML checks is to partner with a global technology entity operating in this field. Such an entity will have the technology infrastructure to monitor thousands of global sources in all relevant countries and territories, remaining up to date with newly published data. It can access all significant watchlists to search for an individual or business on datasets focused around risk themes. These themes will include adverse media, sanctions and watchlists, and politically exposed persons (PEPs).3
Penalties for failing AML compliance
Monday laundering is a global problem that requires global action. The Financial Action Task Force (FATF) is an international body that sets standards to ensure national authorities can effectively counter illicit funds linked to drug trafficking, the illicit arms trade, cyber fraud, and other major crimes.
If any of the more than 200 countries and territories within its ambit fails to meet its obligations, it can be gray- or black-listed.4
Black-listing is a severe sanction and seldom applied. Gray-listing is more common and carries remedial requirements. It does however add significant penalties for businesses in such a listed jurisdiction. The cost of raising finance and trading with global counterparts could increase. Local banks will have to enhance screening requirements during onboarding, as well as face greater levels of scrutiny and transactional costs when dealing with international peers. Companies in general will require context-specific actions that include a greater focus on risk, compliance and negative list screenings.
Local financial regulators will respond by tightening controls and imposing penalties on institutions under their jurisdictions — which happened recently in South Africa.5
Bottom line, it’s far less onerous to comply with KYC and AML requirements than to deal with the consequences of not doing so.
1https://www.cfatf-gafic.org/documents/fatf-40r/376-fatf-recommendation-10-customer-due-diligence
3https://sanctionscanner.com/knowledge-base/politically-exposed-person-pep-56
4https://www.fatf-gafi.org/en/countries/black-and-grey-lists.html
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