KYC Authentication: An Important Tool to Prevent Money Laundering

Financial organizations, particularly banks, have adopted digital KYC authentication for identity verification to protect customers’ data from illicit activities and prevent monetary fraud. KYC stands for “Know Your Customer” or “Know Your Client”, and KYC authentication is a mandatory procedure required by banks and other financial institutes when opening a customer’s bank account.

E-KYC: How Does Online KYC Serve as a Systematic AML Tool?

It has been widely observed that the emergence of digital financial systems and ease of monetary transactions has resulted in the rise of financial cybercrimes. According to some estimates cited by a World Bank report, about USD 1 trillion worth of illicit funds are transferred out of developing states annually. Therefore, the states whose citizens are involved in unlawful monetary practices receive certain sanctions and even economic isolation if required. Financial Action Task Force is the inter-governmental regulatory authority overseeing AML. If any country gets black-listed by FATF, it is bound to face international isolation.

Hence, governments have shifted to various methods for ensuring digital transparency in financial organizations. Consequently, the latter must adopt AML compliance regulations. KYC authentication is one of the methods adopted by mainstream financial institutions like banks. E-KYC, or simply online KYC, is an effective means to secure the database of financial institutions from exploitation by fraudsters.

Significance of KYC Anti-Money Laundering Regulations

As mentioned above, KYC authentication is the process of checks and regulations a bank must carry out to ensure security in customer verification. At the same time, AML or anti-money laundering compliance refers to the regulatory processes for preventing money laundering and other illicit financial practices. KYC AML regulations were introduced to regulate emerging financial frauds, particularly money laundering and terrorism financing. A United Nations report suggests that money laundering accounts for 2-5% of global GDP.

Therefore, KYC anti-money laundering regulations are crucial in making the monetary systems, specifically banks, transparent and secure. Having robust KYC protocols is the most effective way for banks and other financial organizations to control money laundering and other financial malpractices. Even though the United States is leading from the front in AML regulation, according to a 2015/16 report findings,  USD 300 billion was laundered in the country annually. As a result, the country’s government and banking sector have been involved in all the necessary steps to prevent money laundering.  

KYC AML Regulations in the United States

The US has a robust KYC AML framework that imposes enormous penalties for noncompliance. One recent instance is the USD 29 million fine imposed on a crypto exchange for violating the Bank Secrecy Act. Thus, US-based financial institutions like banks must comply with the relevant KYC AML requirements and KYC authentication to avoid such penalties. The primary financial regulator in the US is the Financial Crimes Enforcement Network which operates under the authority of the US Department of Treasury. It works against money laundering and assures AML compliance by financial institutions. The Office of Financial Assets Control is another regulatory body in the US that serves as a watchdog overseeing US sanction programs. It ensures that companies comply with the regulations as put forth by the country’s law. The rules include Bank Secrecy Act, Patriot Act, and AMLA 2020. 

The Bank Secrecy Act is the primary AML legislation introduced in 1970 that imposes reporting and record-tracking of US financial institutions. Similarly, the Patriot Act was passed as an amendment to the BSA, post-9/11 incident. This Act imposes a range of customer due diligence processes and screening responsibilities on US businesses focusing on financial transactions. Lastly, the US introduced the Anti-Money Laundering Act 2020, the most prominent reform to AML laws that works against the threats posed by financial cybercrimes. 

AML KYC Compliance for financial organizations

Regulatory compliance means abiding by the laws, rules, or regulations and conforming to the established policies. KYC compliance refers to the regulatory guidelines that financial organizations like banks must obey for KYC authentication. Similarly, AML KYC compliance means they must conform to the regulatory guidelines to prevent money laundering practices. The primary purpose of compliance is to seek protection from fraudulent activities in the finance sector. Therefore, the US requires its financial organizations to stay compliant by conducting a KYC authentication assessment to identify customers. 

The banks must refresh customer data for KYC authentication to keep it up-to-date. Moreover, compliance requires ongoing monitoring and screening of transactions, sanctions, and Politically Exposed Persons or PEPs through KYC authentication.

Client Due Diligence: Synonym for KYC

Client Due Diligence, also known as Customer Due Diligence, is another name for KYC authentication. It is the process through which banks collect customer data for identity verification and is one of the main components of the KYC authentication process. Just as KYC authentication overlaps with AML, CDD furthers the prevention of illegal monetary transactions. The banks work in compliance with AML guidelines through Customer Due Diligence. It is also crucial in the company’s risk management strategy and is required by regulations like the Bank Secrecy Act and Anti Money Laundering Act. CDD analyzes the customer lifecycle from onboarding while reviewing the changes over time. Hence, it is significant in KYC authentication. 

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