Financial institutions are heavily regulated by financial authorities in ensuring adequate KYC and AML (Anti Money Laundering) procedures. But you may not know that other businesses should also consider anti-money laundering.
It’s not only financing businesses that need to consider AML compliance and contribute to fighting against money laundering. If your business handles payments and customer data, you’re responsible and have a duty to fight against money laundering. If customers can pay you, money laundering can easily take place.
The relationship between AML and KYC involves identifying money laundering and putting the procedures in place to prevent it. Identifying customer risk and verifying their identity means preventing money laundering and contributing to the fight.
What Is Money Laundering?
Money laundering is a criminal act where launderers use legitimate businesses and financial institutions to “wash” their money through legitimate businesses. Money earned from an illegal business, whether through drugs, weapons, or terrorism, must be washed and untraceable. So criminal organizations “clean” their money by buying a business or purchasing expensive items from different companies.
How Is Money Laundered?
There are various money laundering methods. Typically, the process involves irregular or random payments through legitimate businesses. Things to look out for are:
- Random purchases (Out of the blue payments by a customer not part of the marketing funnel or without any prior customer contact).
- Refund requests soon after purchasing.
- Refund requests from unnoticed third parties.
- Reluctance or refusal to provide Identification.
- Overpayments.
Money launderers use these techniques frequently, and businesses should be aware of the various methods used. This awareness comes through education and stringent KYC processes. Generally, the more money that comes through your business, the more strict you need to be and the more regulations you will need to comply with. These compliances will differ from country to country.
For example, in The US, strict KYC compliance regulations were introduced post 9/11 through the Title 3 Patriot Act. All financial institutions from then on had to show proof of KYC, customer identification program (CID), and customer due diligence (CDD).
What Your Business Needs To KnowÂ
You can choose to dive deep into money laundering and the various methods and techniques your business can use to stop it. But you’re not required to gain that knowledge unless you’re a large financial institution.
Customer ID & KYCÂ
Verifying customer identity should be a mandatory process in your financial institution. Any new customer who does business with you needs to be checked through KYC. You should then keep data for at least five years, and if there is little to no customer contact for 12 months or more, you should repeat the process.
KYC checks should include gathering as much information about the client as possible so you can identify money laundering signs. Typically KYC checks include:
- Personal information
- Customer activities
- Funding sources
- Check financial documents
All of these checks are so you know your customers are who they say they are and discover their funding sources.
Consider Advanced KYCÂ
For some institutions, regular KYC isn’t enough. This advanced due diligence is needed for checking more extreme cases. For example, this could be someone from a high-risk third-world country.
For advanced checks, you must gather more information and analyze financial documents from various sources/parties. However, conducting a thorough KYC audit can be extremely time-consuming, and most businesses don’t have the time or resources to perform this audit.
Thankfully you can use Regulatory Technology, known as RegTech, to make this process quicker instead do manually having to sift through all of these documents and files.
Check Clients For SanctionsÂ
Another step you can take to vet your clients is checking for sanctions. Authorities can place financial sanctions on individuals and businesses who may have been identified as suspect or risky regarding AML by financial governing bodies.
Large companies and financial institutions will have these checks heavily regulated anyway. Still, smaller organizations should make an effort to contact financial institutions to query any sanctions for clients you consider a potential target.
Err on the Side of Caution
Through stringent customer checks and awareness of money laundering in almost all businesses that handle payments, you can contribute significantly to the fight against money laundering. To recap, let’s check out the measures you should put in place:
- Check all customer’s ID
- Identifying the signs of money laundering
- Consider advanced KYC checks
- Use regulatory technology to streamline the checking process
If your business needs more information or assistance with AML compliance, don’t hesitate to get in touch with Jumio, experts in KYC and financial identification services.
