How can AML system help your company provide a secure and smooth customer experience? In this article, we will talk you through the insights of this framework.
Anti-Money Laundering (AML) refers to the laws, regulations and activities by financial institutions that aim to prevent the legitimization of illegally obtained funds. AML requires banks to monitor and report suspicious activities actively.
This framework seeks to combat financial crimes such as money laundering, corruption, and market manipulation. Anti-Money Laundering measures help prevent fraudulent cases, especially when a customer is first starting to use a financial service at a bank.
In today’s article, we will talk in-depth about the AML framework and tell you all about why it is important, what are the regulations, and how we can help you to stay compliant.
Why is AML important?
To understand the importance of AML, first, we must understand the effects of money laundering - the crime it is meant to stop.
Money laundering directs financial flows away from economically and socially productive uses, which can have a negative effect on the financial sector and its stability.
This practice can lead to the spread of corruption and other illegal activities, weakening collective ethical standards and democratic institutions. AML procedures create trust in financial institutions and operate as gatekeepers against fraudulent activity.
The financial sector's stability depends on the level of trust in the system - large amounts of criminal money flowing through the system can lead to penalties and withdrawals of investment, which could lead to the potential collapse of major financial institutions.
A culture of compliance is not only for fighting crime but also to ensure business continuity and the customer's trust.
History of Anti-Money Laundering
One of the first nations to introduce Anti-Money Laundering legislation was the United States with the Bank Secrecy Act of 1970. Under this Act, banks must create an effective AML compliance program and establish due diligence systems. Though the Act has since been amended and strengthened, it was an early effort to combat money laundering in the US.
The Financial Action Task Force on Money Laundering (FATF) was established in 1989 by the G-7 countries in response to mounting concern over money laundering. These days, FATF publishes international standards for combating money laundering, terrorist financing, the financing of proliferation of weapons of mass destruction and corruption.
The International Monetary Fund (IMF) has been another vital organization concerned with AML efforts since the year 2000. Its goals are stated as “protecting the integrity and stability of the international financial system, cutting off the resources available to terrorists, and making it more difficult for those engaged in crime to profit from their criminal activities.”
AML Compliance
As mentioned before, compliance with AML procedures creates trust, helps avoid penalties, and protects brand reputation. The laws and regulations set around AML help detect, respond and avoid fraud-related risks.
In order to stay compliant with the regulations, the financial institution must keep an eye on all the new directives and establish policies in accordance with them. These policies give a detailed overview of the people, processes, and technology to prevent illicit funds from entering the financial system.
Compliance requirements usually include a customer identification program (also known as know your customer or KYC), large currency transaction reporting, suspicious activities monitoring and responding, and sanctions compliance.
What’s the difference between AML & KYC?
Know Your Customer (KYC) is a part of Anti-Money Laundering efforts through customer identification and screening, ensuring the customers are who they claim to be.
While AML covers all actions that prevent money laundering, KYC allows financial institutions to ensure criminals do not use their services for unlawful purposes through identification.
KYC is a mandatory part of the AML procedure to comply with regulations worldwide. Not only is it used to verify the identity of the customer, but it can also be used to track high-risk customers when there is suspicion of illegal activities.
Important parts of KYC are Customer Due Diligence and Enhanced Due Diligence, which refer to specific procedures used in KYC. They deal with customer identification risk assessment and provide information on whether/how to do business with said customers.
AML & KYC regulations
Anti-Money Laundering laws and regulations differ by country, but there are some general practices that are similar throughout the countries. The end goal of the regulations is the same - to prevent money laundering.
AML procedures include KYC during onboarding and throughout the customer's lifecycle, monitoring financial transactions, reporting suspicious activity to regulators, methodical recordkeeping for audits, and up-to-date policies and training for employees.
The Know Your Customer process goes through the steps of verifying the customer's identity, screening the customer against prohibited lists, risk assessment and ongoing monitoring.
On the other hand, Enhanced Due Diligence is used for high-risk customers, which usually includes stricter rules for monitoring their transactions.
Why is it important to verify identity?
Identity verification is an integral part of Anti-Money Laundering procedures, and there are many benefits in complying with this measure. It is not only a mandatory step enforced by laws and regulations, but it’s good for business.
Build trust
We already covered the need for trust to sustain a financial system, but there needs to be trust between the customer and the financial institution as well.
A great way to build that trust is identity verification checks to show that the consumer’s information is safe and prevent them from hopping to a different platform because of security concerns.
Avoiding penalties
Many countries require companies to verify their customers’ identities. Implementing effective and compliant AML and KYC protocols is the best way to avoid costly fines for negligence. An important part of this is to stay up-to-date with new regulations and directives.
Improving customer experience
Digitizing identity verification streamlines the process of onboarding while providing the financial institution with the necessary information for security. Making the process simpler means higher conversion rates as potential clients are more likely to finish the process.
How can Kvalifika help?
At Kvalifika, we develop products to help companies worldwide comply with KYC and AML requirements. Ignoring these frameworks might cause enormous fines. Identity verification can play a significant role in preventing fraud and scams online.
Take a look at the tools we are building to help you fight fraud and build trust with your customers.
Our products guarantee you a very high accuracy level when verifying customers. Our fast and automatic tools support every MRZ type, making it easier for companies to verify customers from different parts of the world.