How KYC requirements for banks are helping fight financial crime

The growing challenge of criminal money making its way into the banking system is a continuing problem for banks. However, a mixture of new compliance regulations for banks may be helping to turn the tide.

In a recent post by RegTech Electronic IDentification, the company detailed how new KYC requirements for banks are helping in the longstanding battle with the scourge of financial crime.

With challenges from financial crime abound, regulators such as the FATF have already upped their compliance measures and are calling on firms to adopt RegTech solutions including ID verification as best practice for KYC compliance.

eID said, “Financial service providers play a key role in stopping the proliferation of dirty money making its way into the global financial system. As such, developing a nuanced understanding of what is KYC in banking is imperative for all financial service providers.”

Examples like individuals on sanctions list who may seek to launder their money using illicit methods can be restricted through effective KYC safeguards – however, eID stated that too often, many companies are not equipped to prevent these illicit activities from slipping through their system.

Banks and FIs who are unable to meet their KYC compliance obligations can often become subject to painful fines – with approximately €20bn in penalisations given out to banks and FIs who didn’t meet the standard in 2020. The firm mentioned that maintaining strict adherence to KYC compliance is necessary, not just for the huge financial penalties but also for avoiding the reputational damage associated with money laundering scandals.

eID remarked, “KYC in banking is far more involved than screening an ID document. The initial onboarding of a customer is only the first step in KYC bank compliance. Customer due diligence is then performed on an ongoing basis. Depending on the risk level that was determined during onboarding, the frequency and intensity of bank KYC checks are adjusted. In addition, the customer’s risk assessment level feeds into AML continuous monitoring, with AML rules becoming stricter for riskier customers.”

Many KYC processes aim to triage customers according to their relative risk for banking and financial service needs. KYC documents provide banks with the proof required for identity verification and customer risk level assessment. The complexity of required documents increases for any bank of FI aiming to operate globally, claims eID, with every country and each jurisdiction within a country has different document requirements and also different languages.

In reality, eID claims, the amounts to screening thousands of documents in hundreds of languages – which can be a task far beyond a human powered KYC team. For FIs aiming to globally expand, an AI-powered KYC solution – such as the qualified electronic signature – has become the ‘simplest and most cost-efficient way to maintain compliance’.

eID said, “The central pillar of KYC is validating the authenticity of a new customer during the onboarding process. For business onboarding, this also involves untangling the complex business structures and identifying the ultimate beneficiary owner. More and more, this part of the KYC process in banking is being taken online thanks to the onboarding standard of automatic video identification.”

The company added, “As KYC banking regulations ramp up in response to increasing financial crime, so do the challenges for banks and financial institutions aiming to meet their compliance obligations. The tension for all financial service providers is adhering to increasingly strict KYC measures, whilst maintaining the rapid onboarding of customers, which has become the fighting ground of all FinTech and alt-banking services providers.

“With the rise of AI-powered solutions and KYC automation for banks, the industry has leaned towards outsourcing these processes to third-party providers with the technology to overcome the regulatory burden with bespoke KYC software for banks.”

Find the full post here.

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