Financial institutions, particularly the banking sector, is under the threat of numerous financial crimes on a daily basis. To counter these threats, global regulatory authorities have devised specific AML requirements for banks for timely fraud detection. While all regulators have a common goal of minimizing the occurrence of financial crimes, the AML guidelines for banking can vary between jurisdictions.
In this article, we will be going through some approaches that banks can use, or are currently using, to meet international AML compliance standards.
So, What Exactly is AML in Banking?
AML, abbreviated for anti-money laundering, refers to a set of guidelines that include instructions and recommendations about how banks can prevent money laundering. Whenever a financial crime, even a minor monetary corruption, is left undetected in a bank, it encourages criminals to increase their fraudulent activities. Therefore, the use of robust AML solutions in banks has become the need of the hour. By integrating artificial intelligence models into the security system, banks can substantially minimize threats such as the financing of terrorist activities and the laundering of “dirty” cash.
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Why Are Banks Under The Risk Of Money Laundering?
Because of the monetary nature of banks, criminal organizations target the institutions to gain access to illegal benefits. Since hundreds of transactions are performed in a single day, money launderers are able to layer their illegally obtained funds, making them untraceable. This makes it even more necessary for financial institutions to stay in compliance with AML regulations.
Banks and AML Compliance Programs
A bank’s AML compliance program comprises measures and controls for regulatory compliance and protection against criminals. Since non-compliance leads to hefty fines and penalties, AML compliance programs must be devised in accordance with international standards. An effective compliance program has five common components. They include:
- AML policies, controls, and measures
- Continuous training and awareness of employees
- Maintenance and monitoring of customer records and transactions
- Customer due diligence
- Reporting authorities in case of suspicious activities
Risk-Based Approach in Banking
The first and foremost thing that banks need to include in their business operations is the implementation of a risk-based approach. In this approach, a bank is responsible for assigning a risk rating to every customer that is onboarded. The risk rating can vary depending on the customer’s transaction history, AML screening results, and their region.
Once a risk rating has been assigned, the bank must perform Enhanced Due Diligence (EDD) on high-risk customers. This is a necessary step for the identification of suspicious activities and to hold responsible UBOs (Ultimate Beneficiary Owners) accountable.
Typically, banks have to implement AML screening along with Know Your Customer (KYC) procedures. With the help of such mechanisms, the risk levels of customers can be efficiently monitored.
Know Your Customer (KYC) in Banking
The Know Your Customer (KYC) process refers to the customer data collection procedures that businesses carry out during onboarding. During this process, a customer is asked to submit an image of themselves holding an ID document. Next, the data is extracted for the ID document using Optical Character Recognition (OCR) technology. The customer is then matched to the image present on the ID document. If the verification process is successful, the process is completed within seconds and the customer is free to continue with their transactions.
Valid ID documents for the process include a government-issued ID card, utility bill, passport, driver’s license, rent agreement, bank statement, credit or debit card, etc.
Customer Due Diligence in Banking
CDD, short for Customer Due Diligence, is a part of the KYC process that is implemented for the detection of suspicious activities, such as terrorist financing or money laundering. While the process of CDD varies from region to region, it has a common goal – the identification of customer risk. During this process, KYC procedures are implemented along with customer risk assessment. This process is necessary to ensure that the user has provided accurate information.
After this, the customer’s data has to be verified from worldwide databases. This involves verifying the information against criminal watch-lists, Politically Exposed Persons (PEP) list, and global sanction lists. As individuals present on any of these lists are high-risk entities, it allows the bank to stay vigilant of the transactions they carry out.