Now that we know what KYC is, let us talk about KYC compliance.
KYC compliance is conforming with policies like risk management, transaction monitoring, and regulations such as FinCEN, GDPR, CCPA PCI-DSS, and FATF.
Risk management: The financial institutions (FIs) must assess the risk posed by a potential customer. To check this risk, they screen the customer through various checks like due diligence and scrutinize all information and documents provided by the customer to check for any inconsistencies or exposure to sanction lists. If the customer is politically exposed, they are considered to be more susceptible to corruption and thus considered high-risk customers. The politically exposed person is defined by the Financial Action Task Force (FATF) as ‘an individual entrusted with a prominent public function’. Thus, the category encompasses a host of politicians and officials ranging from heads of states down to local politicians and councilpersons. As a result, such customers must undergo a stricter diligence check . Some FIs may also include adverse media coverage into their screening process to make the process sturdier.
The next part is transaction monitoring. The FIs job is not done with initial checks and then letting the customer open an account with them. Criminals are adapting to changing AML norms and adapting new techniques to beat the systems. Thus, a customer may have a clean profile while onboarding and may try to commit financial crimes later to evade Anti Money-Laundering (AML) detectors.
Besides complying with norms, compliance monitoring helps FIs determine and manage the potential risk of clients. Once the FIs determine the customer’s risk level, they can adjust the level of the customer’s transaction monitoring accordingly.
The last and most critical component is compliance with regulations laid down by various governments as well as intergovernmental organizations like FATF to counter financial crimes like money laundering and terror financing. KYC is essentially a part of AML activities.
However, in today’s times, many companies have global operations. Thus, they have to juggle with different sets of regulations, in addition to global regulators like FATF. These regulations include complying with AML norms, including transaction monitoring. Some of these compliances are as follows:
Banking Secrecy Act (BSA): This is the law that basically kicked off the AML proceedings. The Bank Secrecy Act of 1970 is also known as the Currency and Foreign Transactions Reporting Act. The US law made it mandatory for US-based FIs to assist the government agencies in detection and prevention of money laundering.
FATF: The Financial Action Task Force (FATF) is an intergovernmental organization formed in 1989 amidst rising cases of money from crimes and drug trade being laundered. The agency designs and promotes policies and standards to combat financial crime. Recommendations created by the Financial Action Task Force (FATF) target money laundering, terrorist financing, and other threats to the global financial system.
The Sixth Money Laundering Directive (6AMLD) was scheduled to come into force on December 3, 2020. The directive further builds on the European Union’s AML/CFT regime regulatory regime applied under its predecessor, 5AMLD. 6AMLD various measures such as defining all types of money laundering and enhancing punitive measures to address several emergent and ongoing issues.
KYC helps companies to comply with these norms. Noncompliance can result in heavy fines and loss of brand value.