The first day of the new year was the start of the EU’s 4.1 AML Directive, the recent update to the AMLD IV (Anti-Money Laundering 4.0) released less than two years ago. This regulation is but one among many other international requirements concerning Anti-Money Laundering (AML) and Know Your Customers (KYC) policies.
AML rules aim to stop the practice of generating income through illegal actions, while KYC is a set of customer due diligence processes, which are also bound by a set of rules and form part of the overall AML process. They help financial services companies to better understand their clients, their financial backgrounds, and the source of their funds.
The global trend is a consistent tightening of AML regulations. As a consequence, financial services companies are forced to employ ever-increasing resources and efforts to remain compliant with these stringent requirements. However, efficiencies can be found through the application of new technologies to streamline AML procedures, while providing multiple side benefits.
Onerous and Complex AML framework
AML compliance is defined by many legislative and regulatory standards. One of the most significant is the U.S. Bank Secrecy Act (BSA) of 1970, later amended to include measures of the U.S. Patriot Act of 2001 that aims to deter terrorist financing networks. Like other AML compliance regulations, it imposes a set of guidelines that financial services companies must follow.
One BSA requirement involves paper-based communications and archiving for KYC or Customer Due Diligence (CDD) procedures which are costly, cumbersome, inefficient and non-eco-friendly. For instance, the BSA has imposed an investigative “paper trail” by creating regulatory reporting standards such as the need for a specific paper record. It has also established recordkeeping requirements for wire transfers. Another example are the U.S. Final Rules that require beneficial ownership CDD compliance records to be retained by a bank for five years from the date the record is created, leading to obvious archiving and storage issues.
For banks’ customers, AML policies can cause a lot of friction, as most banks still require the physical presence of their clients for identity checks under KYC procedures. If you want to open a bank account, you may have to go to your bank’s branch to prove your identity, because sending documents by the post or via digital channels for customer identification processes may not be sufficient and possibly remain unsecured.
On the trail of strengthened AML regulations, regulatory sanctions and large fines issued to banks have grown substantially in the past few years. Global financial institutions have incurred significant fines of several million U.S. dollars while regional and smaller banks have not been spared.
New technologies to modernize and enhance AML tools
There is a global shift towards using new technologies that will facilitate AML compliance and introduce a balance between risk and convenience. As digital systems are increasingly recognized as more efficient in the banking sector, KYC tools positively follow the same trend. Digital technologies can be efficiently used for tracking, processing, analysing and storing information which will be needed to identify and report suspicious transactions.
Automation streamlines KYC processes by enhancing their efficiency, their accuracy and the time spent on the verification of customers’ information. Artificial intelligence systems can help identify risks associated with customers by doing real-time open and deep web searches and analysis to potentially detect and prevent fraudulent activities. Blockchain technology can also prove valuable for CDD and KYC procedures by preventing past transactions (such as a database entry) from being modified by an administrator.
E-identification for e-KYC is also a major innovation allowing for quicker, more cost-effective and seamless identification processes. It substitutes the arduous paper-bound procedures with digital signatures that establish identity. Opening a bank account with e-KYC can now be done quickly and remotely.
Security technology is particularly relevant for proving identity
Security technology is necessary to establish customers’ identity under AML policies. This is highlighted by the latest EU directive stating that “it is essential to recognise secure electronic copies of original documents as well as electronic assertions, attestations or credentials as valid means of identity”. By securing communication channels to allow for electronic submission of KYC information, financial services companies can leverage the tools used for identification and reduce their costs (avoiding paper-based communications) while enhancing their customers’ digital experience (taking less time and meeting customers’ demands for seamless digital services).
To protect digital transactions and communications involved in electronic AML and KYC processes, security solutions must be used to fight against cyber threats. Encryption is one of the most efficient security technologies as it secures the data wherever it travels. Hence, communications between banks and their customers to confirm their identity can be digital, secure, compliant and avoid all AML regulations’ issues mentioned previously.
As AML and KYC requirements are still increasing, financial institutions deploy significant costs and resources to remain compliant. To help the financial services industry become more efficient on the topic, innovative technologies are being developed. These can bring automation and artificial intelligence while reducing risk and costs. Digital security is one of the technologies needed throughout the entire process as it helps to meet all the requirements as well as being more effective. More specifically, data-centric security can be effectively employed as it protects the data itself, wherever it travels, allowing banks to more easily implement a secure end-to-end KYC process. APrivacy provides data-centric security which tackles AML issues and meets the financial sector’s expectations. If you would like to learn more, please contact us.
Digital Security Perfected – APrivacy Ltd. is an award-winning company which combines military-grade data security with a seamless user experience on any platform, any device, anywhere. APrivacy Ltd.’s enabling technology now allows the financial services industry to confidently communicate with clients using their favourite channels leading to increased revenues and reduced costs while meeting the strictest regulatory requirements.
