Digital onboarding and real-time transactions are key to delivering a slick customer experience for financial services in today’s age.
Yet this world of open trading has created gaps for financial criminals, including money launderers, terrorist financiers and fraudsters, to exploit, writes Bradley Elliott, CEO of RelyComply.
They are adept at hiding their identities and the source of their funds. Keeping one step ahead of them without impairing the experience of legitimate customers is a major challenge for compliance teams at Financial Institutions (FIs). FIs must move towards accurate, perpetual Know Your Customer (pKYC) checks to reduce business risks.
FIs cannot allow financial criminals to get away with their practices, given that fincrime proceeds to facilitate activities such as drug smuggling, human trafficking, corruption and terrorism. For FIs, failure to comply with KYC and Anti-Money Laundering (AML) regulations can lead to severe financial, reputational and legal consequences.
Manual anti-money laundering processes and KYC checks are no longer good enough in this real-time, digital environment. Lengthy physical paper trails and collected ID cards won’t help FIs understand who their customers are and where their funds come from at a pace that is rapid enough for the digital world.
Today, best practice dictates implementing a process and platform combination to simplify and streamline KYC and AML processes. This will create a powerful barrier to risk and meet regulatory demands while streamlining legitimate transactions.
KYC is not a one-and-done solution, nor has it ever been. But today’s stricter rules call for FIs to implement KYC approaches that allow continuous monitoring and rapid adaptation to a changing landscape. We see five steps to achieve advanced KYC in the digital era:
Spot the red flags
Ineffective KYC protocols and outdated platforms allow criminals to infiltrate legacy systems and dormant accounts, obfuscate the origins of their money, over or under-declare sums, use anonymous pseudonyms, and open multiple accounts under single persons.
There are immediate signs FIs should notice during onboarding KYC to minimise risks:
- Incomplete personal information or lack of evidential documentation
- Unexplained sources of wealth or income
- Being based in jurisdictions known for poor KYC/AML measures or high-risk customer bases
- Jobs in high-risk industries such as gambling or precious metals
- Unusual transaction amounts or patterns
- Adverse news
- Affiliations to politically exposed persons (PEPs) or presence on sanctions lists
Align KYC to risk levels
Every onboarded customer should undergo KYC, including identity verification (IDV), customer screening, and document validation. By taking a risk-based approach, FIs can develop Customer Risk Assessments that align their individual investigations level according to risk levels.
Risk factors include the red flags listed above. High-risk customer profiles can be subjected to enhanced due diligence to discover more about their usual transaction behaviours, links to locations and industries, and whether they are an Ultimate Beneficial Owner (UBO). This reduces the likelihood of time-consuming and costly false positives.
Adopt a company-wide culture of compliance
FI employees must understand compliance protocols to maintain high KYC standards. Documenting processes and centralising data into a single source of truth is paramount. This gives each departmental function a unified 360° picture of every customer.
Further benefits of using a central KYC/AML platform include instilling access controls for authenticated compliance officers, data encryption, and the ability to recalibrate risk thresholds. As AML regulations change, fincrime develops, and customers’ circumstances shift, FIs must adapt KYC processes and train staff to comply.
Adopt automation technology
Each process in KYC can be automated to ensure faster and more accurate results than manual efforts. Artificial intelligence is revolutionising ID verification’s ability to recognise biometric data and process and corroborate documents, speeding up the validation process and achieving a smoother customer onboarding experience.
Furthermore, robust KYC/AML platforms can absorb data from diverse sources to check for PEPs, sanctions, or adverse media in real-time, even as data gets updated around the clock. With criminal activity flagged as and when it may happen, enhanced due diligence can be carried out quickly and accurately.
Continually improve for the future
Once-off KYC checks aren’t enough. Perpetual KYC (pKYC) uses intelligent tech to monitor and approve customer data from onboarding onwards. This continuous monitoring can detect fluctuations in transaction patterns outside the norm before alerting human analysts.
This way, only high-risk factors are investigated, and compliance professionals are granted more time to spot areas where AML processes and platforms can be improved through automation. Self-learning models can also evolve to react to new criminal tactics and refine their capabilities.