Certain rules and regulations exist across the globe that prevent the prevailing illicit financial crimes, such as money laundering and terrorist funding.
The predominant vehicles used in money movement include banks and other financial institutions. This action has compelled businesses to put their thinking cap on regarding the compulsion and regulation of laws in financial services with certain compliance requirements such as KYC and AML directives.
The huge money movements in these illegitimate activities have a common factor that results in the flow of fraudulent money via different people or corporate individuals sprawled across different regions.
In this blog, you’ll witness the KYC and AML compliance guide for fintech businesses today, underlining what these corporate firms should know and what series of actions they should implement.
The Role of AML and KYC in Fintech
Adhering to anti-money laundering obligations and understanding your customers are significant elements of compliance procedures for fintech companies.
The companies must align with local regulations and international standards regarding CDD or Customer Due Diligence, and they are:
- Customer identification and identity verification
- Executing Risk-based assessment
- PEP lists, screening sanctions, and other sources
- Ongoing monitoring (including transaction monitoring)
Fintech companies face a lot of pressure to attract new customers, making a user-friendly and efficient onboarding process compulsory. Additionally, these firms find it challenging as they continuously have the fear of being attacked by illicit activities that will exploit these financial institutions for fraud, money laundering, and terrorism funding.
Major Challenges the Fintech Sector Faces
Fintech businesses are making efforts to make the customer onboarding process fraud-free with robust security measures in their digital KYC solution. However, the process involves a myriad of challenges that the fintech sector faces, including
Onboarding and Payment Clearance Problem:
AML processes can make any registration process challenging, probably contributing to customer turnover (losing customers).
Regulatory Sanctions:
Fintech businesses worldwide must comply with inflexible AML requirements, including AML training, suspicious activity reporting, and user verification. Thus, non-compliance may result in substantial sanctions.
Fraudsters Screening:
Fraudsters may use forged identities to initiate phishing attacks (hacking) or conduct illicit transactions. Thus, it becomes important for fintech businesses to keep an eye on such criminal activities.
Chargeback Prevention:
Chargeback is a payment amount credited to your card through which you make payments after a customer questions the disputed transaction. These chargebacks disadvantage businesses due to inflating fees, lost shipping, time wastage on dispute resolution, and transaction processing costs.
Fintech’s Risk-Based Approach
All the regulatory entities existing worldwide mandate fintech businesses to plan a robust risk-oriented strategy that combats money laundering and considers the risk associated with this sector.
For instance, the fintech industry is susceptible to illicit activities. To rectify these problems, it becomes necessary for fintech firms to build an AML compliance program that involves a combination of various protective measures.
An AML Team
Fintech businesses need to appoint an MLRO (Money Laundering Reporting Officer) and/or Anti-Money Laundering (AML) compliance officer separately, or at times, you can appoint both, depending upon different regulatory regions. Their main responsibilities involve regular monitoring, reporting, and compliance adherence.
User Verification and Identification
Complying with regulatory obligations, fintech firms should work on Know Your Customer (KYC) to assure users’ identity.
SAR (Suspicious Activity Reporting)
Employees are duty-bound to inform MLRO to take necessary actions on money laundering activities; further, MLRO brings it to the regulator’s attention. Moreover, MLRO regularly reports to upper management, primarily of detecting money laundering strategies and the number of suspicious transactions within that time frame.
Record Keeping and Retention
Regulatory entities give instructions to keep an in-depth record of customer due diligence checks and other related reports governed by regulators when demanded.
Employee Training
The corporate world must ensure their employees are well-informed about illegal financial acts and corresponding precautionary measures. You can achieve it via different means, including online tutorials, in-person classes, or other instructional/comprehensive techniques.
Risk Assessment & Management in Fintech
KYC/AML risk assessment has a significant role in onboarding new customers. Financial institutions should know how to mitigate risk when onboarding new customers while offering a seamless customer experience.
Fintech businesses must compose AML risk management protocols that classify customers based on their risk profiles. The risk level accredited to a customer will identify the documentation types that they require while undergoing monitoring procedures.
EDD
EDD (Enhanced Due Diligence) is a significant tool for analyzing risks when evaluating potential business partnerships.
EDD involves a more attention-to-detail analysis of a customer’s identity and risk categorization.
This thorough identification process involves different procedures, including:
- Assessment of adverse media and negative controls
- Conduct and management of on-site visits
- Development of ongoing risk-analyzing strategies
- Risk-based approach
- Monitoring ongoing transactions
Furthermore, EDD is taken into action when users give rise to a higher threat of terrorist funding or money laundering.
Let’s say that when a user lives in a high-risk country, compliance officers have to gather more detailed information about their identity, like their sources of wealth and funds.
CDD
CDD is customer due diligence, which refers to a series of checks that help assess and verify your customers’ risk profiles and identities.
During the CDD verification process, businesses must identify and verify customers or carry out KYC checks. Also, businesses must not forget to define customer risk profiles at this particular stage.
In some cases, when the risk associated with money laundering is minimal, organizations can go with Simplified Due Diligence (SDD) to reduce the entire verification time.
However, high-risk situations require Enhanced Due Diligence (EDD) compliance strategies.
PEPs, Sanction lists, and Adverse Media Screening
Organizations should carry out anti-money laundering (AML) screenings, including adverse media, watchlists spanning all over organizations, including OFAC (Office of Foreign Assets Control), EU (European Union), HMT (Her Majesty’s Treasury), DFT (Department of Financial Transactions and Reports Analysis Centre), and global sanctions among others.
Moreover, businesses must ensure that their customers fall under Politically Exposed Person (PEP). These mandatory checks must be implemented during the client onboarding process while maintaining a strong customer relationship.
Transaction Monitoring
In the fintech landscape, a robust transaction monitoring system addresses the following queries:
- Does the origin and destination of the transaction meet careful examination or not?
- Does the transaction align with the customer’s risk profile?
- Do you see any red alert that suggests these funds or welath might have been acquired illegally?
Streamlined Onboarding
Fintech firms protect their organization by adopting a multifaceted approach to ensuring that only the legal document holders undergo the verification process, including:
AML Screening:
It’s important to do a detailed cross-verification of customers against adverse media, sanction lists, databases of Politically Exposed Persons (PEPs), and internal blacklists from other platforms, guaranteeing a secure onboarding experience.
Facial Biometrics:
Facial biometrics offers a more secure solution, as a person’s face is harder to steal or duplicate than a password. Facial recognition is a progressive technology used to identify people in photos, videos, or in real time to prevent fraud worldwide. These KYC/AML methods are difficult to replicate and, thus, reduce the risk of fraudulent activities.
Automated Document Verification:
With the involvement of artificial intelligence, companies can effortlessly detect and reject forged documents and photos submitted by fraudsters.
Conclusion
Overall, a well-structured KYC and AML compliance strategy helps avoid heavy fines and advances the customer onboarding experience, directly boosting conversion rates.
