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The financial sector is the major target of financial criminals. Banks lose millions to fraud, and non-compliance penalties annually. Two recent cases of money laundering that rose in the banking sector include the Danske bank and Swedbank money laundering scandal. Both the banks lost millions of dollars, credibility, and market value due to non-compliance with KYC/AML regulations. Looking at these cases the banks are investing in online KYC software for global risk cover.
The regulatory authorities are becoming more rigid in the implementation of KYC and AML regulations. Banks and other financial institutions are under the radar of these authorities, why? Because the financial sector is the major target of financial criminals.
What Are KYC/AML?
The global financial regulatory authorities are developed to control financial crime at a national or international level. Some of the common regulatory authorities are FATF, FINTRAC, FinCEN, FINMA, etc. These authorities aim at eliminating financial crimes like money laundering, terrorist financing, email frauds, account takeover fraud, identity theft/fake identities, corruption, etc.
KYC and AML are the regulations imposed by the above-mentioned institutions. Anti Money Laundering (AML) laws are imposed to eliminate money laundering and terrorist financing. The AML laws require an in-depth screening of the customers of a bank against, global watchlists, sanction lists, and PEP lists. Also, the banks are required to practice Enhanced Due Diligence (EDD) on high-risk customers.
Now the question is how the bank will know if a customer is bearing a high risk. It is through the KYC (Know Your Customer) verification of the people coming to the bank for account opening. KYC includes a thorough identity verification of the customer. Identity verification includes ID card verification, address verification, biometric verification, document verification (passport, utility bill, driving license), etc.
The reporting entities of these regulations include financial, legal, cryptocurrency, real estate, precious metal, fuels, etc.
Why Banks Need KYC and AML Compliance?
The banks were the initial reporting entities when the AML rules were introduced in 2001 through the Banking Secrecy Act (BSA) of the U.S. Later, with the advent of the latest technologies including FinTech, the reporting entities list expanded and covered almost all business sectors.
Below are the reasons why KYC and AML compliance is significant for the banking industry:
Regulatory requirements
The first and foremost reason is “regulatory compliance” because banks bear huge penalties in case of non-compliance. Take Danske bank, for instance, the bank is sued by the USA, Korea, UK, and a few other countries. The reason was the lack of AML practices in the bank which caused loss to the investors belonging to those countries. The bank is instructed to pay a huge fine and also its Estonia branch is closed that was involved in this scandal.
Fraud prevention
Another benefit of complete KYC and AML compliance is fraud prevention. KYC and AML screening of the customers helps the banks in onboarding only legitimate customers. Identity and Document Verification software identifies the fake identities or the blacklisted people within seconds, eliminating the fraud at the very first stage.
Banks need to practice KYC and AML screening for fraud prevention because it helps them in increasing their profits and growth. Also, the customers feel more secure with online platforms that have some sort of visible security features like, face verification, ID card verification, etc.
Credit rating and market value
Credit rating is very dear to the banks as they work hard to gain a good credit rating. The rating agencies have a tough criterion for giving credit ratings to the banks. The security features and regulatory compliance are some of the few primary factors that affect the credit rating of a bank.
Also, the market value of the banks lies in their goodwill. One money laundering scandal could prove to be a killing blow for the market value and credit rating of the bank. Take the case of the Swedbank for example, the bank was charged for money laundering cases of millions of dollars and lost its credit rating and market value as well. Millions of dollars were wiped off the bank’s market value.
To wrap up, the banks are under the radar of several regulatory authorities and it is high time they identify the significance of KYC and AML compliance. Along with in-house measures, outsourced KYC and AML screening software could prove to be a faithful companion in markets packed with fraudsters. It helps the banks to onboard a loyal and secure customer base.
