It’s undeniable that financial criminals and their tactics are becoming more sophisticated every day. With incidents of fraud rising dramatically, banks and financial institutions (FIs) are often on the frontline to combat these evolving risks and threats. In a united effort to prevent financial crimes, global and local regulators create far-reaching Anti-Money Laundering (AML) policies, laws and regulations.
To comply with AML regulations, FIs are legally required to continually update their internal policies and build out more comprehensive compliance programs. However, as security controls continue to advance, the time and resources needed to keep up with evolving regulatory requirements are proving to be major challenges for the financial services industry. When time is of the essence, regulatory technology (regtech) has become an essential tool for FIs to stop bad actors through improved Know Your Customer (KYC) and Customer Due Diligence (CDD) processes.
Banks are key players in money laundering prevention
Handling large amounts of illegal cash is a major liability for financial criminals. To avoid suspicion, criminals turn to money laundering as FIs will only deposit money that appears to come from legitimate sources. As one of the most common forms of organized crime, there are multiple ways to launder money and the techniques range from simple to extremely complex. No matter the technique, money laundering is typically a three-step process involving placement, layering and integration:
- The money laundering process begins when illegal funds (also known as dirty money) are placed into a legitimate financial system
- Through a series of layered transactions and wire transfers to multiple accounts, the real source of the dirty money can be concealed to eventually produce what looks like legitimate funds
- Once the dirty money is clean and integrated into the financial system, criminals can withdraw the laundered funds from legitimate accounts to finance their nefarious activities
To stop financial criminals in their tracks, AML policies enact various controls to monitor suspicious activity that could indicate money laundering, such as unusually large cash deposits on an account, or reluctance to provide normal information when opening an account. These policies help banks and FIs detect and prevent money launderers from masking illegal funds as legitimate income.
Through these regulations, banks are required to collect customer information, monitor and screen their transactions and report suspicious activity to financial regulatory authorities. Banks are also required to hold deposits in an account for at least five business days. This holding period helps mitigate risks associated with money movements.
The fundamentals of AML for banks
As the gatekeepers of the financial system, banks and FIs are held to high standards to identify and prevent money laundering. While each jurisdiction will have specific requirements, the four fundamentals of an AML compliance program for banks include:
- Ongoing monitoring
- Suspicious activity reporting
As the first step in an AML compliance program, KYC is the process of identifying and verifying a customer’s identity. In other words, banks need to determine that their customers are who they say they are.
While a KYC check is initially conducted when customers open an account, banks are also required to update their customers’ KYC details over time. Should a customer fail to meet minimum KYC requirements, banks can refuse to open an account or cease working with them. A KYC check can be done using:
To further verify customer identities and the nature of their businesses, the CDD process allows banks and other FIs to collect information and assess the risk a customer may pose for money laundering or terrorist financing. The information collected as part of this process will be analyzed against a variety of sources, including both public and private databases, politically exposed persons (PEPs), government records, watchlists and sanctions screening.
While KYC and CDD processes are needed to establish the baseline of risk and intent, ongoing monitoring is vital to detect any potential suspicious behavior that may reveal itself over an extended period of time. To monitor a customer’s risk profile or business relationship, banks and FIs will need to:
- Continuously monitor transactions to ensure a customer’s risk profile matches their behavior
- Watch out for any changes in risk profile, or any factors that could be deemed suspicious
- Maintain relevant records, documents, data and information that may be needed for CDD purposes
Suspicious activity reporting
To further prevent criminal behavior, if a suspicious transaction is detected by a FI, they are required to report it to financial authorities. A Suspicious Activity Report may be triggered if there’s any transaction behavior that seems out of the ordinary, that might be a precursor to a crime, or that might threaten the safety of the public. Suspicious Activity Reports are vital for law enforcement efforts and the development of future legislation through the analysis of emerging trends in financial crime.
Offloading the burden of AML compliance with regtech
While banks and FIs are legally obligated to comply with AML regulations, they can be met with some reluctance. With implementation often being costly and ineffective, it begs the question: what’s the true benefit of these policies? Meanwhile, compliance teams are nearly at capacity for bandwidth with 80% of their workday occupied with issues of low materiality or risk.
To circumvent this strain on vital resources, regtech software has become the essential solution to help organizations streamline their workflow for list screening, processing results, record keeping, and regulatory reporting. Backed by the advantage of efficiency and automation, modern regtech solutions can help ease pressures, saving organizations time, money and the hassles and financial impacts of avoidable regulatory inquiries and/or fines. This is a major feat for compliance teams with the added ability to focus on the highest-priority compliance issues.
As risks and threats continue to evolve, responsive and forward-thinking solutions will provide banks and FIs the greatest opportunities to meet AML compliance and global regulations while protecting their bottom lines. Empowered by rapid, low-cost and frictionless accuracy, regtech can facilitate the balancing act that’s needed to ensure thorough and comprehensive AML and KYC checks without disrupting customers and processes.
With AML regulations growing in complexity globally, it’s important that banks and FIs seek to develop compliance programs that are effective, efficient and sustainable. Learn how to best prepare for the new era of AML enforcement in Europe. Register for the Everything you need to know about 6AMLD webinar today.