AML Compliance (Role of AML Compliance in KYC Onboarding)

Contributing to anti-money laundering (AML) compliance breach, the Royal Bank of Canada (RBC) facilitated money laundering or terrorist financing transactions in spite of having reasonable suspicious grounds to report the illicit flow of money, forfeited with $5.5 million by the Financial Transactions and Report Analysis Centre of Canada (FINTRAC). The RBC scandal provides evidence that with an active Know Your Customer (KYC) program, failure to strong AML compliance and report suspicious activities can cost institutions hefty fines and reputational damage.

Published in the Burton-Taylor Reports, in 2022, the AML/KYC compliance cost was reported to reach $1.56 billion. Having that said, the implementation of the strict due diligence in knowing your customer dubbed as KYC onboarding before allowing them to enter your structured business is important but integrating KYC onboarding process with AML compliance is vital for the businesses both financial and non-financial to stay compliant with increasing AML regulations.

This digital piece of paper will allow you to delve deeper into different aspects of the AML/KYC procedures and the intricate synergy of KYC with AML compliance while focussing on why KYC without AML compliance is a wingless bird.

AML Compliance: A Brief Walkthrough

From the passage of the Bank Secrecy Act in 1970 to the USA Patriot Act in 2001, the authorities have been attempting to curb flow of illicit money and terror funding, requiring institutions to be cooperative and compliant to these policies. With the evolution of economic and geographical discrepancies, the need for more robust anti money laundering (AML) regulations was an unavoidable measure. The surfacing of Panama Papers in 2016 exposing the sophisticated and shadowed ways of launderers through shell companies, gave birth to the Customer Due Diligence (CDD) rule issued by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Implementation of AML/CDD rule requires institutions, particularly financial institutions, to thoroughly verify and monitor their customers, aimed to develop better understanding of the nature of customer relationship and their transactional activities. It also ensures the transparency and accountability in combating money laundering and other financial frauds, knowingly and unknowingly facilitated by the institutions.

Greater Risk VS Higher Compliance Cost

In an effort to stem financial abuses, FinCEN encourages the firms to practice customer due diligence supporting the AML measures and requires them to flag or whistleblow any illegal activity in the form of suspicious activity reports (SARs) executing through their systems. However, a rigorous and functional compliance process and its implementation within the institutions is a costly and time consuming measure, which has become more overwhelming after the Russia-Ukraine conflict followed by an unending series of sanctions. For a better understanding on compliance cost, below are the factors to be considered while incorporating the costs associated with key parameters of a functional compliance program.

Concluded from the regulatory impact assessment (RIA) by the FinCEN, businesses can outweigh the compliance cost with financial benefits and greater risk of non-compliance. To curb the illicit flow of black money which is estimated to be $300 billion in each year of 10 years analyzed by the RIA, only 0.45% of the amount is being stemmed.

However, the firms under strict obligations to comply with regulations are investing in AML checks for instance, the Venture Investment Report of UAE (United Arab Emirates) reveals that a 249% increase in fintech sector investment was seen amounting $243 million in the first half of year 2022.

KYC Compliance & Onboarding Requirements

Enforced by the Financial Industry Regulatory Authority (FINRA) rule 2090 and CDD final rule by the FinCEN, knowing and verifying the customers before getting in transactional businesses with them is mandatory to eliminate financial entropy.

Motivated to ensure AML measures and stability of the financial system, both the businesses and clients are obliged to conduct customer identification, customer due diligence, and enhanced due diligence where required, formulating a KYC onboarding process mandatory for the new and existing customers. Encouraged to implement within AML/KYC plans, the essential KYC onboarding requirements include,

Verification of Customer Identity: Authentication of provided information by the customers including IDs issued by the relevant government authorities, contact details and addresses is the primary requirement in KYC measures.

Risk Profiling & Due Diligence: Monitoring the nature of client business activities including transactions and risks associated with the customer profile is essential to develop a risk profile of every opening and existing account.

Enhanced Due Diligence & Reporting: An increased and risk-based approach to perform ongoing monitoring to timely report any suspicious activity through SARs is a key component of AML/KYC compliance.

