Power Sustained Growth With A Technology-Driven Compliance Strategy
11 February, 2023
Shahid Hanif is the Chief Technology Officer and cofounder of ShuftiPro, a biometric identity verification (IDV) solution.
Regulatory noncompliance continues to plague financial institutions, and regulators are not holding back. Over the past year, regulators have slapped financial institutions with eye-popping fines for failing to comply with Know Your Customer (KYC) and anti-money laundering (AML) requirements, with some of the most notable fines from 2022 including Santander UK’s £108 million (about $133 million) for anti-money laundering failures; Deutsche Bank’s $7.1 million settlement for allegedly violating AML prevention rules (paywall); and virtual currency exchange Kraken’s $362,000 fine related to noncompliance with international sanctions.
The cost of noncompliance is high, and these recent cases demonstrate just how critical it is for financial institutions to implement a formal and robust identity verification (IDV) program. IDV is the foundation of KYC, Know Your Investor (KYI), anti-money laundering (AML), fraud prevention, financial crime compliance, sanctions screening and many other statutory and regulatory requirements.
Key Learnings From Cases Of Noncompliance In 2022
How can global financial institutions strengthen their IDV, AML and KYC/KYI programs to ensure compliance and avoid this type of reputational damage and monetary fines? What can financial institutions learn from recent public cases to immediately buttress their internal compliance processes? Let’s take a brief look at these cases.
• The U.K.’s Financial Conduct Authority (FCA) found that Santander U.K. failed to mitigate the risk of money laundering. Specifically, the FCA said the organization must establish “the identity of its customers and, in respect of business customers, the nature of the customer’s business and how it will use the bank’s services.” The FCA also found that the bank failed to conduct periodic reviews to make sure it understood its customers’ money-laundering risks. Lesson: A robust IDV program doesn’t end with the first verification.
• Deutsche Bank’s most recent case involved processing transactions with certain individuals on international sanctions lists. Lesson: IDV should include screening through sanctions and politically exposed person (PEP) watchlists.
• Kraken was found negligent for not blocking internet access to its platform by suspicious individuals and agreed to spend $100,000 (beyond the $362,000 fine) on additional compliance security solutions. Lesson: It’s more cost-effective to build a strong IDV foundation before you risk your business reputation.
How To Build Effective KYC Programs
Organizations that still rely on manual processes for IDV incur inefficient resource allocations and risk noncompliance due to human error. Legacy compliance programs built on spreadsheets or obsolete software cannot easily be scaled and may take hours, days or weeks to produce results.
The most effective compliance programs employ KYC checks that not only let firms maintain a record of their clients but also identify suspected money launderers and report them to the concerned authorities in a timely manner. Many financial organizations are now employing compliance measures that utilize advanced technologies such as artificial intelligence (AI) and machine learning (ML). Today, screening solutions have instant access to thousands of international sanctions lists and the ability to verify customer identity in seconds with the utmost accuracy.
Of course, even the most advanced technologies are useless without skilled professionals who know how to use them to tackle fraud attempts. Organizations must hire and maintain staff who stay informed of changing regulatory responsibilities as well as automated solutions. Attention to detail, critical thinking, adaptability and computer literacy are the most valuable skills that KYC/AML compliance personnel must have. AML compliance involves different processes to incorporate KYC data and systems. Because AML regulations are quite complex, compliance requires the consistent observation of customers’ transactions.
Obtaining customers’ names, addresses and other personal information becomes difficult during remote onboarding, and online customer interactions are considered one of the top risks contributing to money laundering, according to the Federal Financial Institutions Examination Council (FFEIC). Organizations should employ instantaneous customer due diligence (CDD) solutions to decrease monetary theft. Client information should be perpetually updated through databases to disclose false information and unwanted customers.
Fostering Continued Growth
Knowing your customers is no longer just a mantra; it is a necessity in today’s highly regulated financial services industry. Identity verification is the basis for KYC and has come a long way from the days of shaking hands across a desktop. Today’s executives should recognize that IDV is not only a tool to prevent fraud, noncompliance and other problems but also an enabler for building business, improving the customer experience and generating ROI.
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Source: www.forbes.com