In almost all countries of the world, there are laws and regulations that exist to prevent financial crimes and curtail fraudulent financial activities such as money laundering, terrorist financing, dealing in hard drugs and trafficking in persons. These illegal activities have one thing in common - the movement of huge sums of money through different persons (individuals or corporate personalities) and across different regions.
The primary vehicles used for these movements of money are banks and other financial institutions. This has made it very necessary for businesses in the financial services industry to be highly regulated and mandated to continually comply with certain regulatory requirements such as Know Your Customer (KYC) and Anti-Money Laundering directives.
This article discusses the ultimate KYC and AML compliance guide for businesses today, highlighting what they should know and the most important structures to put in place.
What Is KYC?
Know Your Customer (KYC) is a term used to explain the different processes used by businesses (especially those in the financial services industry) to verify the identities of their customers. KYC further entails that businesses conduct due diligence exercises on their customers and continuously monitor the financial activities of such customers throughout the course of their business/customer relationship.
KYC helps businesses to collect certain Personally Identifiable Information (PII) about their customers and their identity documents which help the businesses to ascertain that their customers are who they say they are. This makes it easy to trace fraudulent financial activities to an individual or a group of individuals. It is in the course of conducting KYC exercises that the risk profiles of different customers are determined, so as to know what level of customer due diligence and monitoring should be conducted on them over time.
What Is AML?
Anti-Money Laundering (AML) is a set of measures and processes conducted by banks and other financial institutions to prevent and combat financial crimes. Usually, it is regulatory authorities and agencies of the government in a country that provide the necessary guidelines for Anti-Money Laundering. In Nigeria for instance, the Central Bank of Nigeria in collaboration with the Economic and Financial Crimes Commission (EFCC) issues AML compliance guidelines and policies from time to time.
Two units of the EFCC - the Nigerian Financial Intelligence Unit (NFIU) and the Special Control Unit Against Money Laundering (SCUML) - work together for the collection and analysis of Suspicious Transaction Reports among other things, in an attempt to clamp down on persons involved in money laundering activities.
The Financial Action Task Force (FATF) of the United States of America sets the global standards for AML and their guidelines serve as a yardstick for AML compliance in other countries.
3 Key Guides To KYC Compliance
To successfully comply with KYC requirements, there are three key processes that must be followed:
a. Customer Identification And Verification
Financial institutions must collect a customer's full name, date of birth and residential address to verify their identity. Additional information, such as a government-issued identification document is also required to validate the information provided by the customer.
b. Customer Due Diligence and Risk Assessment
Businesses in the financial services industry must assess the risk associated with each customer to determine the level of scrutiny required. The three levels of customer due diligence are simplified, standard and enhanced due diligence.
Customer due diligence further involves analysing the customer's transaction history, financial background, and other factors to identify potential risks in comparison with the benefits the customer will bring to the business.
c. Ongoing Monitoring
Banks and other financial institutions must continuously monitor customer accounts for suspicious activity, such as sudden large transactions, so as to know when to file a Suspicious Transaction Report. This monitoring process continues all through the lifespan of the customer's business relationship with the business.
AML Compliance Best Practices
Here are some key points to guide you in your journey to satisfying AML compliance in your specific industry:
a. Stay Up-To-Date With AML & KYC Laws And Regulations
The fast-paced nature of the regulatory compliance landscape makes it very necessary for businesses in regulated industries to stay informed and always be up-to-date with AML laws and KYC regulations. These regulations and directives are constantly evolving. In order to be a KYC and AML-compliant business, keen attention must be paid to the development of these laws and regulations.
b. Build A Good Organisational Culture
To ensure consistent application of policies and processes for AML compliance throughout the organization, it is crucial to building a good organizational culture that is characterized by regular training of all employees, with active involvement from top management, including board members to adhere to AML and KYC international best practices.
c. Periodic Customer Due Diligence
Since KYC is the first step in the AML compliance process after customer identification and verification have been done at the point of customer onboarding, banks and other financial institutions must conduct due diligence on their customers from time to time to assess the risk of money laundering and other fraudulent financial activities by the customer. A customer whose risk profile was low at the point of onboarding and required minimal monitoring could turn out to have a higher risk profile later.
d. Transaction Monitoring
Financial institutions must monitor transactions to detect unusual activity that may indicate money laundering. This process involves analyzing customer transactions and account activity to identify potentially suspicious activity. The transaction monitoring process involves the use of automated systems to identify patterns and anomalies that may indicate suspicious activity.
e. Suspicious Activity Reporting
Financial institutions must report suspicious activity to the appropriate regulatory authorities put in place by the government. This process involves the use of a reporting system to notify regulators of any unusual activity that may indicate money laundering or terrorist financing.
For businesses to successfully comply with KYC and AML requirements, they need to ensure that the steps and components of these compliance processes are followed. These steps outlined above can be taken as a guide to KYC and AML Compliance.
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