Pacing with Regulatory Changes: A mandatory process and KYC tools upgradation is another cornerstone of regulatory compliance to meet the gaps of automated tools and evolving regulations.

Audit Reports & Documentation: Keeping a transparent record of customer profile, transaction details and other verification proof, businesses dealing with financial transactions are required to maintain for investigative authorities or audits.

Synergy of AML & KYC Compliance

The undeniable function of KYC compliance is the forefront security of the businesses through knowing the client and verifying if he is who he is pretending to be, while AML compliance allows businesses to meet the pace of regulatory changes and implement risk-based scrutiny measures while dealing with high-risk customer profiles such as politically exposed persons (PEPs), sanctioned entities, and persons in the watchlist or any other designated barred lists.

Being the integral component of AML compliance, KYC alone creates loopholes in the compliance infrastructure where failure to identify and report illegal financial activities can cost the businesses legal and monetary penalties. Let’s explore the cases when failure to AML compliance caused organizations a fortune in spite of performing KYC onboarding checks.

History Lessons

Failure to comply with AML compliance, one of the largest banks, Danske Bank with its headquarters in Denmark came in settlement with the Department of Justice (DOJ), the US Securities and Exchange Commission (SEC), and Danish Special Crime Unit with a collective fine of $2 billion. The bank not only failed to identify and flag the illegal transactions facilitating the sanctioned entities in Russia and evading the financial restrictions, but the Estonian branch of the bank misled the investors regarding its AML compliance failure. Opinionating the scandal, it will not be useless to say that beating the bad guys in carrying out the illegal financial activities by abusing your business infrastructure is difficult but not impossible.

In another AML non-compliance scandal, FinCEN imposed a civil penalty of $140 million on USAA Federal Savings Bank for contributing to AML violations which were required to meet BSA (Bank Secrecy Act). Indifferently facilitating thousands of illegal transactions, the bank failed to timely report the activities and meet AML/KYC requirements. The inadequacy of the AML program keeps a potential to greatly harm your business compliance environment, highlighting the need to integrate existing KYC compliance with active AML compliance.

Challenges of AML Integration with KYC Compliance

Where the integration of AML into existing KYC compliance is an inevitable measure to stay compliant with regulatory requirements, small to medium scale firms face various challenges in the shift.

Voluminous & Changing Regulations

Meeting the ever-increasing global and regional regulations is the main pain point of firms when complying with AML/KYC regulations. Post Covid19 intricacy of financial systems and increasing sanctions due to war crimes has made it almost impossible to keep a pace with these regulatory changes. Reported by Thomson Reuters, around 36% of surveyed organizations face the greatest challenge of changing regulations and their implementation within the available resources and budget.

Database: Is it available and reliable?

One of the major challenges businesses face in compliance maintenance is the availability and credibility of data to perform AML/KYC checks. Several other barred lists are being developed as you are reading this, the magnitude of voluminous data and its fair access hinders the firms to screen high-profile clients and consider it enough to perform basic KYC onboarding. Apart from its availability, the credibility of data is another concern that needs to be addressed.

Complex AML Tools & Associated Costs

With the evolution of tech integration into AML tools and solutions, running the accurate checks with desired outcomes has become overwhelming for the businesses and MLROs. The long trail of costs associated with tool installation and maintenance, dedicated staff recruitment and training, and mandatory process upgradation to meet the regulatory requirements are the factors that become a roadblock for small to medium enterprises in implementing AML compliance in combination with their KYC onboarding processes. Commenting on the compliance cost analysis 2022, study revealed that the cost of senior compliance staff is likely to see escalation in the coming year.

AML Watcher: Your Ultimate AML Compliance Partner

Addressing the said challenges, AML Watcher believes in empowering all scale businesses to stay compliant with AML/KYC measures through shared objectives of combating financial instability and crimes. With its simple and easy to maintain AML compliance tools including PEP screening, sanctions screening, watchlist screening, and adverse media screening integrated with reliable databases from hundreds of countries, allows your organization to meet the regulatory gaps while not evaporating resources and time.

Control your compliance needs with AML Watcher and reach us out to learn all about AML compliance.